Most enterprise Software-as-a-Service (SaaS) startups require an annual contract with their service. A minority of SaaS startups offer a month-to-month option either as the norm or for a premium over their annual contract price. What’s the economic value of an annual contract relative to a month-to-month offering for SaaS startups? How much more do vendors charge for the privilege of not having a contract?
Here are a few data points for prices from popular SaaS vendors (plans prominently highlighted on vendor sites will be used when multiple plans are available):
- Zendesk – $49/agent/month billed annual vs $59 month-to-month (source)
- New Relic – $149/server/month with annual contract vs $199 month-to-month (source)
- Olark – $44/month with annual contract vs $49 month-to-month (source)
Now, this isn’t a large sample size, but for companies that offer different pricing relative to an annual contract or month-to-month, month-to-month is between 10% and 30% higher. It makes sense that committing to a year of service results in a lower price.
What else? What are your thoughts on the economic value of annual contracts vs month-to-month for SaaS startups?
David Cummings on Startups 
I agree that it makes sense that those who commit to a longer term should enjoy some sort of preferential pricing. We provide a discount for customers who prepay by check for a significant amount of service. Not only does it save us the credit card processing fee, but the prepayment is a very tangible commitment on the customer’s part. Cash is king. Words are wind.
A downside of long term commitments (vs month-to-month) is that they often introduce the need to “re-sell” the relationship at the end of the term.