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Estd 4.22.2023
Based on our methodology in Price to Scale, there isn’t a one‐size‐fits-all answer; rather, the key is to structure multi-year deals in a way that balances customer value with your need for margin protection and the ability to capture rising costs over time. Here are some considerations from our book’s approach:
• Rate-lock versus Escalators
– Locking the rate can create simplicity and price certainty for the customer. However, it may also mean that you’re absorbing future cost increases or inflation.
– A fixed annual increase (or escalation clause) allows you to spread the impact of rising costs over the term of the deal. This approach can help maintain profitability while still offering a committed multi-year arrangement.
• Upfront Payment Discounts
– Offering a discount for upfront payment is a way to secure commitment and reduce customer churn risk. As discussed in Price to Scale, discounts for enterprise deals can be significant (even up to 80% in some larger deals), so it’s crucial to factor in the lifetime value of that commitment when setting your discount levels.
– The decision to offer an upfront discount versus a rate with annual escalation depends on how much price predictability your customer needs versus the risk you’re willing to take on for locking in a longer commitment.
• Customer Value and Negotiation Dynamics
– The structure you choose should reflect both the savings and added value customers expect over the contract term—often framed in terms of long-run savings (as noted in our discussion on enterprise savings over three or five years).
– Evaluate competitive pressures and the particular cost economics of your deployment (e.g., cost of implementation, recurring service benefits) to decide if a locked rate, an escalated rate, or an upfront discount model offers the best balance.
In summary, Price to Scale encourages a tailored approach: consider a fixed annual increase if you plan to account for inflation and rising costs, or offer upfront payment discounts if securing cash flow and long-term commitment is more critical. Ultimately, the choice should be guided by the value delivered to the customer over time and the specific dynamics of your enterprise negotiations.