How Multi-Year Agreements Fit into Your SaaS Company’s Renewal Strategy

Should your early-stage B2B SaaS company use opt-in licensing or evergreen licensing to guide its renewal process? We answered this question in a recent post about why you may want to reevaluate your approach.

To recap, with opt-in licensing, a customer must receive, review and sign-off on an agreement from the SaaS vendor in order to renew its licensing of the software for another term. With evergreen licensing, a customer’s licensing of the software automatically renews.

In this post, we examine another piece of the renewal puzzle to consider: multi-year renewal agreements.

What Are Multi-Year Renewal Agreements?

Similar to an opt-in renewal agreement, with multi-year licensing you are establishing set terms to the software licensing agreement; however, the contract is typically for two or three years rather than one year, as with opt-in licensing.

Multi-year renewal agreements also resemble evergreen licensing in some respects, as it removes annual renewal discussions and the added benefits of having a customer opt in to renew their contract on an annual basis, which we outlined in our previous post about licensing.

Things to Consider for Multi-Year Licensing

There are three main factors to evaluate when investigating how or when a multi-year licensing strategy could make sense for your company, as well as best practices for when this renewal approach becomes inevitable:

  • Timing
  • Customer size and complexity
  • Bargaining power

1. Timing

Again, there are many benefits to using an annual opt-in licensing approach, especially for an early-stage B2B SaaS company.This approach encourages you to keep a pulse on customers and receive frequent and invaluable feedback that helps you scale your business.

That said, you may want to offer multi-year licensing agreements that, at the end of an agreement’s term, require an opt-in. Here are two key opportunities for introducing multi-year licensing.

When Selling Enterprise-Wide

As for an early-stage company utilizing multi-year agreements with its earliest, first-time customers, we have seen multi-year agreements be successful when selling “enterprise-wide” upon an initial transaction with a new customer.

In other words, when account expansion opportunities don’t present themselves, an early-stage company that secures multi-year agreements benefits from realizing greater future revenue under contract.

At Renewal Time

We have also seen early-stage companies have success introducing a multi-year agreement as an option at the time of a customer’s first renewal. For instance, while an initial licensing agreement may be a one-year opt-in agreement, at the time of a customer’s first renewal, a software vendor 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 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 discount or locked in pricing.

2. Customer Size and Complexity

For large enterprise customers, early-stage SaaS companies may naturally get pushed into a multi-year renewal agreement because enterprise customers typically prefer multi-year agreements, from a procurement and budgeting standpoint.

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 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 both the customer and the vendor. It gives the customer what they want while posing minimal risk to the vendor—as long as the vendor has a customer success organization that is proactively working to achieve its 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 journey will still be in its infancy at the year-one mark.

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3. Bargaining Power

If the timing and circumstances are right, your early-stage SaaS company may be ready to introduce multi-year agreements with customers. That said, make these agreements worth your while and utilize them as a bargaining chip. When you have a customer who only wants to sign a multi-year agreement or is asking for a rather steep price discount, use a multi-year agreement to get something in return, such as a quick signing date.

Next Steps

Based on these three overarching factors, you should have a better sense of whether multi-year licensing agreements are appropriate for your early-stage B2B SaaS company, and 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.