How Multi-Year Renewal Options Fit into Your SaaS Growth Strategy

Should your early-stage B2B SaaS company use opt-in licensing or evergreen licensing?

We addressed this question in a previous blog post, where we described how opt-in licensing encourages — even mandates — a customer–vendor collaboration that provides an early-stage SaaS company with five important benefits.

In this post, we examine another piece of the licensing puzzle: multi-year renewal agreements. With multi-year renewal options, your SaaS business can increase revenue up front, reduce churn, and more.

What Are Multi-Year Renewal Agreements?

A multi-year renewal option means the customer and you establish set terms to the software licensing agreement that cover multiple years. Often, the multi-year contract covers licensing for two or three years (sometimes, up to five years) rather than just one year. Commonly, the annual licensing fee tied to multi-year agreements is paid by the customer annually in advance.

Factors to Consider for Multi-Year Renewal Options

There are three main factors to evaluate when investigating how or when multi-year renewal options could make sense for your company:

• Timing
• Customer size and complexity
• Bargaining power

1. Timing

As an early-stage company, you may find it difficult to convince an early adopter customer to agree to anything more than a single year, opt-in licensing agreement. And that’s fine! The opt-in encourages you to keep a pulse on customers and receive frequent and invaluable feedback that, if you’re an early stage company, can help you accelerate realization of product-market fit and scale your business.

At Renewal Time

When the customer’s first renewal comes up, plan to provide multiple renewal options. For instance, while an initial licensing agreement may be a one-year opt-in agreement, you can offer to renew the contract at a two- or three-year duration while still leaving the option for a one-year renewal.

The pricing of an annual licensing fee is a great lever to pull to encourage a customer’s selection of a multi-year renewal option. By reducing the annual licensing fee increase for any customer who selects a multi-year agreement, a customer is able to lock in better pricing than they would signing-off on a series of one-year agreements.

Said another way, a multi-year agreement is a great retention strategy and a way to secure a longer-term commitment from a customer in exchange for a somewhat smaller increase to the annual fee.

When Selling Enterprise-Wide

Multi-year agreements are also successful when selling “enterprise-wide” upon an initial transaction with a new customer. That is, the initial sale to the customer represents 100% of the PARR (potential annual recurring revenue).

Note: For any customer up for renewal that is receiving good value/achieving outcomes from the solution, always include an increase to the annual fee. Even a three to five percent increase to the annual fee can generate significant gains that contribute directly to the bottom line. And should a customer push back on the increase, you have already set an expectation of an increase and have provided yourself with negotiating space.

2. Customer Size and Complexity

Enterprise customers commonly sign multi-year agreements in order to simplify budgeting. So, your sales and customer success teams should be prepared with a multi-year option for both an enterprise prospect and customer.

Please note: An enterprise customer will also likely demand an out-clause. This would allow the customer to opt out of subsequent years of a multi-year agreement as long as the customer provides, for example, a minimum of 90 days written notice in advance of the agreement’s annual anniversary date of its intention not to renew.

While we recommend not including an out-clause in a multi-year agreement unless asked to, we also don’t believe an early-stage SaaS company should be overly troubled by the inclusion of an out-clause in a multi-year agreement. An out-clause provides safety for you as well as the customer. It gives them what they want while posing minimal risk to your business — as long as you have a customer success organization that is proactively working to achieve customers’ desired business outcomes.

In addition to the size of a customer, you may also want to consider the complexity of your solution. If the scope of implementation is a six-month project, a two-year contract could make the most sense, as your customer may still be at an early stage in its customer journey at the year-one mark.

3. Bargaining Power

A multi-year agreement can be used as a bargaining chip. When you have a customer who is asking for a rather steep price discount, counter with a multi-year agreement that provides a year one price that’s at or close to the requested price, and then increases in the annual fee for each of years two and three.

Also, be ready to provide your customers with one-, two, and three-year renewal agreement options, with the one-year option being the most expensive. When given three renewal choices, a customer commonly picks one of the three.

Explore Next Steps with Multi-Year Renewal Options

Based on these three overarching factors, you should have a better sense of whether multi-year renewal options are appropriate for your early-stage B2B SaaS company. You can now look out for signs that it could be time to introduce this approach to your renewal strategy.

For additional insights on opt-in, evergreen, and multi-year licensing, contact Carema Consulting.