How to evaluate which contracts are better than others for your subscription business
by Niclas Lilja, on May 10, 2019
When deciding on the practical aspects of subscription business, contract types and terms may be one of the trickiest, yet most important. That's because contracts can determine your monthly recurring revenue, your cash flow and liquidity, and even your ability to scale your business. So how can you go about determining which contracts are right for your company?
Short term goals versus long term goals
Which contracts you use for your business may very well be contingent on your short term and long term goals. If you want to ramp up quickly, you may want to offer something very standardized, with a freemium option or pricing tiers based on usage ratings to make sign up very easy. But for high-touch sales organisations, it may make more sense for you to offer dynamic, customizable options with several charge types, since you spend a lot of time with potential customers in order to close a deal.
The long term goal of establishing deep customer relationships that enable longer agreements and loyalty, may be more important here than having a high number of customers quickly.
You may also have things to consider for where you will invest your resources, such as hiring employees, or purchasing business solutions. When looking to make these decisions, it's important to have a clear handle on your secured monthly recurring revenue, and forecasting. Your contract types can dictate your ability to make accurate predictions about the future of your business, which in turn affects how you may be able to allocate time and money.
Quality versus quantity
This also means you should think about which type of market you are after: high volume of lower paying customers, or fewer big-ticket customers. This will greatly determine the types of contracts you offer. Each has its benefits, and will largely depend on the value driver and the product or service you are offering.
In this case you should also consider the expectations of your target market, and what the current industry looks like. You may choose to offer similar contracts to competitors or parallel companies, based on market expectations, or potentially you choose to do business differently if you find a way that may be more appealing to prospects.
Flexibility versus security
Another thing to consider is what your customers will value most, and how that affects your business. Offering flexibility in terms of contracts may be appealing to potential customers, but can offer your company less security when it comes to secured revenue.
Aside from contract types, it's also necessary to think about how billing terms and charge types will play a role as well. Perhaps you charge an annual fee, which creates a more secure situation for your business than only charging monthly without a cancellation period. But customers may feel unsure about making an annual commitment, or feel sticker shock at an up front fee.
Think about how to balance your business needs with customer expectations as a way to ensure longevity of your business, but also customer satisfaction and retention. In some ways, you may be able to find a solution that combines dynamic pricing and billing, though in these cases it is crucial to have a proper handle on your subscription management and customer data.
The decision about contract types shouldn't be taken lightly. There are many elements that go into determining the best contracts for your business and your customers.
Want to learn more about the different subscription contract types and which ones may be best for you? Download our Contract Types E-Book now.