Dear SaaStr: Should We Allow Refunds in a Multi-Year SaaS Contract Paid Upfront?

Let me add a slightly controversial answer.  If you’re still a startup, then I’d say — Maybe.  If pushed.  If it’s important to the deal, when signing.  And maybe, if you failed the customer, even if it’s not in the contract itself.

But almost everyone you ask will say No reflexively.   They’ll say never allow refunds in a multi-year contract:

• Sales will hate it, especially if there is an explicit or implicit clawback if they do.
• Finance will hate it because they have to deal with reserves, or a financial hit
• Customer Success will hate it because it’s a discussion they just don’t want to have
• And let’s be clear — what’s the point of giving a discount for multi-year if they can cancel? It doesn’t really make any sense.

They are right.  So generally, don’t do it.  Especially at scale, especially once you have a dominant brand in your space.  Probably don’t do it then.  That big multi-year discount comes with a multi-year commitment after all.  Doesn’t it?

But … Before $10m, $20m ARR, maybe rethink that just a bit.

You are still a start-up.  Until you are at $10m, $20m ARR … Close The Deal.   And — Cash is King.

If they’ll pay you three years upfront, and you have to take some risk that you make them happy — I’ll take that risk.  As should you.  Stand behind your product, and yourself. And if you do — very few customers will really ever ask for a refund, even a prorated one.

And few of your large customers, the ones that will actually pre-pay for 2-3 years, will churn anyway if you do your job right.

So net, net the risk is low.

Get the Deal Closed.  And if 1 or 2 customers are unhappy, and ask for some of their cash back later and aren’t using your product — it probably won’t much matter.  And likely, you overpromised them or failed them in some fashion.  Even if they prepaid for several years.