In this bite-size webinar and article, commercial technology solicitor Edward Kilner talks about the key terms for inclusion in your SaaS contracts to safeguard your business interests.
SaaS agreement key terms
Our commercial technology solicitors have identified five key terms that are fundamentals for any SaaS agreement. They are:
- User numbers
- Price increases
- New features
- Auto-renewal
- Termination
Get these right and you will get real commercial benefits out of your SaaS agreement. There has never been a better time to negotiate hard on your SaaS agreements or to review your existing commercial contract terms to make sure your business is getting the best out of its agreements.
For a general read on SaaS contract tips from a consumer perspective take a look at our article on SaaS Contract Negotiation Essentials.
If you are looking for help with reviewing commercial contracts take a look at:
- Why you should regularly update your commercial contracts
- Understanding Commercial Contracts: Your FAQs Answered
- Contract lifecycle management: what you should be doing
User numbers
Whether you are busy innovating, developing the latest patch, or selling SaaS agreements, it is easy to get side-tracked from the thing that is of interest to your financiers and accountants; your profit.
It is worth thinking about whether your profit comes from high user numbers and asking questions such as:
- Do you have a fee per user or user number bands?
- Do you have a minimum user requirement?
- Does the fee per user, fee band price structure, or minimum number, require adjustment? For example, are ninety percent of your requests for additional help or complaints generated from contracting parties with X or fewer user numbers?
- How will the user numbers business model work in the future with increased home and hybrid working practices as well as freelance and overseas-based workers?
Asking yourself these questions, and challenging the way you do things, can help you create SaaS agreements that are more profitable, and flexible, target the customers who generate fewer assistance requests and complaints or assist you to attract customers who are more likely to want to increase user numbers or be interested in paying for additional innovative services or useful patches in addition to their licensed user fee payments.
If the user numbers structure works for your SaaS agreements, it is worth looking at:
- Offering discounts or extra incentives for firms who increase user numbers
- How you provide for reduced user numbers. Do you require advance notification to reduce user numbers with the notice provision tied into the end date of the SaaS agreement or the auto-renewal date? Does tying in those dates increase the risk of a SaaS contract being terminated? With requests for reduced numbers of licences, can you offer a minimum basic fee and additional fees for extra usage or services so there’s a basic licence and a ‘licence plus’ service?
Price increases
No customer likes price increases but what they hate most of all is being ambushed by price hikes without warning or where the price escalation clause is carefully hidden in an auto-renewing SaaS agreement.
Getting price increases right is difficult at the best of times but never more so when customers are watching inflation rise and their profits reduce or when they are struggling to pass on their increased overhead to their end consumers.
SaaS agreement and commercial technology solicitors say every SaaS contract should include a price escalation clause that expressly provides for a price increase. There are various options, such as:
- The reservation of the right to increase the contractual price at any time during the life of the contract subject to giving advance written notice- most customers will want a right to terminate the contract by choice if they are unhappy with the price rise
- A formula to agree on price rises on an annual or bi-annual or another regular basis. The formula could be the retail price index, consumer price index, or an IT price index. The IT price index may be preferred as they tend to outstrip the RPI. Alternatively, you could use a combination of a named index and a percentage-based increase
- An agreement that you can pass on increased overhead on notice at any point in the SaaS agreement – for example, if your host provider increases their costs
- Linking a price increase to the auto-renewal of the contract
- Linking price increases to updates or patches or add-ons. Whilst the price increase can appear to add value as the customer is getting something for the extra cost, it can result in different pricing structures for those clients who do not want to pay for updates, patches, improved functionality, or innovations
For additional reading take a look at Commercial contract price increase clauses | Price escalation.
New features
New features can help see off the competition and assist in improving customer loyalty. They can also be a source of extra revenue if you can justify an increased license fee or add-on charge for your new feature.
New features are particularly important in scenarios where:
- Your market is highly competitive and you want to distinguish your offering from your competitors
- Licence users in a client firm are not likely to increase but there will be interest in a more sophisticated features or improved functionality
- Your market is specialist and limited and therefore increased profit can only come through either expanding into other areas or improving the functionality of your specialist product by adding additional features
Auto-renewal
Auto-renewal provisions should be considered in every SaaS agreement as with auto-renewal a customer has to take active steps to cancel the contract otherwise it continues on an indefinite basis. Normally, with an auto-renewing contract, the consumer has the right to cancel the agreement but only if they give a specified period of notice. The notice period can be tied into the auto-renewal date making it harder for the customer to organise themselves to cancel the contract in the specified timescale.
Some customers are understandably reluctant to commit themselves to an auto-renewing contract so you may need to consider offering a trial period where there is no ongoing commitment to help cement the relationship. Alternatively, competitive pricing in return for auto-renewal of the contract may provide your business with cash flow certainty. Secure cash flow may be more important to your business than getting a slightly better price per licence but with no auto-renewing contract.
For a more in-depth look at this topic have a read of UK auto-renewal contracts: acceptable and unfair terms.
Termination
The provisions to end a SaaS contract deserve serious thought as there are the benefits of flexibility against the certainty of an annual contract that self-renews. What you do not want to do is allow the customer to terminate as a matter of choice unless there is a reason for the termination, such as within 7 days of notice of price increase, the customer can terminate the contract if they follow the contractual provisions.
Clearly thought out termination clauses help your business maintain its client base and provide certainty of revenue stream if contracts are annual rather than rolling monthly agreements. However, you should always include the right for you to terminate if there is a material breach in the agreement or for non-payment.
For more information on termination clauses in commercial contracts take a look at Can you terminate a commercial contract? | Termination clauses.
If you are incentivised to review your SaaS agreement, our team of IT and commercial technology solicitors can help you ensure that your needs are catered for in negotiating:
