What’s the best way to structure multi-year deals with enterprises? Should we lock in pricing for the duration, include an annual price escalation clause, or give a larger upfront discount for a longer commitment?

Based on the approaches outlined in Price to Scale, there isn’t a one‐size‐fits-all answer—instead, the best structure depends on your market dynamics, customer segmentation, and the overall pricing context. Here are some principles from our book that can help guide your decision:

• Incorporate Flexibility with Escalation Clauses:
While locking in pricing for an extended period might seem attractive to both you and your customer, it also poses a risk if market conditions or your cost base change. Our book leans toward including an annual price escalation clause. This option allows you to benefit from long-term commitments while maintaining the flexibility to adjust pricing for inflation, rising operational costs, or increased value delivered.

• Use Upfront Discounts Judiciously:
Offering a larger upfront discount for a longer commitment is commonly seen in enterprise deals and is aligned with the volume-discount principles discussed in Price to Scale. However, such discounts should be carefully calibrated. They should reward the customer’s commitment without compromising your long-term revenue model. The key is ensuring that any discount remains consistent with the degressivity in unit pricing that our book highlights for larger deals.

• Segment and Customize:
As emphasized in our book, understanding and segmenting your customer base is crucial. Some enterprise customers may value the certainty of fixed pricing, while others might appreciate the reassurance that pricing will evolve with incremental value. It can be effective to offer multiple options—perhaps standardizing an annual escalation plan while also allowing for upfront discounts with certain restrictions or additional service benchmarks. This approach helps prevent a “race to the bottom” in discounts while keeping your pricing strategy competitive.

In summary, our pricing strategy book, Price to Scale, typically recommends structuring multi-year enterprise deals with built-in price adjustments (like an annual escalation clause) rather than completely locking in rates. This structure strikes a balance between securing long-term commitments and maintaining a pricing strategy that can evolve, ensuring both parties share in future growth or cost increases. Consider supplementing these principles by tailoring your approach based on the specific needs and risk profiles of your enterprise customers.