Every modern business spends time identifying ways to improve recurring revenue.
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At the leadership level in Revenue Operations groups, individuals will task the team to run countless reports on existing revenue and forecasts. Deal Desk teams will join in and analyze nearly every deal to create a tactical defense for ARR & NRR goals. Finally, pricing teams will jump in and stratify pricing models to support more use cases and fix the leaky ARR faucets. But what does Sales Leadership do?
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Today, we are introducing a series of playbooks for sales leadership to incorporate into their mix of strategies. You may be familiar with some of these tactics, or you may be seeing them for the first time. We’re going to review these through stories of traditional mistakes.
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Let's look at common examples of mistakes in ARR with B2B SaaS negotiations:
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The Scenario:
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‍You win a deal because you offered the first 60 days for free to get started. You want to count that ARR right and get your team paid?
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Logically, you'd think this is true immediately, but you have a 12-month contract that moves the start date 60 days in the future. Unfortunately, that means until 60 days pass, the ARR won't be recognizable even if they pay right away.
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So what are better alternatives in negotiation so that you can recognize the ARR sooner?
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Consider a discount line item. Offer a 14-month contract and add a discount line item that removes 2 months' worth of contract value. In RevOps, we have a Dynamic Pricing formula that we use to generate a monthly discount, taking the aggregate contract, dividing by 12, and multiplying by a custom property.
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Your customer won’t sign unless you remove auto-renewal. Your ARR is only good for that 1 year of the contract, and you’ll need to go back and negotiate a new renewal.
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In this case, it’s better to leverage the term, but offer to remove auto-renewal when:
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YMMV, so we recommend considering not leading with one-year offers.
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Once you make an offer in writing, this becomes the starting point for negotiations in the mind of the customer. It is much harder for your sales team to start with a one-year offer and negotiate a longer-term contract than it is to start with a multi-year offering in comparison.
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Instead, try one of these approaches:
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Make your first offer using the longest term to give you the strongest starting position possible, usually three years. This approach also gives your team additional levers during the negotiation process to offer a good (1-year), better (2-year), best scenario (3-year).
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Deliver all three options upfront using the good, better, best framework of discounts. If you make concessions, you’re able to tie them directly to the options instead of going back to the deal desk to craft a new custom multi-year model.
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The power of a three-year, or even any multi-year deal is that you can standardize discounts, and your customer can then negotiate term length and discounts in a framework that protects ARR while still delivering value to the customer.
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In the example below, if you’re able to get buy-in on a multi-year commitment, you can use CPI and ramping discounts as a tool to compare and contrast between offerings. Customers may come back and ask that Option A be done on NET 60 or a slightly deeper discount on the first year. That’s well and good for your ARR growth because you’ll have committed revenue that is higher in year 2 or 3.
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When they decide to purchase Option C, you may make more ARR this year, but counter-intuitively, they may not find as much value in the second year and try to re-negotiate pricing down further. This is a big risk for CS teams and if they run a playbook like this by offering multi-year ramp deals on renewals, you can fix your success challenges and win back that ARR in year 2 or 3.
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Stay tuned for our next playbook about charging for seat overages.
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If you have any thoughts or comments, we’d love to hear them. And if you’d like help in adopting any of these playbooks on RevOps, contact our support anytime.
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