I recently ran across an interesting Quora question.
What are the typical discounts SaaS companies offer for a multi-year contract paid upfront for a 2, 3 & 5 year contract?
Jason M. Lemkin had, of course, already answered…I decided to piggyback on Jason’s answer from a more analytical view.
Below my thoughts on the subject:
I think Founders and their sales execs. oftentimes operate w/o eyes wide open as to the true cash impacts of this type of decision. This is a decision pitting certainty (locked in cash/revenue) vs. opportunity (some cash received and potential to expand that).Quantitatively, I like having a simple tool to call upon, so I built a model (Here’s the link to the Google Sheets file). You can play with this to truly see the cash impact of your decisions of single-year vs. multi-year and the discounts you choose to offer.The model is lightweight/generalized and certainly not perfect (feel free to make it better). Holler with questions/comments. I can’t speak to the sensitivities holding up in Sheets as I built in Excel and ported over for sharing.Core drivers:
- ACV discount offered (%),
- Annual ACV expansion achieved (%) — assuming you’re not going multi-year contract) and
- Discount rate used for present value calculations to put single year vs. multi-year side by side. Assumed weighted cost of capital is 20%, really for Seed/Series A stage.
- Cash up front from discounting is not always better, sometimes it is as you will see in the model. Of course, it’s all a negotiation, but I hope this lightweight tool helps you out.
Qualitatively, here are some things to think about:
Can you deploy the upfront chunk of cash now into identified opportunities?
Are you giving up future upside by locking in a multi-year deal? If so, is it worth it?
What gives you better leverage on all fronts? More cash now and a long-term contract or retaining optionality?
Do you just need to WIN THIS DAMN DEAL?
Here’s my answer on Quora — https://www.quora.com/What-are-the-typical-discounts-SaaS-companies-offer-for-a-multi-year-contract-paid-upfront-for-a-2-3-5-year-contract-Five-is-a-stretch/answer/Brian-Parks-1Let me know your thoughts.