The pros and cons of different types of SaaS contracts
by Niclas Lilja, on Oct 18, 2018
When defining the business for your subscription model company, you want to take many different things into consideration for your SaaS contracts. It's not as simple or straightforward as you may think, and there are several important factors that can dictate the success of your business, your cash flow, and your ability to secure future revenues.
Up front payments and periodical recurring payments
Depending on the industry you're in, it can make more sense to collect payment up front, in addition to requiring periodical invoicing periods which can be monthly, quarterly, or yearly (depending on the contract type and length).
If you have large overhead and operational costs, such as a lengthy onboarding term, it can be difficult to jump start growth for your business if you are waiting on payment for your products and services at a later date - in which case it may make sense to charge up front. But you also want to take into consideration the expectations of your customers. Perhaps for enterprise businesses, in which contracts can be worth thousands - or more - a total up front cost would not be appropriate.
More commonly, you can think about lowering subsequent monthly fees after charging the initial set-up and implementation costs. The key is to ensure that you are receiving suitable payment for what could potentially be a long and costly onboarding, then having recurring payments after the initial period.
You may also want to first consider what your payback period is for customer acquisition costs, and what you would need for your business to be sustainable. This can allow you to determine what is most appropriate when deciding your up front payments and periodical recurring payments.
Termed versus evergreen
Termed contracts can offer businesses security, which can be much needed in a growth phase. However, they can also mean that a price is locked in, and can't be changed or renegotiated until the renewal period. This can work out great, if you have shorter contracts, but remember that while signing a three-year contract sounds great for future stability, you may wind up losing out on opportunity down the road for increasing price or adding on upsells.
Evergreen contracts may lack the same level of security as a termed contract, but it allows you much more flexibility. This is something to consider if you have customers who are unsure of what they want or what they are getting. You can assure them of their opportunities to add-on features, or reduce their product offering depending on their experience. But having the flexible option may be seen as good customer experience to begin with.
Set fees versus pay per usage
We've discussed how important it is to set pricing tiers appropriately, and what most businesses and customers are looking for in terms of subscription offerings from B2B SaaS companies. But a pay-per-usage model may also be something worth considering, depending on your industry and customer expectations.
The pros of a pay per usage model is that both your business and your customer know exactly what they are getting for their money. You don't waste time and resources on delivery of your product or services, and your customer doesn't feel that they are paying for something they are not fully using.
The cons of the pay-per-usage model is that your MRR can change drastically month-to-month, and forecasting becomes more difficult. In some cases, your volume of customers may reach a point where this is less concerning, but until then, you could also have a set base price and feature package, and extra features or usage is added on extra each month.
There are, in fact, so many details to consider when setting contracts for your SaaS subscriptions. When you weigh the pros and cons, think about your business needs versus your customer expectations, and consider how to best ensure future revenue, you'll have a clearer picture of what makes sense for your SaaS company.