Renewals for software as a service startups can be one of the biggest killers of growth. They are a hole in the bottom of the revenue bucket that keeps leaking while you’re trying to add new customers on. One of the common way’s that companies look to help renewals is by using a autorenewal clause in their contracts. What is an autorenewal clause? Well it’s a couple of sentences in your contract that basically states ‘if no one cancels this contract it will renewal with the same terms’. This look a bit deeper into this.
What is an Autorenewal Clause?
An autorenewal clause in a Software as a Service (SaaS) sales contract, statement of work or master service agreement is a contractual provision that stipulates the automatic extension of the agreement beyond its initial term, typically for a predefined period, unless either party takes explicit action to terminate or modify the contract. This clause is commonly used in SaaS agreements to ensure continuity of service for the customer and to secure a predictable stream of revenue for the service provider.
Under the autorenewal clause, if neither the customer nor the SaaS provider formally notifies the other party of their intention to terminate or modify the contract within a specified notice period before the initial term’s expiration, the contract will automatically renew for an additional term. The notice period and the duration of the renewal term are typically outlined within the contract and can vary from one agreement to another. It’s crucial for both parties to understand and adhere to these terms to avoid unintended contract renewals or disruptions in service.
Autorenewal clauses can offer several advantages for both SaaS providers and customers. For providers, they provide a degree of predictability in revenue streams, reduce administrative overhead associated with contract renewals, and maintain a steady customer base. Customers benefit from the convenience of uninterrupted service and may find it easier to budget for ongoing SaaS expenses with predictable renewal terms.
However, autorenewal clauses also come with potential downsides, especially for customers. If they are not vigilant, customers might find themselves locked into contracts they no longer need or want, leading to difficulties in terminating agreements or negotiating contract changes. This is important for SaaS companies that are selling into enterprise businesses. You need to understand the autorenewal provisions because it is part of the customers experience with you. And you don’t want you customers to have a poor contracting experience. Although an autorenewal clause is useful you should set reminders to evaluate whether the service still meets their needs before the renewal deadline.
When asking what is an autorenewal clause in a SaaS sales contract the most simple explanation is that it is a contractual mechanism that automatically extends the agreement’s duration unless one of the parties takes explicit action to terminate or modify it. While autorenewal clauses can offer benefits in terms of predictability and continuity, they also require careful attention and proactive management to ensure they align with the evolving needs of the customer.
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Example Autorenewal Clause
Let’s have a look at an example autorenewal clause and how it would be embedded into your contract:
1. Term and Autorenewal:
1.1 Initial Term: This Software as a Service (SaaS) Agreement (“Agreement”) shall commence on the Effective Date and continue for an initial term of [X] months/years (the “Initial Term”).
1.2 Autorenewal: Unless either party provides written notice of termination at least [Y] days prior to the expiration of the Initial Term or any subsequent Renewal Term (as defined below), this Agreement shall automatically renew for successive periods of [Z] months/years (each, a “Renewal Term”).
2. Notice of Non-Renewal:
2.1 Termination Notice: If either party intends not to renew this Agreement upon the expiration of the Initial Term or any Renewal Term, such party shall provide written notice of non-renewal to the other party no later than [Y] days prior to the end of the then-current term.
3. Renewal Terms:
3.1 Renewal Terms: Each Renewal Term shall be subject to the same terms and conditions as this Agreement, unless otherwise mutually agreed upon in writing by the parties.
4.1 Early Termination: Notwithstanding the autorenewal provision, either party may terminate this Agreement during a Renewal Term by providing written notice to the other party at least [X] days prior to the desired termination date.
5. Fees and Payment:
5.1 Renewal Pricing: Upon each renewal, the pricing for the SaaS services shall be subject to adjustment, and the parties shall negotiate in good faith to determine the applicable fees for the Renewal Term.
6. Termination Fees:
6.1 Termination Fees: In the event of early termination by the Customer during a Renewal Term, the Customer shall be responsible for any applicable termination fees as outlined in Exhibit [A] of this Agreement.
7. Entire Agreement:
7.1 Entire Agreement: This Autorenewal Clause constitutes an integral part of the entire Agreement between the parties and supersedes all prior understandings, written or verbal, with respect to the renewal and termination of this Agreement.
When to Use This in Your Contracts
Using an autorenewal clause in your SaaS enterprise contracts is most useful when you don’t foresee any changes being made to your contract at renewal. This includes when you’re confident that the level of usage your customer will have of your product won’t change and when you won’t need to renegotiation the terms of your contract at renewal.
This is most often the case when your customers are small to medium companies with an annual recurring revenue of less than ten thousand dollars per year. Contract Sent has been built to help you track clauses in your contracts as well as renewals and to close sales and renewals faster.