What is Co-Terming?
Co-terming refers to combining existing and new services all to the service dates of the original contract. Co-terming is commonly used when adding additional seats, new support packages, or additional services to an existing Annual Agreement.
All new terms are subject to a treatment based on specific periods, dictated by the originating contract. For example, the end date of a co-termed agreement is equal to the end date of the original agreement. The start date of the co-termed agreement will be the date for new services agreed upon by the customer.
How do you get started with Co-terming in your business?
Your initial service or renewal agreements must call out language for co-terming. If you're interested in learning more, feel free to reach out to email@example.com for language recommendations.
Why is co-terming best practice for SaaS businesses?
Generates additional cash flow before next renewal. Supplemental charges are pro-rated to the end of the Original Term from the expansion go-live date, thus enabling larger expansions mid-term. These are great for companies who's value takes months versus days to realize or have lengthy onboarding cycles, usually seen in mandate-ware.
In addition, your Renewals will capture full ARR value with less pricing sensitivity.
As always, provisioning of customer services for coterminous expansions must be completed for revenue recognition to start.
Example Agreement Terms
Let's take for example a new agreement that starts on 12/31/2022 at an initial annual subscription of $35,000. The customer decides to expand their spend on 06/16/2022 for an additional $15,000 per year. The total amount due for the adjustment to the original terms is now $8,219.18 because the order was pro-rated for 200 days of the $15,000 ($15,000/365 days) * 200 days. At renewal, the total ARR, sparing any CPS or additional service items, will be $50,000 per year.
The table below outlines each stage of terms from initial agreement terms to renewal.
|Effective Start Date||12/31/2022||06/15/2022||12/31/2023|
How does pro-ration work?
Pro-ration depends on an organization's definition. Some organizations decide to pro-rate per day, per month, or even per quarter. Below we have an example of daily pro-ration for the above exercise.
|Start||End (End of initial period)|
|Pro-rated Days||200 days|
|Daily Value (ARR / 365 days)||$41.10|
Building a strong foundation for what happens between annual agreements all depends on the way your revenue operation is built. Adding a process for co-terming is highly recommended to those in the B2B SaaS industry. If you would like to hear more or talk more in-depth about your process today, you're welcome to chat with our team for advice at any time.