Using price escalators in SaaS contracts

Maintaining net dollar retention over 100% is critical to the health of your SaaS business and getting a premium valuation. One easy hack to improve NDR is to include automatic price escalators in your annual contracts with customers. Our portfolio companies do this, and the automatic price increase upon renewal is anywhere from 3% to 5%. Even getting 5% or 3% goes a long way to improving net dollar retention metrics and generating more cash.

Our portfolio companies have had the following experiences with price escalators:

“We have a standard 5% increase. But so many companies want to strike that. Jenna has been awesome managing renewals and is increasing everyone’s rates significantly. She hasn’t been getting much push back. She just states it very matter of fact that our rates have increased.”

“We started including auto-price increases in our renewals at the start of this year and it’s been surprisingly effective. Our starting point is 10% and we get it more often than not; some customers negotiate us down to the 3–5% range.”

“The automatic price increases are a beautiful thing because they give us leverage: i) we can trade an automatic price increase for an earlier renewal, longer contract period, or upselling to more features; and ii) when we do waive price increases, the customer walks away satisfied. They feel like they’re winning.”

So, if your SaaS contracts don’t have automatic price increases of 3% to 5% upon annual renewal, you’re missing out on free money, negotiating leverage with customers, and improved retention metrics.

Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.