March 12, 2017

Enterprise Sales Decision: Multi-year with Discounts vs. Single-year with expansions

Enterprise Sales Decision: Multi-year with Discounts vs. Single-year with expansions

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:

  1. ACV discount offered (%),
  2. Annual ACV expansion achieved (%) — assuming you’re not going multi-year contract) and
  3. 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.
  4. 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 — me know your thoughts.



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