Can we talk about multiyear contracts for a second?
I learned about multiyear contracts in the context of SaaS products. But I believe they apply to service companies equally well. So today I wanted to talk about multiyear contracts.
If you’re sitting in the spot where I sit, where you’re always looking at and evaluating companies, whether for your own company or for others, and you’re looking at whether to buy them or not, and you’re talking about an agency, of course I want multiyear contract.
It’s a no brainer, right? Like at the core of it, if you’re an agency and you don’t have anything that is contractual in nature beyond the project you’re working on right now, it means that all your revenue could disappear. If you have monthly contracts, that’s great. But if they can, with 30 day notice. tell you that they’re out, then again, there’s not a lot of value. I can’t ascribe more value to your business if you don’t have those contracts.
Yearly contracts, they’re great. Multiyear contracts, that’s even better.
So of course, sitting from where I’m sitting, I want you to have multiyear contracts. I recommend multiyear contracts. I think they’re fantastic.
What happens when multiyear contracts go wrong?
What happens when the promise you make isn’t the promise your customers need? What if what you’re offering, and the way in which you’re locking them in, isn’t helpful to them?
Well then you’re doing yourself a disservice. Feeling locked in won’t make your customers happy. And when they’re not happy, they talk to other people. And that will be a consequence to your ability to close more deals.
If I’m telling you that multiyear contracts are good, but also telling you that multi-year contracts can be bad, then the real question is how do you structure them correctly?
Letting people out of their agreements
And the trick to this, I believe, is letting people get out of them. I know what you’re thinking. You’ll say to me, “wait a second, isn’t the point of a multiyear contract that they can’t get out?” Yes. You’re right. But if you lock someone in, and it becomes a prison, you could quickly turn into the bad guy. Let me give you an example (one that drove me to a new campaign at work).
A Hosting Example – Multiyear Lockup
There are a set of hosting companies that will advertise that you can get hosting for $3 a month. When you go to checkout, you discover that it’s $3 a month times 12 months for the first year, 12 months for the second and 12 for the third. A three-year lock to get that rate. And people pay it because they’re under the assumption that it will work for them. And that they have no interest in changing anything.
A year into it, they realize this isn’t what they wanted, but they don’t want to lose that sunk cost. They don’t want to say, well, it just is what it is. They’re planning on sticking it out for two more years. And you know that that’s not right because now someone has their options limited. Someone is feeling trapped, a prisoner to a decision they made in the past.
Crafting multiyear agreements with an out clause
So how do you deliver multiyear contracts in a way that helps you as a business (so you can count on that revenue) and still gives people an out?
Here’s my take : when you give people an out, put a price tag on it.
What you basically say is, listen, I gave you a discount for our service to this new price because of your three-year contract. I gave you that discount and if you cut out before the three years, there’s a fee. Call it a cancellation fee, a contract fee, a discount fee. But it’s the difference between what they paid and what they would have paid before the discount.
Now someone may not like that. They may be frustrated by that, but they’re not going to feel ripped off.
It’s simple, you got a discount because you signed a multiyear contract. If you want out of the multiyear contract, you got to pay back the difference, the savings that you made that you shouldn’t have gotten. Plus a small fee.
Here’s the trick
Now I want to tell you the trick to doing that is putting that all up front, all the information in front of them in advance.
Imagine you’re offering website maintenance services. You say, the fee is $250/month. If you sign a two-year agreement, I can make it $200/month. However, if you cut out before the end of that contract, you have to pay back the difference, plus a $250 fee.
Most people will agree without issue, because when they’re stepping into a multiyear contract, they want the deal. They’re excited. They have no plans on leaving.
But if they do decide a year later that they want to leave, you’re not the bad guy. You have an easy reply – “Here’s the contract you signed and here’s what you’ll owe me, in order to leave.”
That’s how I would recommend you go after multiyear contracts.