As a legal tech startup pioneering the automation of the contract lifecycle, we at ClearContract understand the intricate balance between achieving financial stability and maintaining customer satisfaction. One question that often arises is whether to push for annual contracts, especially when most of our customers come through free trials and have grown accustomed to monthly arrangements. Let’s dive into the pros and cons of annual contracts, using insights from our team and industry experts to help you navigate this critical decision.
Contract Terms vs. Payment Terms
First things first, it’s important not to confuse contract terms with payment terms. Annual contracts do not necessarily mean a single, large upfront payment. According to Mike Kavanagh, Vice President of Commercial Sales at OneTrust, “Companies are comfortable signing annual contracts; the push back comes from the large outlay of cash; especially in this climate where CFOs are reviewing every deal and trying to hold on to as much cash as possible.”
A feasible solution? Flexibility in payment schedules. Quarterly or semi-annual payments can make annual contracts more appealing without imposing financial strain on your customers. However, as Mike suggests, don’t give this flexibility away for free. Instead, request something in return, such as case studies, reference calls, or participation in webinars. This strategy not only eases the burden on your customers but also enriches your marketing collateral.
Nevertheless, this approach comes with its own set of challenges. What happens if a customer fails to pay? Before implementing flexible payment terms, ensure you have robust systems in place to manage defaulters, including suspending or canceling accounts if necessary. This elevates the expectations on your product and customer success teams to consistently deliver value.
ClearContract product overview here
Managing Your Existing Monthly Customers
Then there’s the elephant in the room: your existing monthly customers. Many boards aim for long-term, multi-year agreements, and the sooner you start, the easier it will be. Mike doesn’t mince words here: “The board will always want to move to long-term; multi-year annual agreements. The sooner you start, the easier it will be. If you let everyone sign up month-to-month, it is just delaying an inevitable problem.”
Transitioning from monthly to annual contracts requires a nuanced approach. Make sure the board understands that abruptly switching to annual agreements can result in a write-down of Annual Recurring Revenue (ARR). A smarter move would be to upsell customers to a higher-priced SKU with an annual contract, offering a modest discount as an incentive. This tactic not only retains your existing customer base but also opens up new avenues for value addition.
Aligning Sales Incentives
Lastly, don’t overlook the importance of aligning sales incentives. Your sales team will push what you incentivize. Mike emphasizes, “The comp plan has to align with your priorities; give sales spiffs for selling new customers on annual contracts; kick it up even more if they can sell them on a 2 or 3-year agreement.”
By aligning your sales team’s goals with your long-term vision, you create a motivated force that will help transition customers to annual contracts seamlessly.
Conclusion
Annual contracts offer predictable revenue streams and increased customer stickiness but come with heightened responsibilities and potential pitfalls. To successfully make this shift, start gradually—flexible payment terms, aligning sales incentives, and ensuring your product delivers long-term value are key strategies. Begin with new customers and progressively convert your existing base.
At ClearContract, we are dedicated to revolutionizing the contract lifecycle with our advanced AI solutions. Navigating the complexities of contract terms is part of our expertise, and we’re here to support you every step of the way.
More about ClearContract here
Until next time, keep innovating and staying ahead of the curve!
