Saas 102 #11 Why Does AfterShip Prefer Not to Sign Multi-Year Contracts?
Recently our business has been growing really fast. That's why we've started building a sales team. (If you’re interested in building your career in sales, why not join us!). But at the moment, we prefer for our sales team not to sign contracts with customers that last longer than a year. (We only sell multi-year contracts on customer request.) A lot of colleagues at our company come to me and ask:
"Why do we prefer not to sign contracts that last longer than a year?"
I'd like to explain some concepts behind how we run our SaaS business, and how they affect our policies towards signing contracts with customers.
For contracts with business customers, both sides need to invest quite a lot in terms of time and labor resources. There are several stages involved, from business discussion and negotiation, to contract approval, to going through the purchase and payment process.
That’s why we don’t sign one-month contracts with business customers, and prefer to sign longer contracts.
From the point of view of our sales staff, after they’ve worked hard to win a contract, they’ll naturally prefer to make that contract as long as possible.
After all, the total payment for a three-year contract will definitely be higher than for a one-year contract. A higher total payment means more commission. At the moment, though, the maximum contract period we allow is one year.
Why do we prefer not to sign contracts that last longer than one year?
Reason one: We don’t want our contracts to hold our customers captive
SaaS stands for “Software as a Service.”
What we are selling is a service that is continuously being upgraded to new iterations. What we are not selling is a rigid product that never changes from its original version.
What happens if our customer signs a three-year contract, but the service we provide isn’t good enough, and after a year the customer is unsatisfied?
In that scenario, isn’t it almost as if our contract is holding the customer captive? Even though they think the service being provided isn’t worth the price, they still have no choice but to pay.
But if the customer signs a one-year contract, they’re under no obligation to continue using our services after one year.
Signing one-year contracts actually forces us to strive to do our best at all times. We have to strive not just to continually improve our products, but also to serve our customers better and help them to succeed.
Always striving forward in this way is the responsibility of everyone at AfterShip, not just sales staff and project managers.
Engineers have a responsibility to ensure stable, effective, service. Engineers are also responsible for developing product features with the goal of creating value for the customer.
Designers have a responsibility to provide a smooth, consistent experience for our customers. The work designers do should enable customers to get the most out of our products.
Even recruitment managers have a responsibility to hire the right people, so we can provide better service to our customers.
Reason two: We don’t want to be held captive by contracts, either
This is a reason which I expect a lot of people won’t have thought of.
We are continuously investing resources to develop new product iterations. That being the case, the features, benefits, and value we provide will certainly have improved in one year’s time when compared to the present moment.
If, in one year, we invest a lot of resources to improve our product service and product features, then the next year, there’s no reason we can’t raise our prices. Good quality products are always subject to frequent price rises. Just look at the difference in price between the first iPhone and the iPhone 13 series. The iPhone is one of Apple’s flagship products, and look at how much it’s gone up in price over the years.
Signing a three-year contract, though, means that no matter how much we invest in resources, or how much we improve our services, we are tied to the price agreed in the contract. We can’t raise our prices after one year even if we’ve improved our services. This is almost as if the customer is using the contract to hold us captive.
If we only sign a one-year contract and the customer is satisfied, they’ll still be willing to renew after a year even if our prices increase. The contract renewal rate for our Enterprise customers is above 95%.
When customers renew contracts, our sales staff can earn commission. This commission makes up for any commission they might have missed out on by not signing a long-term contract at the start. And because our prices may have increased, sales staff might actually earn more commission over the long term by signing contracts that last a maximum of one year.
An example might be useful to further illustrate the reasons for raising prices:
In general, each of us work very hard at our jobs and careers. That being the case, then as each year goes by, we should be more skilled and capable at what we do than we were a year before.
Imagine you worked at a company for three years. Each year you were there, you got better at your job. You provided more and more value for the company as time went by. But, they never gave you a pay rise. Would you still be willing to work there?
Of course you wouldn’t.
If you have more capability than before, serve the company better than before, and produce more value than before, then you are worth a higher salary than before.
The same logic applies to our products and services. We are continuously improving our products. We continue to provide better services to, and create more value for, our customers. This means that the value of what we provide our customers is worth a higher price. We can take the extra money we get from raising prices and share it with those colleagues at our company who are continuously improving both themselves and our products.
The dynamics of long-term contracts are very interesting. SaaS companies that aren't sure they can continuously improve their products and services hope to sign contracts that are as long as possible.
That’s because once they’ve got the contract, then if their SaaS products don’t improve (or even get worse) over the next few years, their customers will still have to pay them. This kind of arrangement is not the way things should be. Personally, I can’t endorse it.
What about a SaaS company that provides great products and services, and has customers that believe those products and services will continue improving?
For that kind of company, it’s the customers who prefer to sign longer contracts if possible. The reason being, the customers know there’s a good chance the prices will go up before the time comes to renew the contract next year.
We want to be the second kind of company. We want to be the kind of SaaS company that earns revenue by creating value for our customers through continuously improving products and services. Perhaps that’s why, at the moment, a number of business customers are, of their own accord, asking us if they can sign contracts with us for three or even five years.
For small to mid-sized customers, why don’t we just stick to monthly billing plans?
As I mentioned earlier in this article, the business product purchasing process can be slow. That’s why business customers prefer to sign a contract lasting at least a year.
For small and mid-sized eCommerce retailers, though, it’s quite easy to purchase the plan they need from our website, and pay on a monthly basis. That’s why, for the last few years, we didn’t think of offering one-year contracts to our small and mid-sized customers.
But recently we’ve started offering one-year plans to small and mid-sized customers. What is our reasoning behind this decision?
Many small and mid-sized customers don’t receive a stable, predictable amount of orders each month.
These are customers that are already committed to our products, so it’s quite troublesome for them to make monthly payments. That’s why we started receiving requests for one-year contracts.
During popular shopping days and seasons (such as Black Friday, or the period leading up to Christmas), the number of orders retailers receive can increase significantly. But in some months, order numbers can drop substantially.
Many small and mid-sized customers can’t accurately predict the amount of orders they will receive in the following month. This means it’s also hard for them to tell which plan will suit them best for that month. If they buy the wrong plan, they might incur unnecessary expenses.
For example, suppose that a customer bought a plan that allowed them to track 5,000 shipments. But in the month they bought the plan for, they ended up needing to ship more than 5,000 orders. In that case, the customer would need to upgrade their plan.
But what if, a couple of months later, they weren’t bringing in enough orders to fully use the allowance their new plan offers. In that scenario, they would be wasting money on the cost of their plan.
From a short-term point of view, the scenarios described above provide benefits to us but are against the customers’ interests.
From a long-term point of view, the scenarios described above are problematic both for us and for our customers. That’s because our customer’s success is a prerequisite for our own success.
We don’t want to earn money by taking advantage of our customers. We want to help our customers grow into bigger, more successful businesses. Once we’ve done that, they can become bigger customers, and we can earn more money by continuing to work with them.
So we decided to provide plans that are billed annually for our small and mid-sized customers. For eCommerce retailers, monthly order volume is hard to predict and can fluctuate significantly. Annual order volume, on the other hand, may be easier to predict.
Customers can also first buy a smaller plan, and then estimate at a mid-point during the year to see if they need to upgrade their plan. What they don’t need to do is make estimations every month to see if they need to upgrade their plan or not.
Summary
SaaS stands for “Software as a Service.” Essentially, what we do is sell a service that is continuously upgrading to new, improved iterations. We don’t sell a rigid product that never changes from its original version.
Since we are selling a service, the most important challenge we face is finding the best way to serve our customers as well as possible, and to help our customers succeed. Our goal is not to sell our product and then do nothing more to help our customers.
Serving our customers well and creating value for our customers is the responsibility of every member of the AfterShip team. It’s not only the responsibility of people in certain roles, such as sales staff or product managers.
And if our products and services really do create value for our customers and help them to earn more money, then even if we only sign a one-year contract with customers, they will definitely be willing to extend their contracts for another year. That remains the case even if we raise our prices.
We want our customers to pay us because of the value we create for them. We don’t want customers to pay us because they are being held captive by a contract, and so have no choice but to pay.
I'm Teddy, Co-Founder & CEO of AfterShip, SaaS 102 is a series of articles where I share my experience in SaaS startups.
We are looking for great SaaS sales talent and welcome you to join us at careers.aftership.com.
(Article translated by Joseph O'Neill)