Contract Lengths

LouiseC

Hi All,

At the moment, we offer 12/24 or 36-month contracts for clients, and the renewal is onto another 12/24/36 month contract. The renewal process I feel works well, call or email (depending on account value/size/risk status) 90 days out from renewal with the details and confirmation that if they don't give 60 days notice to terminate/change subscription they are auto-renewed at their current subscription level, and follow up email confirming they have been renewed, including the subscription length.

I spoke with a client today who wasn't happy at our contracts, and felt they were outdated and that after the first year has passed you should just automatically go onto a rolling contract with 60 or 90 day notice, and apparently they have spoken to others in our marketplace who agree. Of course, clients will not be happy with the contract terms if they have failed to pay attention to the emails and the terms in their inbox...

but it just got me wondering what the general consensus among the community is around this. Do you renew to longer-term contracts? Do you go on to rolling after year 1? What's your biggest challenge with contract lengths?

EdPorter

Interesting comment from your customer. I don't like that customers need to pay attention to their email and take action based solely on that. Do you reach out other than through email? Is the email automated?

As for term, I think there's a few options here. One question would be the reason for 24 and 36 month contracts. Does the customer get a better rate for longer term? I tend to write contracts that have auto renewal terms of 1 year, even if they did a longer term initially. This depends on product mix, support agreements/SLAs, etc if offered though.

If a customer wants to cancel, I'm eager to know why. If they aren't using it, then I don't want to hold them hostage (depending on when within the term they want to cancel).

I don't like month to month though. If you build a revenue forecast model on ARR then doing monthly makes that process much harder.

Lots to unpack here and lots of considerations. Happy to brainstorm if you want. I'm fairly opinionated on contract terms and how they are enforced.

Curious what others will say

Stewart Stokes

In my limited experience, customers really don't like multi-year auto-renews. Even if it's clearly in the original terms, they were notified, and had full ability to respond....life sometimes happen and multiple years is a long time to lock someone into something that they didn't explicitly agree to. Especially if they didn't want to continue the service.

I think one year auto-renews is a fair balance. As long as it's clear in the original terms and you reach out early enough that the customer has plenty of time to respond. This will still create some awkward situations where someone wants to cancel but doesn't meet the terms. But as the vendor I think it paints you in a better light to the customer and to the broader market. Customers recognize that you as the vendor need to have a process for handling renewals and that the customer needs to take some ownership of their contracts. Working through disagreements over one year auto renews is much easier than working through disagreements on multi-year auto renews.

That said, a rolling 60-90 day term after the first year is super customer friendly. At my last company we had contracts where the customer could ALWAYS term for convenience with somewhere between 60 - 120 days notice depending on contract size. Customers loved it, it made it easier to sell, but certainly it made life harder for CS because we had to ensure we created value quickly. I think it's a healthy dynamic for a business but from a purely financial standpoint it does probably leaves some revenue on the table.....but do you really want to be managing the business based on getting revenue from customers who don't want to be your customer? For the most part, no.

Harsh Shah

I had a chance to work with short-term (monthly, quarterly) and long-term contracts (yearly, more than 1 year) contracts. Now, the reason we provide short-term contracts is to cover small businesses. Also, if some business is not 100% sure that our solution would work for them then they opt for this contract, but we only open this door which we feel is a right-fit customer based on our ICP.

After an initial cycle of short-term, they have to compulsorily move to the long-term contract based on their requirement. I believe this model won't work for all businesses for the obvious reasons. But yes, if you wanted to try something like this then you could. That is a great way to deliver quick value and build enough confidence so they are ready to invest in a long-term contract.

Now coming to the main discussion, if you're having a long-term contract like 1, 2, or 3 years then after the initial contract ends we provide them an opportunity to change the terms to a rolling 60-90 day term. This is not a compulsory thing, if the customer has made a long-term vision with our solution then they go with the previous contract only. The reason is, that we give them some benefits (monetary & non-monetary) if they choose a long-term model. That's a great way to positively influence their decision.

Another thing you should make sure of while dealing with long-term contracts is to maintain constant communication with your customers and users. As rightly said by Ed, you must reach them on multiple channels and make sure that they read and respond to their renewal mail. I usually keep updating the customers before 60-90 days that their renewals are coming whenever I connect with them and get their thoughts. I would do small things consistently to get them to notice your updates about the renewals.

I would be happy to chat if there are any other queries, please feel free to DM me on LinkedIn.

jhilderbrands

The baseline renewal process you describe that the customer was looking for is typical in the absence of anyway to manage said renewal.

I looked at this previously with our legal team and if you don't get an active signature so positive confirmation to a contract it would never stand up so a yearly charged product renewing for 3 years without positive signature from the customer isn't worth the paper I'm afraid.

If an analyst from a PE looked at that they would mark down the multiplier of value considerably because the 'contracts' that have auto renewed are not enforceable. Acceptance to contract terms by absence of a negative sentiment doesn't typically hold weight.

What is ideally done is your baseline automated renewal is exactly what the customers says, 1yr and 90day cancellation notice. However it should be more expensive than their previous contract years. So the automatic part needs to raise the price by 5 or 10 percent. Then the 1yr rolling starts.

Wat that does is bring them to the table if they want a cheaper price and allow you to have a playbook to talk to them about committing to a 3yr deal for a better price than the 1yr rolling.

Need to make sure you have the people to have those conversations but you will end up with higher renewal ARR from those that chose to auto renew with the uplift and solid contracts with customers that understand what they signing up for so they don't feel duped.