What if the customer does not pay in the second year?
If you have an enforceable contract, the client is obligated to pay for the services received.
As a business owner, I would be very concerned if a SAAS was demanding upfront payment for 2 years.
A multi-year contract helps you ensure steady revenue for your business. So long as it can be properly enforced.
There can be different payment models: monthly, yearly, full contract upfront, etc... And you can discount each of the terms appropriately. If I were a customer I would want some flexibility in how often and what I pay for.
But just like everything else, no payment / no service.
It solves the "CAC Payback" problem.
Even without upfront payment, a 3-year contract is superior for 3 reasons:
- The CAC Reality: In my previous role, our payback period was 14 months. A 1-year deal was a financial risk. A 3-year deal guaranteed profit.
- Valuation: Investors value "Committed Revenue" (bookings) much higher than projected revenue. It secures funding and allows you to hire devs now.
- No "Renewal Mode": It buys your Customer Success team time to actually implement and build value, instead of stressing about the renewal from month 6.
