Procurement
• 11 min read
9 Types Of SaaS Contracts Explained: You Must Need To Know
10th January, 2024
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As businesses expand, the necessity for SaaS contracts grows, governing relationships with diverse customers and partners. However, securing the right agreements becomes paramount to scale operations while mitigating legal risks.
This article aims to delve into the core aspects of SaaS contracts: their definition, purpose, critical clauses, and types. By grasping the fundamentals of SaaS contracts, businesses can navigate agreements proficiently, avoiding pitfalls associated with unfavorable terms or incorrect agreements in the future.
Before we discuss the 9 types of SaaS contracts, let's first understand what a SaaS contract is and its purpose.
What Is SaaS Contract?
A Software as a Service (SaaS) contract, also known as a SaaS agreement, is a legal document delineating the terms and conditions between a SaaS provider and a customer for utilizing a software service. This contract comprehensively outlines subscription terms, pricing structures, Service Level Agreements (SLAs), data security provisions, and other pertinent terms. It establishes both parties' rights and responsibilities, ensuring clarity on accessing, utilizing, and maintaining the SaaS application throughout the subscription period.
Distinct from traditional licensing agreements involving physical media or downloads, a SaaS contract enables another business to use the software via the cloud. This agreement grants the customer the right to utilize the software in line with the terms specified in their subscription.
But why do we even need a SaaS contract?
The Purpose Of SaaS Contract
The primary purpose of a SaaS contract is to outline what clients can access upon subscribing to a software service. Given that SaaS companies often offer various subscription tiers with distinct features at different prices, these contracts specify the chosen tier, customer rights and obligations, and subscription costs, providing clarity to both parties.
Moreover, SaaS service agreements serve to protect the providing company. They define permissible usage of the licensed software, prohibiting actions like sharing or engaging in illegal activities. Additionally, clauses are included to limit liability in the event of a data breach, safeguarding the company against losses resulting from piracy or hacking incidents.
It's important to note that SaaS contracts vary for each company and service. Some, such as Adobe, offers monthly or yearly subscriptions, while others adopt a pay-as-you-go model, wherein customers only pay for the software when actively using it.
But when do we actually need these SaaS contracts?
When Do We Need A SaaS Contract?
SaaS contracts become essential when a company licenses cloud-based software rather than selling it directly. Any entity licensing such software needs well-defined terms and conditions to prevent legal complications and potential revenue loss.
Typically, SaaS companies offer varying agreements catering to different client sizes. They commonly provide contracts for individual users and small businesses alongside customized agreements for larger enterprises. For instance, Adobe Cloud Creator presents options for individual subscriptions and small business licenses with fixed terms and non-negotiable prices, allowing subscribers to select their service tier.
Moreover, SaaS companies like Adobe negotiate contracts with major institutions, considering factors such as user count, required bandwidth, contract duration, and the necessity for personalized or custom support teams.
For businesses following a similar operational model, crafting distinct SaaS agreements for diverse clientele becomes imperative.
Now that we've covered the foundational aspects of SaaS contracts, let's explore the key clauses that warrant attention in every SaaS contract.
Key Clauses To Examine In Every SaaS Contract
Various SaaS contracts incorporate unique terms and clauses influenced by industry specifics, provided products, or offered services. However, all cloud service agreements commonly include certain standard clauses:
Scope Of License
The authorized use clauses in a SaaS agreement typically encompass:
Specification of permissible access and usage methods for the services.
Identification of the SaaS services accessible and the permitted extent of access and usage.
Stipulation of user limitations or other defined constraints on access and usage.
It's important to note that while a SaaS vendor might exclusively offer SaaS services, they often serve multiple clients through a multi-tenant model of software service distribution. Additionally, vendors may restrict the licensed field of use, confining it to your specific business sector, market, or industry.
Limitation Of Liability
The Limitation of Liability clause within a SaaS contract shields SaaS vendors from legal claims by contractually mitigating end-user liability for damages. This clause restricts a user's ability to seek full recovery for losses incurred due to software problems or malfunctions.
However, the framing of the Limitation of Liability clause by the SaaS vendor hinges on the risks associated with their specific SaaS product. Commonly utilized forms in SaaS licensing agreements often contain limitations of liability that favor the vendor. These typically include a disclaimer followed by a statement outlining the maximum damages a vendor could potentially be liable for under the agreement.
Ownership And Security Of Data
Defining data ownership in SaaS agreements is crucial as the software provider and users generate substantial data. It's imperative to specify who owns the data entered into the platform since the hosting of customer data by the software provider can sometimes blur ownership lines.
To ensure clarity, it's vital to examine data storage practices and any associated access restrictions. SaaS agreements should also encompass a privacy policy elucidating how the service provider utilizes user data. This policy delineates the information collected, its internal or third-party sharing, data encryption measures, backup protocols, and the provider's responsibilities in case of data or security breaches.
Customer Service And Support
The Customer Service and Support clause is pivotal in detailing the assistance and support provided by the SaaS vendor. It encompasses response times and commitments regarding the expected quality and level of service. This clause outlines the vendor's dedication to providing timely and reliable customer support.
Subscription plan, model, and pricing
The Subscription Plan, Model, and Pricing clause within the contract delineates the inclusions of the subscription plan and how the SaaS vendor will render their services. It provides explicit details regarding costs, outlining the method and timing of charges.
SaaS contracts typically adopt a subscription model with payment frequencies such as monthly, quarterly, or annually. Under this model, customers make regular payments to maintain access to the service or product. However, it's crucial to note the various types of SaaS pricing models:
Flat-Rate Pricing: Offers a single product with a fixed set of features at a specific price.
Usage-Based Pricing: Operates on a pay-as-you-go structure based on actual usage.
Tiered Pricing: Provides multiple packages with varying feature combinations at different prices.
Per-User Pricing: Involves a fixed monthly cost per user, with additional users increasing the overall expense.
Per-Active-User Pricing: Charges only for users actively utilizing the software, irrespective of the total number of registered users.
Each model holds distinct advantages and considerations that should align with the needs and usage patterns of the customer.
Tenure, renewal, and termination
The Tenure, Renewal, and Termination clauses in SaaS contracts often span a typical duration of one year, with some extending to 3-5 years for larger enterprises. Typically, SaaS contracts feature an evergreen renewal, automatically extending for another term unless actively terminated before a specified date. This feature, common in subscription-based agreements, streamlines the process, saving time and resources compared to renegotiating each term.
Notice within a specified period is required to opt out of automatic renewal. Missing this notice window might result in being locked into another renewal period.
Moreover, termination for convenience clauses in SaaS agreements permits contract termination for any reason, usually with a notice period that can be negotiated, typically ranging from ten to ninety days. Leveraging AI-powered software can expedite the identification of automatic renewal clauses and other pertinent terms, facilitating more efficient contract reviews.
Now that you've delved into various clauses, exploring different types of SaaS contracts could provide further insights.
SaaS Agreement Spectrum: 9 Different Types Of SaaS Contracts
Listed below are the different types of SaaS contracts that you need to be familiar with to avoid getting into the wrong agreement:
1. SaaS Service Agreement
SaaS Service Agreement, also referred to as a SaaS Agreement or SaaS Master Service Agreement, this contractual document defines the relationship between the SaaS provider and customers. It establishes the right for customers to access the provider's SaaS product via the cloud instead of purchasing the software outright.
This agreement outlines the specific software access granted upon subscription, detailing features, service levels, and agreed-upon payment terms.
Key components of a SaaS Service Agreement should include:
Identification of available SaaS applications and transparent pricing details, specifying how and when costs will be charged.
Agreement duration, outlining terms for termination or renewal.
Data security provisions addressing ownership and rights to provided data, including a clear statement on software intellectual property ownership.
2. SaaS Service Level Agreement
The SaaS Service Level Agreement (SLA) can exist as a separate document or a section within the SaaS Service Agreement. Its primary aim is to set minimum performance standards for the service level offered to customers, particularly focusing on service availability.
Balancing certainty without exposing oneself to excessive liability is crucial. Promising uninterrupted SaaS availability 24/7 throughout the year may be impractical due to external factors beyond one's control. Therefore, it's essential to commit only to services that are realistically achievable.
Key elements to include in a SaaS Service Level Agreement:
A detailed description of the services and functionalities provided by the SaaS product, integrating performance indicators, metrics, and quality benchmarks.
Response times for time-sensitive issues and a guaranteed software uptime.
Stipulated penalties if the guaranteed standards are not met, alongside critical exclusions that exempt the provider from penalties or security obligations related to software maintenance.
3. SaaS Subscription Agreement
Pricing holds immense significance in SaaS agreements, often becoming a central point in B2B negotiations. While some SaaS services adopt a pay-as-you-go model, where clients pay only for utilized software, most opt for a subscription-based approach. In this model, customers pay for continual product access at regular intervals, typically monthly or yearly.
Depending on client requirements, the SaaS Subscription Agreement might exist as a section within a broader SaaS Services Agreement or as a distinct contract.
Key components of a SaaS Subscription Services Agreement include:
Detailed delineation of the chosen subscription pricing model, considering various common SaaS pricing models.
A comprehensive payment schedule outlining recurring billing cycles (monthly or annually) and specifying the amount due in each cycle.
A clear statement outlining the services provided to the customer and the delivery method.
4. SaaS Licensing Agreement
The necessity for a SaaS Licensing Agreement differs from that of a SaaS Services Agreement, indicating distinct purposes.
While many of us use SaaS-hosted applications daily—like Gmail, Office365, and Dropbox—where users access the software online without physically obtaining a copy, a SaaS License isn't applicable in these scenarios.
A SaaS License is specific and rare, employed only when an organization's end users are provided with actual copies of the software, typically installed on their computers.
It's crucial to differentiate between a SaaS Services Agreement and a SaaS Licensing Agreement. Using a license instead of a service agreement might lead to unintended consequences for SaaS vendors.
In rare cases where a customer installs a copy of the software on their computer, a SaaS Licensing Agreement becomes necessary. If a Software License is required, it should include:
Clear delineation of the license type provided to the customer, specifying whether it permits software usage on one or multiple computers at the same location.
Details concerning the rights to the application retained by the licensor encompassing software, name, copyright, distribution, and intellectual property rights.
A stipulation preventing the licensee from transferring the license to another party or modifying the software, with specific details outlining what constitutes "modification," possibly restricting modifications altogether.
5. SaaS End User License Agreement
The distinction between a SaaS EULA and a SaaS Services Agreement is straightforward: one pertains to the provision of software services, while the other is a license allowing software use under specified terms.
When comparing a SaaS Software License Agreement and a SaaS EULA, the difference lies in the direct relationship between vendors and their customers. The former applies when the vendor's application is installed and operated on the customer's hardware. At the same time, EULAs are relevant when distributing software through intermediaries, such as releasing an app on app stores.
EULA terms are one-sided, granting users a license to utilize the app, with users consenting to these terms before software download.
A SaaS company providing software licenses should have an EULA. However, if merely offering access to services via the cloud, neither contract type is applicable.
Key inclusions in a SaaS End User License Agreement (EULA) encompass:
A clear statement clarifying the license for software use, emphasizing permission for usage, not ownership transfer.
Explicit mention that unauthorized software usage may result in legal consequences.
Defined permissible software usage, coupled with stringent prohibitions against:
Leasing, transferring, distributing, or selling the license to third parties.
Modifying, copying, or reproducing the software to create derivative works.
Engaging in illegal or unintended software usage as defined by the licensor.
6. SaaS Terms & Conditions
Think of SaaS Terms and Conditions as the guidelines for using a website or app. While not legally mandated, they are prudent for companies to implement.
These terms essentially outline user conduct, specifying permissible and prohibited actions on the site or app in exchange for the services offered. They establish ground rules to maintain software functionality and ensure fair play.
These rules provide protection for users, delineating acceptable behavior and actions to avoid repercussions for themselves or the company.
Key inclusions in SaaS Terms and Conditions encompass:
Explicit delineation of actions users are prohibited from undertaking, such as damaging the site or its reputation.
A clear termination clause enables the company to swiftly remove users misusing the platform, safeguarding the site and other users.
Clarification regarding the company's intellectual property ownership and stipulations on user utilization without permission. If users can share content, provisions for reporting unauthorized intellectual property usage should be outlined.
7. SaaS Reseller Agreement / SaaS Distributor Agreement
Often, SaaS companies prefer collaborating with local partners to market their software in foreign countries where they lack a direct presence.
In such instances, they engage with local SaaS resellers or distributors and formulate a SaaS Reseller Agreement. The reseller purchases the software to sell to their local clientele, employing their terms and conditions.
The SaaS company doesn't engage directly with the reseller's customers; instead, the end customer enters into a SaaS agreement with the reseller. However, the SaaS Reseller Agreement delineates the relationship, rights, and responsibilities between the SaaS company and the reseller.
Key inclusions in a SaaS Reseller Agreement encompass:
Clear delineation of jurisdictional laws governing the agreement if the SaaS vendor and reseller operate in different countries.
Specification of intellectual property ownership and the delineation of necessary rights and licenses for seamless contract functioning.
Establishment of a software maintenance and update plan. Generally, as the SaaS provider, you would be responsible for ensuring the software remains current and well-maintained throughout the contract duration.
8. SaaS Channel Partner Agreement
A SaaS Channel Partner aids in promoting your SaaS to new audiences and receives rewards for each new customer they bring in, often in the form of cash, sales commissions, or other incentives.
This collaboration enables broader customer reach, extends brand influence, and establishes a mutually advantageous customer exchange channel.
Prominent SaaS companies like HubSpot, SEMrush, Zendesk, and Databox initiated successful SaaS Channel Partner Programs early on, contributing to business growth, revenue increase, and accelerated development.
To govern the relationship with your SaaS Channel Partner, a comprehensive SaaS Channel Partner Agreement should include the following:
Clear delineation of rights and responsibilities for both parties, incorporating terms and guidelines for marketing and advertising activities.
Incorporation of a confidentiality clause safeguarding both companies from trade secret disclosure, specifying intellectual property ownership in your product, website, and marketing materials.
Detailed payment particulars, specifying amount, timing, and method for compensation related to each activity. Additionally, it should outline the agreement's duration and circumstances leading to termination.
9. SaaS Referral Agreement
This contract facilitates a company referring potential customers to your SaaS company, earning a commission based on a percentage of the deal's value.
Key Inclusions in the SaaS Referral Agreement:
Referral Types and Qualification Criteria: Explicitly define the types of referrals eligible for commission and outline the criteria for a 'qualified referral,' including specified timeframes and agreed-upon formats for referrals.
Payment Details: Clarify the commission structure, including how often payments will be disbursed. Additionally, articulate procedures for handling returns and credits related to referrals.
Non-Exclusive Agreement Acknowledgment: Acknowledge that this agreement is non-exclusive, allowing both parties to recommend similar products and collaborate with other partners without exclusivity constraints.
Now that you have explored all the types of contracts, you might have understood how difficult it is to manage these legal terms and conditions. Fortunately, there's a solution, i.e., an advanced SaaS management platform. This platform is designed to help manage, govern, and provide full transparency for all your legal SaaS contracts. While several platforms are available, the one that stands out from the rest is Zluri. Why Zluri? What features does it offer? Here's a quick read-through.
How To Manage SaaS Contract Effectively?
SaaS contracts are the legal bindings which cannot be overlooked, if one fails to meet the terms and conditions they might face legal repercussions and monetary loss. So to prevent such situations, Zluri, an advanced SaaS management platform, comes into play. It helps in effectively managing SaaS contracts and provides complete transparency into these legal agreements, ensuring you stay informed about established terms and avoid any potential legal consequences.
This was an overview of what Zluri does, to provide you with better understanding let’s dive deeper into its benefits:
Manage All Your Contracts In One Place
Zluri's SMP offers a revolutionary approach by consolidating all your contracts into a centralized dashboard. This user-friendly interface provides comprehensive insights into vital contract details like quantity, value, payment terms, etc. This holistic view makes managing contracts efficient, enabling a strategic approach to optimize Return on Investment (ROI).
No more tedious navigation through individual contracts; everything you need is conveniently accessible in one organized space, simplifying and enhancing the efficiency of your contract management process. This centralized repository ensures ease of access and allows for informed decision-making across your entire contract landscape.
Auto-Fetch Contract Details Through Integrations
Zluri's SaaS management platform seamlessly integrates with diverse applications to automatically retrieve precise contract details. This includes identifying contract initiators, real-time monitoring of contract statuses, and comprehensive analysis of usage patterns. Accessing real-time data becomes invaluable for optimizing software spending, enabling pinpoint identification of underutilized contracts and facilitating necessary adjustments to licensing—ultimately resulting in substantial cost savings.
Furthermore, Zluri's SMP provides an integrated view of each application's security and compliance information. These insights empower informed decisions regarding contract renewals, bolstering your organization's resilience against potential risks.
Stay On Top Of Renewals With Zuri's Renewal Calendar To Avoid Sudden Surprises
Zluri's automation extends to its renewal reminder, providing timely alerts and notifications to your team and ensuring no contract renewal dates are missed or overlooked. These notifications occur at crucial intervals—30 days, 15 days, and one day before contract expiration. Zluri offers user-flexible settings, allowing personalized alerts tailored to individual preferences.
These alerts act as strategic tools, empowering proactive planning for contract continuations, discontinuations, or renegotiations for better deals. Zluri's SMP supports decision-making by furnishing detailed insights into purchase history, user requirements, current market data, and frequently utilized applications. This data-driven approach ensures that your renewal management and negotiation strategies align seamlessly with your organizational objectives.
So what are you waiting for? Book a demo now and see for yourself how Zluri can be a revolutionizing solution to manage your SaaS contracts.
FAQs
Can SaaS Contracts Be Customized To Suit Specific Business Needs?
Yes, SaaS contracts can be customized to meet specific business needs. Customization may involve adjusting service scope, pricing, user access, and other terms to align with the unique requirements of a particular business. The extent of customization can vary among SaaS providers.
Can A SaaS Contract Be Terminated Before The End Of The Agreed Term?
Yes, a SaaS contract can be terminated before the agreed term ends. However, one needs to note that it should be stated in the terms and conditions of the contract.
What Happens To The Data After The Termination Of A SaaS Contract?
After a SaaS contract ends, the fate of the data depends on the contract terms. It could be kept, deleted, moved, or follow special rules outlined in the agreement.
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