Software Contracts and Traditional Business Practices

As an investor, I like seeing portfolio companies have their customers sign annual (or multi-year!) contracts and get the benefit of cash flow predictability (including prepayment) and customer commitment. In exchange for doing a longer customer contract, the vendor company can invest more in the customer acquisition process, the on-boarding/implementation process, and on-going customer success and support.

As a buyer, I dislike contracts as the needs of the business can change (need to cancel or downgrade — not possible), the vendor can provide poor service or a poor product experience for a period of time and there’s no recourse, and product usage can fluctuate (Slack is famous for only charging for users that actually use the product, not all users in the system). No contracts and more flexibility to adjust spending (specifically, spending less during certain months) is more customer-friendly.

Over time, as more next generation SaaS companies emerge, and there’s more comparable competition in the market, I believe we’re going to see more SMB software vendors not require contracts and have more flexible business practices that better align with how users want to buy. This will be a slow transition but expect it to be mainstream in the next 5 – 10 years.

What else? Do you think SMB vendors requiring annual contracts will be continue to be the norm?

3 thoughts on “Software Contracts and Traditional Business Practices

  1. Agree on all points as usual David. It will be interesting to see if there is any fallout from this trend on the acquisition front. I believe that buyers will be able to posture claiming the lack on long-term contracts, but this will be a temporary phenomenon. 2-3 years from now, the contracts won’t matter, only customer retention will. But the next 2-3 years may be a bit dicey.

  2. David – I really you are probably really busy but expressing a deep desire to see your replies to comments on your fantastic posts. Is that something we might get some of going forward? Thanks!

    Michael Pratt 914-309-4191 | | | 2728 Hood St., Apt 529 Dallas, TX 75219

  3. I think all software vendors will need to offer SaaS offering and not long term contracts. To offset higher risk to the vendors due to uncertainty of long term commitments from the clients, I think the monthly prices would be higher and would be discounted to those who commit to annual contracts, just like being offered by some startups now.

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