In enterprise software sales, offering to buy out a competitor’s contract means your company is willing to cover the cost or overlap of an existing contract with a competitor to encourage a customer to switch to your solution. This involves providing the customer with free or discounted usage of your product for the remainder of their current contract, making the transition cost-neutral. It’s a strategy to reduce the financial and psychological barriers of switching vendors. This practice is common in competitive markets, especially when trying to displace a competitor with long-term contracts.
For instance, Zoom used this strategy to compete against WebEx by offering buy-out contracts, allowing customers to switch without financial burden. Instead of writing checks, Zoom provided free usage during the overlap, helping them gain customers who otherwise might stay because of multi-year deals or the hassle of switching.
The benefit of buy-out deals is reducing friction in the sales process. Customers prefer not paying twice or dealing with switching issues unless there’s a compelling reason. If the transition is easy and financially neutral or beneficial, closing the deal becomes more likely.
However, this tactic may not suit everyone. It can be costly, and the ROI may not justify the expense unless targeting high-value or marquee accounts. It’s most effective when above $10M ARR and capable of absorbing the costs, or in competitive markets where displacing competitors is crucial for growth.
If considering this approach, establish clear guidelines on when and how to offer buy-out deals. For example, offer them for multi-year contracts or strategic verticals. A simple approach is combining them with a new one-year contract, such as offering 15 months for the price of 12 when three months remain on a competitor’s contract.
Ensure your sales team’s incentives align, as winning a competitor’s customer often requires more effort, possibly needing higher commissions to motivate your team.
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