This post is by Jason Lemkin from SaaStr
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It is popular in enterprise sales, especially as a “trick” to get a customer to sign a multi-year deal. Why would a customer sign a multi-year deal (especially one with cash up-front)? Two reasons:
- An additional discount. I.e., another 10% off for a 3 year deal, cash up-front. This will sound great in the early years, when cash is king. Later, perhaps less so, as it’s yet another discount you didn’t have to give.
- Price protection. This is a big deal in the enterprise, where things are budgeted. The last thing I want as an enterprise buyer is to get to start using a new app, budget say $400k a year for it for years to come … and have the vendor raise the price to $600k. That wrecks my budget (and some trust). So in many cases, an enterprise buyer is somewhat happy to do a 3+ deal IF they are 99%+ sure they’ll use you for 3 years, in exchange for eliminating even the chance of a budget-busting price increase.