The art of the sales deal goes through many paths, and one of those is the ramp deal. For SaaS businesses, ramp deals used strategically can maximize growth rather than leaving huge amounts of revenue on the table. However, as we well know, SaaS pricing is a pretty complex subject, and throwing in multi-year ramp contracts and discounting only further adds to the complexity. So, should you offer them? Well, like many things in life, it depends. Learn more about discounts.
What’s a Ramp Deal?
In simple terms, a ramp deal is a multi-year contract for a product or service that lasts for more than twelve months in which products can vary in price, quantity, or discount over different ramp intervals (time-based periods). Ramp deals are an ideal negotiating tool for Sales in order to get prospects to agree to sign on to a short-term deal. But as with any pricing model, advantages and disadvantages exist.
Ramping Up Benefits
Close deals and reduce churn — in a nutshell, that sums up the core advantages of ramp deals. In other words, the longer the SaaS contract period, the fewer opportunities for the customer to drop your service.
Predictable revenue is one of the key advantages to ramp deals. For SaaS companies, multi-year ramp contracts provide a steady stream of revenue for the length of the contracts as long as requirements are met. They can also be amended throughout the duration if all parties involved agree to make a change. More importantly, predictable revenue enables more accurate forecasting years down the road and provides a gauge for the state of the business going forward.
While they provide Sales with leverage in signing customers, ramp deals also have long-term advantages in terms of how they scale the product and services based on the customer’s current and future needs, and maximize revenue for Sales. For example, a customer can subscribe to a product for three years, say for a specific number of licenses that will increase over time as the company grows. In this case, the contract has three ramp intervals for this subscription. In Year 1, the price is $1,000 (10 licenses at $100/unit). At the beginning of the second year, the price will change to $1,200 (15 licenses at $80/unit). At the beginning of the third year, the price will change to $1,400 (20 licenses at $70/unit). In more complex ramp deals, adding new products or services can also be included through amendments throughout the life of the contract.
Speaking of amendments, while ramp multi-year deals lock customers into long-term contracts, an added advantage for Sales is they provide leeway for negotiating new contracts before the existing contract runs out. This can come in the form of offering new products and services and implementing additional discounts for renewals and longer-term contracts. For customers, the benefit of ramp multi-year contracts is they won't experience unplanned price hikes down the line.
Ramping Down Disadvantages
While plenty of benefits exist for ramp deals, there are also disadvantages. The biggest ties directly with the complexity of quoting and billing. With modern SaaS pricing, you’re not just dealing with a one-time cost but also with multiple pricing options, with variations, over different periods of time. For example, you might provide a product with monthly recurring services, a subscription with multi-year ramp contracts, or a usage-based subscription service. Unfortunately, most traditional, siloed billing systems simply aren’t designed to manage these scenarios and support all of your pricing variations. As a result, managing data from quote to invoice to revenue is ever more complex, and reconciling data becomes a nightmare for finance teams.
Another issue is whether you’re delivering on what you promised and the value they perceive from your offering. The nature of long-term contracts, regardless of whether they have ramp intervals, is highly dependent on the company’s ability to meet the agreed upon service level agreements (SLAs). Depending on the terms, a breach of contract is an easy out for customers.
One of the advantages of ramp deals for customers — the ability to lock in pricing — can also be a disadvantage for SaaS companies when it comes to increasing prices, especially when discounting is applied. From internal factors (e.g., rising development costs) to external ones (e.g., inflation), the potential for a negative impact on revenue is to be expected. Depending on the structure of the ramp deal and applied discounts, SaaS businesses give up the ability to increase prices for the life of the contract. While the impact may be small to begin with, the financial impact could be greater as the business grows.
Ramp deals are often a win-win for both parties, providing flexibility for customers as they scale, while securing long-term revenue for SaaS companies. But there is a downside when trying to upsell customers who have already committed to a certain price for years to come. While amendments during the life of ramp contracts allow for adding new products and services as customer needs change, some customers may be set on paying the agreed amount and nothing more. That makes them unlikely to take on another contract and limit upsell opportunities.
Is Your SaaS Business Ready for Ramp Deals?
Ramp deals have their advantages and disadvantages, but whether they’re right for your business begins with knowing your customers. While they can speed up your ability to close deals and reduce churn, they require a sound business model, strong business practices, and ultimately satisfied customers. In other words, offer ramp deals when your customers are already staying with you for extended periods of time on short-term deals.
On ramp or off, contact us to learn more about leveraging ramp deals.
