Sensitivity Model: 1-Year vs. 3-Year Contract
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The purpose of this model is to inform contract structuring and what you're gaining or giving up by selling a 1-year vs. 3-year contract.
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The primary drivers to play with are:
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The primary drivers to play with are:
Cell B4: The ACV discount you’re offering for a 3-year contract where you get all cash upfront in year 1.
Cell E6: The anticipated ACV expansion rate you can achieve in years 2 and 3 on a 1-year contract you’re able to renew.
Cell E10: The discount rate applied to present value the cash flows from years 2 and 3 on a single-year contract you’re able to renew. This discount rate applies to a single-year contract with and without expansion.
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Cash ReceivedYear 1Year 2Year 3
3-year Gross
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Cash Received From 1-Year Contract Without ACV expansion$300,000$300,000$300,000$900,000
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ACV Discount For 3-Year Contract17.86%17.86%17.86%
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Cash Received From 3-Year Contract (Actually received Year 1)$246,412$246,412$246,412$739,236
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ACV Expansion Rate For 1-Year Contract0.00%10.00%10.00%
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ARR From 1-Year Contract With ACV Expansion$300,000$330,000$363,000$993,000
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Present Value (time value of money)
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Discount Rate For 1-Year Contract Without ACV Expansion0.00%20.00%20.00%
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Discount Rate For 3-Year Contract Without Opportunity For ACV Expansion
0.00%0.00%0.00%
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Discount Rate For 1-Year Contract With ACV Expansion0.00%20.00%20.00%
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Present Value For 1-Year Contract Without ACV Expansion$300,000$208,333$173,611$681,944
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Present Value For 3-Year Contract without Opportunity For ACV Expansion
$246,412$246,412$246,412$739,236
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Present Value For 1-Year Contract With ACV Expansion$300,000$229,167$210,069$739,236
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Takeaways:
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17.86%
3-year contract ACV discount required to achieve same present value as 1-year contract with 10% annual ACV expansion
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6.71%
Annual ACV expansion required for 1-year contract to achieve same present value as 3-year contract with a 20% ACV discount
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You can leave questions/thoughts/improvements as comments or email me at bparks@bigfootcap.com
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Contract Decisioning Sensitivy Model
 
 
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