Why you should never auto-renew SaaS contracts

We’ve all been there. You see an email notification about a deduction from your credit card or account and you’re racking your brain to remember what it’s for. Was it that exercise app subscription you bought on new year’s, or that streaming subscription that’s now available at a huge discount, or a reading app you have no time for?
You’re not sure. But there’s one thing you’re sure of: you don’t really need it anymore. After all, you didn’t remember it till this email popped up in your inbox, did you?

You and most SaaS buyers are fighting the same villain: auto-renewals. You’d think that million-dollar industries like SaaS wouldn’t have the same problem. Unfortunately, most companies still make a very basic mistake: opt for auto-renewals for their SaaS purchases.  

Before we dive into why that is a problem, let’s look at what auto-renewals look like in the SaaS context.

What is SaaS auto-renewal?

An auto-renewal clause is a component of a SaaS contract that allows your vendor to extend your original contract and billing without requiring your re-approval.

Simply put, if your contract has an auto-renew clause, you don’t have to worry about missing your renewals for the next year or deal with follow-up calls from your vendor, or going through approvals again next year.

Sounds like a good deal?

Not really.

5 reasons why SaaS auto-renewal is a bad idea

In the case of SaaS buying, a lot depends on the fine print. And what happens behind the scenes. Unfortunately, in both cases, there’s a lot you could miss.

Here’s why:

1. Loss of critical negotiation leverage

The last 90-120 days of a contract equip you with the most buying leverage. With an auto-renew clause, you give up control over this critical period.

In effect, you give up the leverage you otherwise have to renegotiate your contract. Instead, you’re stuck at what could often be a higher locked-in price, insulated from the pricing advantages of a market as dynamic as SaaS.

Even with a right-fit solution where you can expect total contract value to grow, you should be entitled to be rewarded for this growth. This is something you give up when you opt for auto-renewal.

2. A lost opportunity to right-size

A lot can change in a year. You could be looking at new business initiatives, new leadership, different priorities, new teams, abandoned or modified projects, and outgoing employees.

On the outside, in the exciting and competitive SaaS space, there could be a company that is better suited to your evolving needs.

Even if you choose to stick to the same solution, an auto-renew clause means that you lose the opportunity to right-size your current SaaS purchases to align with your evolving needs. Additionally, you’re locked into a contract that may not even match with current market rates.

3. The mandatory cancellation notice

Cancellation terms are often confusing, vague, or obscure. Most auto-renewal contracts come with a long cancellation notice period between 30 and 90 days. This means additional dates for you to keep track of. If you’re a fast-growing and dynamic company, any benefit that having auto-renewal provides in terms of remembering and managing dates stands to be nullified.  

Additionally, not all companies send you auto-renewal notification emails in advance so you can re-evaluate your options.

4. Cancellation penalties

If you choose to break your agreement after it automatically renews, you could face multiple penalties in the form of cancelation fees or an early termination fee (ETF). This means, that you end up losing a portion of the full contract cost, or in some cases, even the full value of the contract.

5. Cumbersome cancellation processes

Most clauses are designed to add friction to the cancellation process by additional steps that you need to take. For instance, a vendor might not accept cancellations over the phone and would need an email. Others might require you to spend hours talking to their customer support agents.

Unless these procurements are centrally managed (or managed by a dedicated team), you can’t expect all employees to own this aspect of the process. The situation gets trickier if a contract owner is transitioning within the organization, or worse, getting offboarded.

Wrapping up

Despite the upfront advantages that the auto-renew option may seem to offer, such as convenience and certainty, it also deprives you of other downstream advantages. You miss out on the opportunity to review, right-size, and renegotiate your terms, or even check out potential alternatives.

Here’s our final advice: Don’t auto-renew until you have taken a critical look at what your vendor’s contract offers you, and more importantly how it suits your needs down the line.

For more insights on SaaS renewals, talk to our expert buyers.