What are the best practices related to auto-renewal of SaaS/enterprise software contracts? #Q&A

By Zeeva Viola | February 15, 2017

Question:

Every contract is different but, in general, do enterprise software and SaaS companies typically set their contracts to automatically renew at their expiration or does a renewal have to happen explicitly. I’m sure both happens but I’m interested in what’s most standard.

Answer:

Yes, have your contract auto-renew. Couple of thoughts around this:

• Start with a 90-day notice required for termination and be ready to agree to a 30-day notice. You can use this as a bargaining chip during negotiation. It doesn’t really matter to you if it’s 30, 60, or 90 days. A cancel is a cancel and having two months extra notice isn’t going to help the revenue pain much.

• If your customers are balking at any type of auto-renew, offer them a 90-day “out clause” meaning that you’ll give them 90-days at the start of the contract to cancel without harm. This shows good faith on your end, plus motivates the buyer to implement your solution quickly. If your product is as good as you say it is, no one will exercise this clause but you’ll be viewed very positively for including.

• Use the auto-renew as a chip for “price protection.” If you client balks at the auto-renew, tell them – “We include this to provide you with protection against price resets. As we continue to build functionality over time, we expect we will charge 50% or even 100% more for our product a year from now. By including this auto-renew clause, it retains the pricing that we agreed to now.”

• But… If you use the “price protection” concept, also add a clause that allows you to reset the price to a higher level after three (3) years, but not lower. For example, if you are charging $5000/month now and your customer continues to auto-renew, by year 3, you might be charging the market $10,000/month. Be sure you have the ability to reset the price at a higher level.

• Expect that customers will break this cancellation clause anyway. I’m sure the people you’re dealing with in selling your service are very nice and don’t expect to break this clause, but if you sign a contract in April and you’re customer is told by their management to cut Q4 costs in September, you might be out of luck either way.

• In this case, insert language that includes some sort of penalty for early termination. Something to the equivalent of 1-3 months of subscription fees paid as a lump sum is fair.

• Be prepared for companies to require the omission or deletion of the auto-renew clause. Some company have internal policies against this because it saves them from lost contracts signed by “so-so who was crazy and left the company.” Four years later, the contract surfaces and suddenly someone in legal during a contract audit realizes that they’ve been paying for a service that no one uses. If that’s the case, be ready to request some other concession. That might be a higher upfront payment or a cancellation payment.

• Stay organized and send auto-renew notices to your clients after the new period is initiated. It’s tempting to let sleeping dogs lie, but it will ultimately be to your benefit to be transparent to your clients and their legal team.