Transcript excerpt of Tomasz Tunguz discussing how contract types vary by market segment and ACV. He reports that mid-market customers predominantly use annual contracts, SMBs lean month-to-month, and enterprises favor multi-year deals; he concludes that annual contracts tied to free trials are generally optimal because conversion rates do not differ statistically by contract type.
If we look at the distribution by respondents here on the Y axis, we broke it down by four different categories. Usage based, how many API calls? In other words, you can use as many different API calls as you want. A multi year contract, a month to month contract, an annual contract, and on the x axis we broke it out by ACV from 0 to 5 all the way to 150k. What we see is the way to read this chart is 80% of respondents in the 15-50K ACV use an annual contract. And what you'll notice is that looking at the heat map, what we've got is in the mid market the vast majority of respondents actually use an annual contract. In the SMB 2/3 use month to month and in the Enterprise you've got 2/3 using multi year. What does this mean? It means that for most companies, an annual contract tied to a free trial is the best way of going about it. And it turns out if you run the correlation of the conversion rate by free trial, there's actually no statistical difference. So even if you're the SMB and even if the month to month contract is the most popular, you really should be using an annual contract because the conversion rate from your free trial won't change.
