Inflation, rising interest rates, scarcity of capital... In the current context, cash management becomes paramount! To get through the crisis, you have to roll up your sleeves: renegotiate your subscriptions, re-evaluate the value of your SaaS tools and terminate what is useless. And SaaS vendors have understood this: many of them offer you a long-term commitment to avoid losing customers... Often, with discount levels that make you want to.
On paper, it's a win-win: the seller (SaaS) secures its future income in a difficult economic context, and the buyer (you) reduces its costs in exchange for a prolonged commitment. However: in most cases, the multi-year commitment is a bad idea.
Over the past 3 years, we've seen dozens of companies suffer with multi-year contracts. On the other hand, some publishers were ready to let them die rather than renegotiate their contracts... So before committing yourself, measure the risk!
In total, we have helped our clients renegotiate 10 million euros worth of SaaS contracts.
Our goal with this article?
To help you save tens (or even hundreds) of thousands of euros by identifying when and why to activate a multi-year commitment.
The keys we deliver to you:
Enjoy your reading!
A multi-year SaaS contract is simply a contract that corresponds to a commitment over several years (generally 2 to 3 years). The buyer commits to remain a customer at a price defined in advance, in exchange for a discount negotiated with the seller.
According to studies, multi-year SaaS contracts are becoming more common in companies of all sizes: 60% of companies use them. There is also a correlation between the adoption of multi-year contracts and the size of the client companies.
A multi-year SaaS contract allows you to save money thanks to the discount negotiated with the vendor. The schemes range from 5% to 10% discount per year starting from 2 years of commitment. A 3 years commitment allows you to negotiate 10 to 20% annual discount against the list price.
By committing to several years, you can also negotiate a discount on the services and fees related to the software subscription.
For example: set-up costs, dedicated customer support, internal training...
All of these elements will allow you to reduce the friction of adopting the software, and therefore maximize its use (and the associated benefits).
The multi-year commitment is therefore attractive on paper... But, there are also many disadvantages!
Logically, by committing to a 2 to 3 year contract, you run the risk of not being able to change your tool if your needs change. You also run the risk of realizing that its use does not correspond to the expected benefits: you would have terminated your subscription after one year if you had not committed.
We are talking to team leaders here. Let's assume that your department's SaaS budget is €100,000 per year in 2023.
You negotiate a 10% discount (compared to an annual commitment) against a 3-year commitment for a SaaS tool at €50,000 per year.
You pay €45,000 per year instead of €50,000, and save €5,000 per year. So far, the operation is interesting.
But in 2024, for external reasons, the SaaS budget is reduced: your annual budget goes from €100,000 to €60,000.
Your room for maneuver is now severely limited: you are unable to renegotiate your contract at €45,000 per year, for the next 2 years... Whereas you could have made the most of this change in situation if you had opted for an annual commitment!
In reality: annual SaaS contracts offer more leverage for renegotiation than multi-year contracts.
It can be complex to estimate usage volumes over 2 to 3 years of commitment. And especially for start-ups or scale-ups in a strong growth phase.
If the contract metric is a number of users, there are two major risks:
In the case of a long-term commitment, it is therefore essential to include options that allow volumes to evolve over the course of the contract (see part 3 of this article).
Are you offered a multi-year contract? As a matter of principle, you should be wary. As we shall see, a multi-year contract is a source of misalignment of interests between a supplier and its customer.
When a company markets a SaaS, it is sensitive to the main indicators (KPIs):
So, if the churn rate is low, the company has no interest in offering you a discount. This would mean reducing their future revenue, when you would have renewed your subscription anyway.
Conclusion: SaaS companies should only offer discounts in exchange for a longer commitment when it allows them to reduce their attrition rate.
The interests are therefore not aligned between you (customer) and the vendor: the length of the commitment is a way to increase the revenue, without justifying an additional value.
But that's not all: a multi-year contract also comes with hidden costs, which need to be taken into account!
In most companies, you will have to negotiate with the procurement department, or finance, to validate the subscription to a multi-year contract.
In fact, 2 hidden costs stand out.
Negotiations take longer, require more people to be involved, and therefore increase the overall amount of time spent on the subject without creating additional value.
Everyone can appreciate this additional cost, which is nonetheless real: by triggering a negotiation process that involves several internal departments, you are making a lot of noise and putting your credibility on the line, where an annual subscription would not have required these steps.
And all this, without taking into account the current economic environment.
It has never been more important to take care of your cash flow than in the current context. Inflation can make certain cash investments more attractive, while capital financing is uncertain for at least 18 to 24 months.
It will therefore only be interesting to commit to multi-year contracts if you obtain at least an additional 10% discount per year of commitment compared to an annual subscription.
Let's see in which cases it will be interesting to use a multi-year contract as a lever to optimize your cash flow.
We have indicated that you should always be wary of a multi-year contract as a matter of principle. This is true in the general case.
Nevertheless, some established SaaS companies offer this type of contract: it is then a question of negotiating your commitment as well as possible to reduce your costs, while minimizing the associated risk.
The most established SaaS companies often offer multi-year contracts because of their historical structure, and despite a low attrition rate.
Their software is recognized, there is no doubt about the quality or the stage of development.
This is the case for:
In these cases, and when the discount levels justify it, it can be interesting to commit to 2 to 3 years. But the reputation of these companies also allows them to justify a lower level of discount
A question then arises: what is the level of reduction that justifies a multi-year commitment?
With reductions of more than 10% per year, one can quickly get the impression that one is missing out on a deal. However, we will see that this does not necessarily justify a commitment because of the associated risk.
How to calculate the targeted reduction level?
In most cases, you will pay your subscription annually, in advance. This means that you must at least compensate each year of commitment with a reduction equivalent to the cost of the capital mobilized.
In 2022, the McKinsey firm estimated that the annual cost of capital is 9.4% for companies listed on the S&P 500 (American stock exchange). Depending on your industry, stage of development and ease of access to capital, you can therefore estimate that the annual cost of capital is 10 to 20%.
To estimate the cost of debt, simply use the rate you have access to via your bank. Probably between 5 and 10% in 2023.
So we find it difficult to consider committing to annual payments without a 5% to 10% reduction per year of commitment. Indeed, even if you don't pay the totality of your subscription at the signature, you commit yourself to pay this amount in advance, at a predefined moment.
In addition to the cost of capital, you must estimate the cost of risk associated with this multi-year commitment.
The risk comes from the elements discussed above, including:
Depending on these elements, the risk associated with the commitment represents an additional cost of 5 to 10% to the cost of capital.
Finally, we will see how you can protect yourself from these risks via specific clauses to be integrated into the SaaS contract, in case of multi-year commitment.
Beyond the length of the commitment and the associated discount, many clauses impact your contract and the service provided.
Be careful: if you don't negotiate the terms of the contract, you risk accepting conditions that are not favorable to your business.
To reduce your risk, we encourage you to carefully define the specific clauses of your contract. In particular, the following 3 clauses.
About Welii: Our teams have renegotiated a total of €10 million of SaaS contracts. Thanks to our platform, our clients have realized several million euros in savings.
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The multi-year contract is therefore a particularly interesting negotiating lever: it can save you several tens (or even hundreds) of thousands of euros per year.
On the other hand, it comes with risks that should not be underestimated. Especially in the current environment:
It is therefore necessary to take the measure of a multi-year commitment, and to integrate the clauses that will allow you to reduce your risks.
Do you want to save money on your SaaS subscriptions?
Shadow IT is present for a company of any size and we always identify 3x more tools than our customers thought. If you spend less than $400k annually on SaaS tools, we'll identify fewer saving opportunities than a client who spends millions, but we'll help you quickly implement a data-driven buying strategy to prevent this wasteful situation from occurring and keep you focused on your business.
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You are free to add any budget owners or anyone involved in SaaS purchasing to streamline your procurement buying process at no additional cost to our platform.
Managing users and identities is a separate business that we don’t do. However, to bring you value and help you with this process, we have partnered with industry leaders like Okta and Auth0 so that we can help you in your Zero Trust Identity process.
We have developed a simple and intuitive solution allowing you to analyze all your SaaS inventory data through dashboard and dynamic list views based on search criteria and filters.
Spendesk is an enterprise expense management solution that allows all employees to pay for SaaS tools. Welii will provide you with insight and support to help you optimize your spending, add leverage to your negotiations, and remove the headaches associated with SaaS purchasing.