Why Short-Term Contracts Aren't Just for Netflix and Spotify Anymore With subscription software as a service rising in popularity, short-term contracts are an increasingly good option for B2B businesses.
By Adam Levy •
Opinions expressed by Entrepreneur contributors are their own.
In the past, landing a long-term contract was the ultimate goal of any software provider. Today, that's not necessarily the case.
Related: 8 Pricing Strategies for Your Digital Product
Short-term contracts are becoming much more typical for B2B companies. For example, look at Codeweavers. This financial-software provider saw a 48 percent rise in sales after introducing a 30-day contract option -- evidence that customers want technology that reflects their own fast, agile business approach.
The allure of short-term contracts
In today's world, where the pace of innovation can make technologies obsolete in the blink of an eye, long-term contracts are no longer meeting expectations.
Consumers have grown accustomed to month-to-month subscription services, thanks to companies such as Netflix and Spotify. Now, those expectations seem to be carrying over to the business world as well -- especially in the software category, where the "software as a service" (SaaS) subscription model is becoming more and more pervasive.
Small businesses, in particular, might prefer to purchase services based on a subscription model for a variety of reasons. For one,a short-term model offers the opportunity to test-run a service before making a larger financial commitment. After a month or two, the subscriber can make a much more educated decision whether continued use makes sense.
Likewise, there's a lower barrier to entry for services twith subscription pricing. Even if a piece of software might greatly benefit a company, the large up-front investment some long-term contracts require could put those products out of reach.
When I started LoTops, we didn't want to miss out on potential customers by offering only long-term contracts. Moreover, we're confident in the product we're delivering and not worried that customers won't renew. For these reasons, we offer short-term contract options; and, like Codeweavers, we've been happy with the results.
For other entrepreneurs looking to benefit from subscription-model pricing, here are three tips to keep in mind about considering short-term contracts:
1. Offer something for everyone.
Just a few years ago, Price Intelligently noted that only one of five SaaS companies the firm surveyed offered both long- and short-term contracts. However, offering both is usually a good decision for most businesses, as some (but not all) customers will want to opt for the short-term contracts. For larger, stable companies, on the other hand, the convenience and stability of a longer-term contract will be more appealing than a monthly subscription service.
Having a long-term pricing option allows for guaranteed revenue whenever customers do choose that route, and it could prevent a business from missing out on some bigger opportunities. So, even if the short-term contract gets more clients, a long-term option won't hurt anyone.
2. Evaluate how the subcription model actually affects revenue.
Although month-to-month contracts might actually slow churn rates, a study conducted by Pacific Crest Securities and For Entrepreneurs showed that those shorter-term plans don't guarantee revenue the way long-term contracts do.
In other words, businesses offering shorter contracts might hang on to customers longer but generate less revenue upfront and less guaranteed revenue.
This doesn't mean that your business should expect less revenue (for example, thanks to subscription-based serviceslike Spotify, the music industry is growing). But it does mean that leaders need to carefully assess the impact on their bottom line before going all-in with short-term contracts.
Metrics such as average lifetime value and churn rate are always important to consider, but businesses need to prioritize those metrics even more for short-term contracts.
Related: 5 Ways to Reduce Your SaaS Churn
3. Make confidence a selling point.
When companies offer a short-term contract, they're giving their product an important vote of confidence. Offering short-term contracts sends a message that a company is sure enough of its product's value that it doesn't need to lock customers into a long-term contract. So, don't shy away from that.
Neil Patel, co-founder of Crazy Egg and Kissmetrics, has explained why confidence is so important: "This level of brand confidence perpetuates itself," he said. "You become a 'best brand' in the mind of the customer. You become the SaaS they 'love and need.' This type of customer loyalty, in turn, builds the brand confidence even more."
From Patel, again, the bottom line is that, "A brand with confidence is a brand that inspires confidence in its customers. They respect it. They stick with it."
Related: 5 Growth-Hacking Secrets for Your SaaS Business
Subscription models for goods and services of all kinds are becoming more prevalent throughout the economy, and customer expectations are evolving in tandem. That said, carefully consider whether packaging products or services for short-term renewal subscriptions makes sense for your business. Such a move could lead to more long-term relationships with your customers than you expected.
