Enterprise Sales Decision: Multi-year with Discounts vs. Single-year with expansions

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Not sure I agree with this, but it’s a viewpoint.

I ran across an interesting Quora question this afternoon (as I was supposed to be working on something else of course…). Jason M. Lemkin had, of course as well, already answered…

What are the typical discounts SaaS companies offer for a multi-year contract paid upfront for a 2, 3 & 5 year contract? (Five is a stretch.)

I decided to piggyback on Jason’s answer from a more analytical view.

Below my thoughts on the subject:

I think Founders and their sales execs. oftentimes operate w/o eyes wide open as to the true cash impacts of this type of decision. This is a decision pitting certainty (locked in cash/revenue) vs. opportunity (some cash received and potential to expand that).

Quantitatively, I like having a simple tool to call upon, so I built a model (Here’s the link to the Google Sheets file). You can play with this to truly see the cash impact of your decisions of single-year vs. multi-year and the discounts you choose to offer.

The model is lightweight/generalized and certainly not perfect (feel free to make it better). Holler with questions/comments. I can’t speak to the sensitivities holding up in Sheets as I built in Excel and ported over for sharing.

Core drivers:

  1. ACV discount offered (%),
  2. Annual ACV expansion achieved (%) — assuming you’re not going multi-year contract) and
  3. Discount rate used for present value calculations to put single year vs. multi-year side by side. Assumed weighted cost of capital is 25%, really for Seed/Series A stage.

Cash up front from discounting is not always better, sometimes it is as you will see in the model. Of course, it’s all a negotiation, but I hope this lightweight tool helps you out.

Qualitatively, here are some things to think about:

  • Can you deploy the upfront chunk of cash now into identified opportunities
  • Are you giving up future upside? likely…
  • What gives you better leverage on all fronts? More cash now and a long-term contract or retaining optionality
  • Do you just need to WIN THIS DAMN DEAL?

Here’s my answer on Quora — https://www.quora.com/What-are-the-typical-discounts-SaaS-companies-offer-for-a-multi-year-contract-paid-upfront-for-a-2-3-5-year-contract-Five-is-a-stretch/answer/Brian-Parks-1

Let me know your thoughts.

Thanks,

Brian

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Denver SaaS Stallions Meetup #1

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it’s subtle, wouldn’t y0u say

We had the first gathering of our Denver Stallions crew last night. The early days of our community are very encouraging. We’ve seen some good engagement on Slack, and now we’ve take it offline to the real world, all in less than two weeks!

If you’ve stumbled upon this and wonder what the hell I’m talking about, we’ve started a community for folks involved in SaaS businesses who are interested in contributing to cross functional, peer-to-peer learning and development. Quick blurb here.

The Recap

11 of us convened at 5:30 and I was the first to leave at 7pm. I consider that a success! That’s really the hallmark of a good network, one that can thrive without you (the Stallion bus factor is very low at an early stage).

I had two deep conversations with entrepreneurs of a different cut. I’ll cover one of those here and the other in a following post.

Conversation #1 with Royce: Engineer turning bootstrapped entrepreneur

Royce is an engineer with deep product experience across multiple startups. One has exited to a large strategic (company with $$$), one is tying the web together and another I’m not so sure about.

He’s at a point in his life where he’s interested in expanding his skill domain beyond engineering into the more business-oriented facets of business building (he’s considering an MBA in fact).

He is scratching his own itch as a father of a toddler that needs a nanny (he and his wife both work). He’s built a niche B2C product that has achieved initial traction in the form of organic signups. He has also hired a market-facing resource who is a well-known blogger in his space to help spread word about his produce.

As far as I’m concerned, Royce, should he choose, is well on his way to having not only a product, but also a business, he can grow in the bootstrapped manner he desires, here’s why:

  1. He Knows (and embraces) his role: Royce knows his highest value delivery is as an engineer, and he has already made a move on his own to engage someone who can help him with distribution (I don’t think he really appreciated this, but from my perspective he is already selling the vision and collecting people as a Founder)
  2. He’s thinking about what he wants: Royce is thinking long-term (next 10 years) about what he wants. In fact, he asked me out of the gates what my 10-year plan is, which signifies to me where his head’s at. I’m not going to say he has a crystal clear vision 10 years down the road, but the fact that he’s planning at that scale is cool and evident in the decisions he’s making (e.g. not taking money that has been offered to him, considering pursuing an MBA).
  3. He’s aware of and interested in complementing his weaknesses: Royce has an innate sense that he’s not the one to go market his vision to the masses. He wants to focus on engineering and product vision and is confident in his ability to deliver on these core aspects of the business. He’s already found someone in the space to help him out via his own hustle (awesome!) and just by being self-aware and real and voicing what role he really wants to play in the business and not pretending like he’s got it all covered, Royce has put himself in a position to be helped (basically he has a very targeted ask: “I need help with distributing this product”).
  4. He’s done his homework: We chatted about the market and the dynamics at play, and guess what, Royce already has organic signups from big-time players (who could really like what he’s building…). He mentioned that he noticed some signups happening across geographic markets and with known domains. When I say noticed, I mean he hadn’t looked at the app in 6 months because of having a baby, a job and a move into a new house. These things happen.

What doesn’t just happen, and what I want Royce to know, is ORGANIC SIGNUPS IN THE HUNDREDS WHEN YOU’RE TOTALLY NOT PAYING ATTENTION.

Bottom line: Great conversation with Royce and happy to report that he was having a probably even greater conversation with Paul Arterburn when I checked out.

In the meantime, if you, or someone you know, could benefit from some nanny-sharing, sign up for Royce’s app at pareday.com

SaaS Reads

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http://saasreads.top/

A minimalist website with top SaaS articles, newsletters, podcast and reports from Nikhil Vimal.

My friend Paul Arterburn shared this great resource in our SaaS Stallions Slack Community (click that link to apply to join if you’re involved in SaaS in some capacity).

For me, it’s an alternative to finding these resources myself and using Pocket to read them later. My hope is that SaaS Reads can effectively be my Pocket for this content.

Nihkil’s project is currently doing quite well on Product Hunt. Upvote it here!