is it proper to offer discounts upon longer subscription?

Lots of advantages to this model. You'll bring in more revenue, sooner, and implicitly get the customers commitment for the year.

On the downside, you'll be giving up revenue from your most loyal and committed customers who were planning on staying with you for the long term with or without the discount.

Optimising this balance is, of course, the challenge!

Re level of discount. One thing which will influence this is the customers likelihood of attrition. On a product such as a CRM system, once they are committed, they will likely be around for the long term due to cost of migrating away. For a business such as RapidShare, people come and go quickly and with limited cost to them.

I would always tend towards using these kind of disounts, though would be more inclined to heavily discount in the RapidShare type of business.

It's certainly proper to offer discounts if you think that will attract more customers. This is akin to the bulk discounts people give for durable goods. Same basic premise.

Benjamin makes a good point about the balance but here's the thing, you also need to take into account the cost of acquiring new customers to replace customers that have left. Keeping a customer that you have spent energy and dollars on is much cheaper than getting a new one.

In terms of giving up revenue, it's all in how you price the offering. Since it costs you more for short term customers (since you have to replace them), those short term (or low quantity) customers cost more.

Competition does play a role in pricing. You need to be competitive but don't let price be your major advantage. That is a slippery slope your do not want to be on.

It's about rewarding trust. At http://startuptodo.com (my training/productivity community for startups and microISVs), base subscription is $30/month. But if the prospective customer is willing to trust me by signing up for 3,6 or 12 months, their price per month goes down to $15/month.

Not only are discounts awarded for buying in bulk, but also for paying in advance since the cash-flow can be such a benefit. Also, why process 12 month payments when you can just take one large payment up-front. The long-term commitment is also a big factor.

I don't like speaking in absolutes, but you have to offer discounts for customers that want to pay upfront for an extended period. Customers expect it. Why would you say "no" to someone that wants to lock themselves into your system for an extended period of time? If you do not offer the discount, customers may question your motivations. You don't want to lose a sale over this.

If you're not a big fan of discounts, then make the savings lower. Instead of 17% off for example, make it 10% off. Let the customer weigh the benefits of paying more, in advance.

I'll share my personal experience. We have customers constantly telling us, "price is not an issue, just give me what I want." Our pricing page is the second most visited page on our site, after our home page. Price does matter.