The Pros and Cons of Multi-Year Client Contracts
When bringing on a new client, you always hope that they'll be with you for the long haul. Of course, if you provide them with the top-quality service that you've promised, they'll have no reason to leave you, right? Still, it can be nice to have the security of a multi-year deal in place when discussing terms. Like with many other business decisions, you'll need to weigh the pros and cons of these long-term arrangements to determine which option is best for you.
So, how do you decide if you're going to allow your clients to opt out of your services after a year or even less, or if you're going to attempt to lock them into a multi-year deal that guarantees you their business for the foreseeable future? Let's look at the benefits and detriments of both options.
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Short-Term Contracts: The Pros
It's an Easy Sell
If you can come to a client and tell them that they'll be able to get out of their contract after a short period of time, or even at any time, they'll probably be more likely to give you a shot. Why? Because they aren't putting the long-term protection and security of their business in your hands and your hands alone. What happens if your company doesn't come through with the services that you described in your sales pitch? If the client only agreed to a short-term contract, they can already see the light at the end of the tunnel and will simply select a new IT service provider as soon as possible. However, if locked into a 5-year deal, their entire business could be at risk.
As one Redditor pointed out, long-term contracts can be used as a bargaining chip to get the client to agree to sign on to a short-term deal.
Build Your Credibility
By giving your clients the option of only signing on for short-term contracts, you're essentially telling them that your service is so good that you're not afraid of losing them. This gives you a chance to really "wow" your clients and show them why you don't need to lock them into multi-year deals. If your service is good enough, your clients will want to stay with you for the long haul whether they're locked into a contract or not. But don't take it from us, here's a response to a Reddit post that asked specifically about the benefits of short and long-term contracts.
Easy Out With Low-Billing Clients
With short-term contracts, you have the ability to escape from low-billing clients who are taking up a lot of your time and resources. Of course, you always want to give clients time to get used to your services before you pass judgment and cut them loose, but sometimes a client can cost your business too much time for the small return that they're giving.
Short-Term Contracts: The Cons
Unpredictability
Even if you're providing top-notch service to your clients, it's never a sure thing that they will stick with you. A short-term contract brings a certain level of unpredictability with it. We've all dealt with clients or customers who just can't be pleased, no matter what. With short-term contracts, these disgruntled few will mostly likely disappear as soon as their contract runs out, at no fault of your own.
Easier to Lose Clients to Competition
If you're operating on short-term contracts, you're giving your competition repeat chances to poach your clients. Think of it this way, if you are bringing clients on to 3-5 year deals, that gives your competitors one chance every 3 to 5 years to steal your business away. If you are operating on one year deals, your competitors will have a new chance to steal your client each and every time their short-term contract runs out.
Long-Term Contracts: The Pros
Predictable Revenue
If you have a client locked in to a 3-5 year contract, you can rely on a steady stream of revenue coming from that client. You are guaranteed to have their business for the length of the contract, so long as you fulfill the requirements. Being able to forecast guaranteed revenue years down the road can help you map out the progress of your business and predict where you will be going forward.
More Time to Negotiate Renewals
When you have clients locked in to long-term deals, you can begin negotiating new contracts up to a year before their contract runs out. This gives you a real leg up on the competition. Of course, it is possible that they have been speaking and negotiating terms with other providers, but being able to come to them a year ahead of expiration can allow you to retain their business by either matching whatever offers they have received, or offering price breaks later. It's also comforting for a client to lock into a multi-year contract when they know that they won't experience price hikes down the line.
Long-Term Contracts: The Cons
Can Be Easy to Breach
When you sign a client on to a long-term contract, the nature of the deal is dependent on your ability to meet the agreed upon Service Level Agreements (SLAs). If your service is not meeting the standard that was established, your clients can easily escape their contract. Make sure that you are delivering on what you promised. A breach of contract is an easy out for clients.
Harder to Upsell
Trying to upsell clients who have already committed to a certain price for years to come is no easy task. When a 3-5 year contract is signed, the client typically expects to pay the agreed upon amount and nothing more. When you come to them with new products or services during the life of the original contract, it is unlikely that they will want to take on another contract, having already agreed to their existing one.
In the end, both short and long-term contracts have their advantages and disadvantages. It's really about finding the fit that is right for your business. Moving to long-term contracts simply because you have a high client churn rate is probably not the best idea. If your clients are leaving you, the first thing you need to do is find out why. Long-term contracts should be considered when your clients are already staying with you for extended periods of time on short-term deals.