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.
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.
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:
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.
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.