Your sales team has nearly landed that giant logo. You are the vendor of choice and about to present pricing. If you are like many SaaS companies you are on the brink of giving away revenue for the wrong reasons.

Do those pricing presentation slides look like this?

Slide 1

£37,500/year* *Based on 60 month agreement

Slide 2

£50,000/year* *Based on a 12 month agreement

Which pricing represents your actual price book? The price book that you use to power your market analysis and the one you built targets off of? If your price book is based on £50k in annual recurring fees for your product you are leading with a 25% discount.

But that is worth it for the multi-year contract, you say! Bullshit, I say. If you are delivering enough value to make an impact on your clients' business year over year your pricing should be going up, not be held down by an old agreement.

In today’s B2B software environment a multi-year contract does not mean you can rest easy for a while. Clients are reviewing vendors on an ongoing basis and competitors spring up overnight. If you think that because a client signed up for a 5 year agreement that revenue is safe then you are in for a nasty surprise.

Even more insidious is the argument that that discount was worth it because of the ‘SaaS/Recurring Revenue Multiple’ - that is what we are going to take a closer look at here.

Running out of cash is lethal.

If you just gave a 25% discount in exchange for a 5 year contract you have shot yourself in the foot in exchange for the right to take on an even bigger valuation. Good luck applying that ‘annual inflation adjustment’ without a fight - and if you put your prices up (which you should as your product grows) you’ve introduced a trench in your renewal values.

You’ve traded £1 for £0.75. If you close 20 5-year deals at a 25% discount with a product that pre-discount costs £50,000/yr you have successfully signed up for £1,250,000 less in revenue over the 5 year period than you should have - not accounting for inflation or any price increases you make.

You can’t eat a multiple.

What have you got in return?

An increase in valuation of £5,250,000 assuming roughly 7x multiple (average as of mid-2023). So that when you have to raise money again, trading chunks of your company for cash you can get more of it. Which you’ll have to do sooner now because you are bringing in less cash than you should have.

I’m also willing to bet you told the investors in the last round an average order value that didn’t include the 25% discount, which introduces another soft point in your forecasting (more on that later).

How much additional runway would £1,750,000 get you? What could you invest in now rather than waiting for more investment money later?

Assuming you’ve sold a product that delivers actual ongoing value to your clients, it is better to take the annual deal at full price and bank the difference to invest in either product development or customer success - both of which are more likely to cause a client to renew every year for 5 years.

Because at the end of the day the only reason for a SaaS company to give a discount for multi-year commitments is if they have attrition issues.

And if you are relying on your sales team being able to trick a customer into believing that the product will deliver value over the long term and hope that that value materialises before the customer gets frustrated and puts in notice at the end of the contract you are playing a dangerous game.

A quick aside on ‘saving commissions costs’

“But I pay CSM commission on renewals and the discount on multi-year contracts is less than the commission payout so it ends up costing less.” And… you’ve immediately set your CSM against your Sales team. I’m guessing you also pay sales reps a spiff on the multi-year deal?

We’ll talk about how to build comp plans that guarantee employee turnover and dissatisfaction while being driving results that have negative value to your business in another article. But with the above mindset you’ve already got a good head start!

Mortgaging the future for today

When you combine an incentive to multi-year contracts with a high-pressure new-business-focussed environment you are essentially asking your teams to create churn risk and hide it. An early stage customer success team tends to be over-burdened and therefore reactive, focussing on the latest fire, renewal, or end of contract notice. A multi-year contract is a license to ignore, but in today’s tight budget environment your client won’t be ignoring measuring the impact they get from your tool.

Creating a pro-active customer success team focussed on driving impact in the customer organisation takes discipline and focus (and is very worth the effort). That team isn’t too worried about renewal dates - they have a cadence in place to recognise important client side milestones and work towards delivering value there instead.

Use the extra cash you earn in the near term from short term, non-discounted contracts to invest in that CS team and/or development that drives value against those same client milestones. That will drive actual recurring revenue that comes from happy, renewing clients.

Today you can spend cash to improve client outcomes. Otherwise tomorrow you have to spend credit to fix past mistakes.