Contract Length: Everything You Need to Know
Contract length is crucial part of the contract process and depends on factors like the age of the business, the product or service it provides and the like.3 min read
Contract length in a business is an important part of the contract process that all businesses should know about. The length of your contracts will depend on many factors, including the age of your business, the product or service you provide, your price point, and the like. You do not have to solely rely on monthly contracts. If you want to have more predictability, you can aim to get annual or multi-annual contracts. However, the choice is up to you and how you want to structure your business.
Average Contract Length (ACL)
The Average Contract Length, or ACL, is the average length of a signed customer contract. To get this calculation, you will need to add the total number of contracts in months. A monthly plan counts as one month. You will then divide by the entire number of contracts to get your average contract length figure.
There is only one way to increase an ACL. You will have to encourage customers to switch to either an annual or multi-year type of contract. You may not necessarily want a lengthened ACL, however. The choice is yours, but there are many benefits to having a longer contract with customers.
What’s a Good Average Contract Length?
The best ACL will actually depend on the type of business you are in. Some companies often prefer to have shorter contracts. If you have a short product development cycle because you produce products more quickly, shorter ACLs will let you renegotiate contracts more often.
If you are still figuring out where you stand in the market with regard to how often you can renegotiate contracts, you will need to rely on monthly feedback to get an idea. When you begin to price monthly, you need to look for as much information as you can about the strength of your product in the marketplace.
A monthly payment plan situation will help decrease any issues that are associated with new buyers signing up for your product. It also allows you to see where they stand with regular payment ability. Having more users means that you can more easily test your marketing strategy, engagement, and conversion funnels.
Having a monthly payment plan will decrease the amount of money a new user has to pay when they are trying a new product. It also helps that they know they can change their minds whenever they want.
If your monthly figures are low, you can be confident that the product is a good market fit. Even if the user can cancel when they want to, they will likely keep using the product. This period of time will provide them with the confidence to continue using your business for years as long as they like the terms you offer.
Once the testing phase with monthly pricing is up, you can then consider hiring a sales team and pay them on a quota system. This is often the next step to getting yearly contracts. Making the decision to hire a sales team will vary from company to company.
As your business grows and you have made all of your pricing decisions permanent, you can begin to opt for multi-year contracts if you wish to do so.
An annual contract helps to reduce any unpredictability. Money paid for 12 months at a time allows you to have a better idea of how you can budget each year. If your business decides to increase prices, you could potentially begin to book contracts up to five years. This will result in more cash in the bank and more money to grow your business.
An annual contract does the following:
· Enables your customer service team to foster long-term relationships with your customers
· Generates account plans to help your customers hit their long-term goals
· Reduces the likelihood of any issues that could cause lost revenue
The buyer will encounter less risk when they commit to a long-term contract with a vendor because it has a reputation as a leader in the marketplace. The vendor will be supported by its brand as well as references from other customers.
Moving to an annual contract after experimenting with it can help you benefit from regular cash collection and strong, regular sales.
If you need help with understanding contract length, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.