Hi Phil,
Great post...in particular "vendors have to ask themselves is whether they?re making the kind of sale where customers want to make an evaluation and are then happy to lock themselves into a multi-year contract."
I think it is the "happy to lock-in" that is the magic bullet in determining your contract strategy. In the end, no vendor will do well by selling in a fashion that makes customers unhappy.
The key is to align your customer's preferences with your own cash flow requirements, which can be easily measured by your company's own cost of capital.
The simplest solution is to offer the contract periods that meet your customer's needs and then add discounts/premiums that reflect your cost of capital, e.g., if your cost of capital is 20%, you might give a 15% discount for moving from monthly to annual, and 30% discount for a 2 year contract relative to monthly (1 - (1/1.2)^2) etc. This is how we price subscriptions at Xignite .
Similar logic can be easily applied to your SaaS sales compensation model (can't wait to see your take on this controversial and confusing issue). Whether it is contract strategy or sales compensation, SaaS companies sell subscriptions, not licenses and need to make financial decisions using recurring revenue and lifetime value based on NPV, not total contract value.
In the end, the long term contracts appear to lock in the customer, but they don't. Customers will only sign if they are "happy with the lock-in" in which case they would most likely stick around that long anyway due to the natural lock-in created by the product itself. The primary benefit of long term contracts is advance payment, in which case the value is easily measured by cost of capital and can be handled by discounts for longer contracts. There is no good reason to try and force your customers into contracts they don't like.
Joel York
at http://chaotic-flow.com
Discussion on:
Message 6 of 1
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