The normal discussion with software sales teams is all around creating special incentives for these teams to sell multi-year contracts instead of settling for annually renewable contracts. Multi-year deals are viewed as harder to sell and less likely to close and sales teams are looking for as fast and as certain a win as possible. Many companies feel they need to discount future years to win years two and three. In evaluating whether those special incentives or discounts are necessary, however, sometimes it helps to flip around the process and “sit in the seat” of your buyer and project sponsor. Why would they want a three-year deal versus a deal where they have the choice to renew annually?
Many enterprise software buying decisions take time and often involve a team of people identifying a need and researching a solution. A business case is created and a project is launched. Someone owns the project, leads the buying decision, and makes the recommendation to the sponsor or to several senior decision makers. Procurement and legal are engaged and the process comes to conclusion with a contract and a purchase order. The project is ready to launch.
The advantage for the buyer of a single year contract is simple. If the vendor’s product did not live up to the promised capabilities or if the support did not meet agreed SLAs, then the software contract can be cancelled and thus the risk of a bad decision is reduced. The disadvantage is that part of the purchase process needs to be redone each year and the spending needs to be re-approved annually.
The advantage of the multi-year contract is a potential solution for your buyer to avoid the challenges of how large businesses operate.
For the software provider, multi-year contract value is pretty clear. Lower churn and longer life-time value, more predictable year-over-year revenue, less sales team and account management distraction associated with annual renewals, and likely a higher valuation multiple on revenue. But the thing to remember is that a multi-year deal can truly be good for both the software provider and for their customer.