How your contract types can impact your ability to scale your business
by Niclas Lilja, on Apr 4, 2019
In business, it can be crucial to look for processes and practices that enable your company to be agile and in a position to grow. Without the ability to scale, businesses can become stagnant, unable to keep up with competition, or lead to difficulty adapting to changing customer needs and demands. That's why contracts can be an especially important part of subscription model businesses, and can actually have an impact on your ability to scale.
Contracts affect your liquidity
For many business, having liquidity is what directly impacts the ability to invest in new tools and software, and hire new employees. There can often be a catch-22 element to scaling when you need to acquire new customers, but don't necessarily have the manpower to handle them without the cash flow to do so.
For many subscription businesses, this liquidity is directly impacted by your contract terms, charge types, and billing periods. If, for example, you determine that it makes most sense for your business to charge annually for your software, and you are targeting larger enterprise businesses, you may have better up front cash flow than if you were to charge monthly.
Contracts affect your ability to forecast result
There are a few different ways contract types can affect your ability to forecast, but one main one is dependant on whether your contracts are termed or evergreen. With termed contracts, you obviously have a set period of payment with your customer, while with evergreen, the contract may be canceled at any time.
There are pros and cons to each type of contract, and you'll need to determine which makes most sense for your business. But when you put the right parameters in place for forecasting, you can make better decisions about how to allocate your resources, and ensure profitability in the future.
Contracts affect predictable MRR
Depending on what types of contracts you have, you may also have various abilities for revenue recognition and getting a clear picture of your monthly recurring revenue. One of the best aspects of having a subscription based business is the elimination of reliance on one-time sales, which can make revenue more difficult to predict.
When determining your contract terms and types, you can then get a clearer picture of your monthly recurring revenue and calculate important KPIs like customer acquisition costs, customer churn, and customer lifetime values, that all contribute to the future success of your business.
Monthly recurring revenue is an important variable for subscription businesses looking to scale, because it can help determine the valuation of a business, it can be an important metric for outside investors to see, or it can be a crucial element for properly allocating resources for things like marketing and sales.
For any type of business to stay competitive and be able to grow, they need to have the proper infrastructure in place that can allow them to be agile. With subscription businesses, a lot of that agility is contingent on how contracts are set up, and what terms are included. Deciding on these things early can allow subscription businesses the insight necessary for determining cash flow, future results, and monthly recurring revenue, which will improve the ability to make decisions about hiring and other investments.
Unsure of how to determine the best types of contracts for your business? Get the Contract Types Guidebook now.