When purchasing or renewing SaaS, one of the biggest considerations you’ll need to make is whether to subscribe to the software on a monthly basis, or whether to commit to a longer-term plan — usually an annual subscription — in a bid to shave anywhere from 20 to 30 percent off the listed price.
But with software prices continuing to rise, fuelled largely by soaring SaaS inflation rates and economic uncertainty, more and more organizations are going one step further and opting for multi-year deals on their SaaS tools, as a way to further optimize their enterprise SaaS spend.
In fact, a study from KeyBanc Capital Markets Technology Group found that 14% of businesses have an average contract length of three or more years.
So, what sort of savings can you expect compared to the usual annual discounts? How do you decide which kind of contract renewal schedule is the best fit for your business? And what else should you be considering before committing for the long-haul?
In this article, we’ll address all of this and more.
What is a multi-year contract?
A multi-year SaaS contract is a commitment made by an organization to subscribe to a SaaS product for a specified period of two or more years. These contracts typically see companies “locked-in” at a set cost, in exchange for a discounted price point or other favorable contract terms.
Multi-year contracts vs annual contracts
Organizations have long seen the advantages of commiting to an annual plan, but how does a multi-year subscription compare?
While, generally speaking, there are a number of advantages to committing to a longer-term SaaS contract, there are also considerations you should be factoring in to ensure it’s the best choice for your business.
Benefits of a multi-year contract
If you’re considering a multi-year contract, you’ve probably been enticed by the incentives that vendors offer to secure repeat custom. But what are they?
Many software vendors will reduce their costs in exchange for longer contract commitments. But while the exact reduction offered by each provider will vary, according to our own data, vendors typically increase their discount by 5% for each additional year that a user commits to.
So while the starting discount may change — Openview found that annual discounts typically sit anywhere between 20-30% — if a vendor’s annual discount is at the lower end at 20%, they will likely offer a 25% discount for a two-year subscription and a 30% discount for committing to three years — and so on.
These vendors will often also offer larger discounts in exchange for a full upfront payment of the entire plan. It can’t, however, be ignored that paying for several years upfront can be a large investment to make, so this should only be considered if your business can easily absorb the impact of a significant immediate payout.
Protection from price uplifts
The cost of SaaS increases each year — in fact, our own data suggests that vendors raise their prices by an average of 9% annually.
But while there are ways to protect yourself against these soaring prices ahead of your renewal deadlines, many organizations are at risk of mid-term price rises.
This is because as many as 88% of vendors include clauses in their contracts that allow them to increase their pricing at any given time, in some cases without even having to notify the customer.
Now while signing up to a multi-year contract doesn’t immediately protect you from price uplifts, it does give you more leverage to request the removal of such clauses or to include a maximum price cap.
One of the largest draws of a multi-year contract is practicality. With a longer subscription, there is no need to renew the plan each year, which can be a time-consuming process for procurement, finance and IT teams. In fact, once you factor in researching alternatives, surveying staff sentiment and employing the best software negotiation strategies to secure a deal for the business, the renewal process is often a lengthy one — and will often conclude in a business simply opting to stay on its existing plan.
Another benefit is not having to worry about the renewal process for a few years, which can be a headache for many organizations, not to mention costly when you factor in SaaS inflation. What’s more, these yearly increases can easily go unnoticed if an organization has a large SaaS stack or has stopped using a particular application but is still continuing to pay its recurring subscription fee.
Lastly, having a locked-in price can help your finance team more accurately budget for coming fiscal years, safe in the knowledge that a given software purchase price will not be increased at an annual renewal.
Things to consider when choosing the length of a SaaS contract
Despite the benefits, a multi-year plan won’t necessarily be the right choice for all of your SaaS applications. It is therefore important that for each contract is carefully considered to ensure that you’re not prematurely taking on a large commitment that could fail to provide a positive return on investment.
Is the tool a good fit for the company?
We’ve thrown some promising facts and figures at you about the potential discounts that you could earn by committing to longer contracts. However, the truth is that vendors very rarely offer a true net discount.
What we mean by this is that the discounted pricing structure will generally provide the vendor more revenue further down the line than a non-discounted annual plan, with your custom secured for several years. By locking in your purchase, they reduce the chance of your business moving to cancel or switch to an alternative tool at renewal.
So, you should only commit to a multi-year contract if it’s the best-fit program for your business operations and that you’re confident that you will still be using the tool years down the line. For instance, if you require a project management tool like Asana and start inquiring about a multi-year plan, you should be confident that your staff are satisfied with the application and won’t be requesting to switch to an alternative such as Monday.com a couple of months into your contract.
A simple way to test the waters is to distribute a free trial version of a new tool among your workforce and survey user feedback. Otherwise, you might end up investing in a non-productive tool with a poor return on investment, solely because of its sunken cost, or having to foot an early termination bill.
This is an inherent advantage of an annual contract, in that you can back out after just a year’s use if the purchased tool isn’t working out for your business.
Is the contract future-proof?
Lastly, consider your business trajectory when weighing a multi-year SaaS contract against an annual subscription. We’re living in uncertain economic times, and you can’t know for sure whether your operations will outgrow a given tool or require you to downgrade an under-utilized plan.
But by the time the business is locked into a set price point, it could be challenging and costly to negotiate changing terms with the vendor.
So, if you’re a small business enjoying considerable growth, it may be wise to stick to one-year or even monthly terms, providing the flexibility to move between tools as needed. On the other hand, if you’ve reached a stable period of growth and are looking to renew the plan for a tool centrally embedded in your workflow, it might make more sense to opt for a multi-year contract.
To determine which contract is the best fit for your current forecasting, it pays to interrogate the contract terms that you are tying the business to.
Consider conditions such as:
- Customer service and support
- Termination rules and associated fees
- Access and usage rights
- Billing schedule
Of these terms, one of the most important to inspect is the billing schedule. Even if you are subscribed to an annually-renewed plan, this doesn’t necessarily mean you will be billed on a yearly basis. A 2022 report by Vista Point Advisors showed that 17% of companies bill annually, 35% bill monthly, and as discussed, a small number will take upfront payments for a multi-year contract all at once.
While this can increase immediate cash flow on the vendor’s side of the deal, your business could find itself quickly out of pocket. During negotiations, ensure that the schedule you’re signing up to works for the business.
How Vertice can secure you the best possible contract terms
Ultimately, it can be challenging to know whether to opt for a multi-year contract or an annual plan — but we’re here to help.
With a database of over 13,000 worldwide vendor pricing points, we can determine which software providers will offer the best discounting options and contract terms for your business. We assess each case holistically, basing our recommendations on every factor from vendor market position and annual recurring revenue, to commission models and previous discounting data.
And what’s more, we’ll even negotiate the deals for your business, saving you the time and the stress of the software negotiation process.
To get started with Vertice today, get in touch with a member of the team and start saving on your SaaS. Alternatively, see for yourself how much we could save you by using our free cost savings analysis tool.