How to introduce changes to contracts in renewal periods
by Niclas Lilja, on Feb 27, 2019
Subscription businesses often have contracts that are set to agreed upon terms, as in they will be renewed or canceled after a specified period of time. Typically, when these renewal periods happen, there are opportunities for renegotiations of the contracts with existing customers, in which companies may look to change some elements of those contracts such as price, billing period, contract length, or any number of various options. In order to successfully introduce changes to contracts during these renewal periods, there is a process you should consider.
Start with value proposition
A good way to approach contract negotiations for increasing cost is by focusing on the value, or actual price-driver of your product or service. The price driver can be any number of things, including seats, features, transactions, KPIs, or various caps. If you are approaching a conversation about a change in pricing, it can likely correspond to a change in the price driver itself. If your customers want to continue to subscribe to your products or services, they are obviously happy with what you offer - meaning they should be willing to pay for it.
When it comes to other changes, such as payment periods or contract lengths, it's important to outline any benefits that would occur from the changes. Positioning the changes as being advantageous to your customer may make them more open to them.
Take loyalty into consideration
Introducing changes to contracts can put your customer loyalty to the test. That's why it's important to have good customer service in place beforehand, as well as have an understanding of customer usage data, and other metrics that can give you an indication of customer sentiment, satisfaction, and need, before you reach the renewal period.
You should take into consideration what loyalty means for your bottom line, and what increased customer lifetime value (CLV) does for your future revenue and cash flow. Securing contract renewal will likely also have a greater return on investment than the costs associated with procuring new customers.
In this case, think about what value your company gets from keeping a customer loyal.
Think about setting precedent
While the best way to ensure you get a fair deal out of a contract renegotiation with an existing customer is to have a good contract to begin with, you should be considering what precedent you set with future negotiations or even other customers. It's natural that a customer may play hardball, look for deals, or want special treatment (more often in the case of the enterprise customers), and it can be tempting to concede, just to keep the business.
But you also have to consider the precedent you set for this customer for the future, and their ability to take advantage of you in the contract negotiation period. You never want to find yourself in a position where you aren't actually making a profit from your customer, or you don't have the liquidity you need for your own operational costs. In some cases, subscriptions businesses do well with customer referrals and network affiliations for sales. But if your customers are telling other businesses what a great deal they were able to negotiate, you can find even new customers, or your other existing customers, will look to shake you down.
Contract renewals are crucial for subscription businesses to secure recurring revenue and reduce customer acquisition costs, while improving customer lifetime value. Think about the value you provide your customers, what their loyalty is worth, and the importance of the precedent you set when in renegotiation of contracts.
Want to learn more about the components of types of contracts, and how to determine the best for your business? Download the Subscription Contract Guidebook: