Why Locking Customers Into Annual Contracts Can Backfire

Jason Lemkin, a longtime fan of annual contracts, now says they can quietly hurt the companies that sell software. In a SaaStr post, he lists the costs: forced discounts, slow payments, extra paperwork and customers who leave without anyone noticing.

Why they look so good

The appeal is cash up front. Lemkin says a $125k annual contract, even after a healthy sales commission, can put $100k or more in the bank right away. For a startup with a low monthly burn, that can mean a whole extra month of runway. He says that is still true. Investors like these deals, and sales chiefs often push for them when they are behind plan.

Where it goes wrong

Lemkin points to several problems he has seen at many startups.

• Collecting can take 4 to 6 months, because annual deals need purchase orders, bills and repeated follow-up.
• A 10% to 20% discount is almost always needed, and customers expect it to continue in years 2, 3 and 10.
• Deals sent to legal or procurement almost never close the same month. That review suits a $250k+ deal, not a small one.
• Customers who stop using the product still show as paid for a year, which can hide weak customer support.

He also says annual deals fit poorly with services billed by usage, since customers must guess their usage before they have started. MongoDB found that revenue rose and sales cycles shortened after it stopped forcing annual contracts.

What the AI leaders do

The post does not say to drop annual deals. It says the AI leaders changed what the customer commits to. Anthropic increasingly signs non-cancelable annual or multi-year contracts that mostly turn into usage-based billing. In the first half of 2026, usage made up $13.1B, or 80% of revenue. Subscriptions made up $3.2B, or 20%.

Sierra sells an annual platform contract, then charges a set rate for each resolved case. Escalations to humans are free. In legal software, Harvey reportedly still leans on 12-month seat contracts, while also adding a pay-as-you-go plan. Legora moved its Agent Pro tier to usage pricing in June 2026.

What to do

Lemkin's rule of thumb is to commit to the relationship annually and meter the AI work by usage. Big customers often want to pay annually, and that makes sense for them. For smaller buyers, he suggests offering both monthly and annual options to see what they really prefer.

Buyers can use the same lens. Before signing a yearly commitment, ask what discount is on offer, whether it carries into renewal, and how much review the contract will need.