Buying SaaS? Think twice about multi-year contracts

Cash is king for fast growing tech-forward companies. So when buying SaaS, companies often opt for multi-year contracts. It’s the logical choice, right? Vendors offer 10% to 30% discounts and companies can avoid annual price hikes and the hassle of renewal negotiations.

In theory this is good for everyone – customers save money and vendors have a steady stream of income. Of course, this assumes that you are fully utilizing your SaaS and that your growth projections are accurate. However, as we’ve seen with dozens of clients running hundreds of SaaS applications, these are rarely safe assumptions.

Evaluating how worthwhile a multi-year contract would be requires a clear view of license use. You can only make actual savings if you optimize your licenses properly.

Before signing off on multi-year SaaS contracts, consider some of the downsides of buying this way.

1. No solution flexibility

Not having the financial flexibility to respond to marketplace changes or evaluate competing services is a liability.

Innovation is a daily reality in the world of enterprise technology. Companies often get locked in multi-year agreement with legacy software companies, only to later find more fitting solutions. Without the financial flexibility to respond to marketplace changes or evaluate competing services, you are at a serious disadvantage. Unfortunately companies attracted to the savings offered in multi-year deals assume several risks with this approach. These include productivity, collaboration, integration, service model, speed, security and other risks if they can’t adopt better SaaS solutions.

2. Multi-year contract legalese

It’s important that you understand what you agree to in a multi-year deal.

Even if your licenses are discounted, confusing contract terms for a multi-year deal could mean paying too much. In some cases, the savings made become less important than the annual flexibility you lose. SaaS pricing is notoriously opaque and SaaS companies are expected to make revenue from new customers a strategic priority.

One study shows that 80% of the top 250 most successful SaaS companies in the world don’t list pricing. The reason for this? It is easier for salespeople to show value for services. They can pitch multi-year options or repackage discounts as one-time, initiation costs or ongoing service fees. Of course most SaaS companies do not engage in nefarious pricing tactics. We are also not demanding upfront pricing across the board. However, be cautious because it’s important to understand what’s you are agreeing to. If you can find great value in annual contracts, rather than multi-year deals, you should be kept in the know.

3. Innovation disincentive

When you’re locked into a fixed license amount, there’s not much that SaaS vendors can do to sell you more.

If a company has the bulk of its revenue tied up in multi-year contracts, its innovation urgency is low. These companies may think: why push for new updates when we have customers for a guaranteed 3+ years? Customers with multi-year contracts may notice they are not receiving the same level of attention. When you’re locked into a fixed license amount, there’s not much that SaaS vendors can do to sell you more.

While there’s no ill intent here, it has become common practice. Since their company business model and personal comp plans depend on adding new business, that’s where their attention will be. While this isn’t true of every vendor, it’s easy to see how vendor and customer incentives become quickly misaligned. This is especially the case for businesses that are dependent on this type of contracting model.

Multi-year or per license?

While counter-intuitive, companies should consider choosing to pay more on a per license basis. If they also actively manage their SaaS use, this would be a better long term approach.

Consider the simple example below:

This compares two companies. The first opts for a multi-year contract to lock in license pricing and the second chooses an annual fee. Both companies try to forecast license need, although it is far more difficult to look three years into the future.

In this example, the company pays more for every license. However, improved monitoring means they buy what they actually use. In our eyes, this is key to maximizing the ROI of a SaaS subscription.

With Cleanshelf, companies can take advantage of insights from Cleanshelf Service Reviews to audit the value of each application. They can also leverage our market insights to discover what other, similarly-sized companies are paying for common SaaS tools.

Ultimately, multi-year contracts may be the right solution but only commit after thoroughly reviewing your SaaS use. You need to be completely clear on what you are actually agreeing to.

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About Cleanshelf

Cleanshelf is the leading enterprise SaaS management platform focused on tracking, controlling, and benchmarking SaaS applications. Their SOC 2-compliant and AI-powered technology helps companies save up to 30% on their SaaS spending by automatically identifying unmanaged contracts, duplicate licenses, and wasted cloud software subscriptions. Based in San Francisco, Cleanshelf provides an enterprise-grade solution to over a hundred clients, including Hilton, Looker, and CoStar Group.

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