The value of fixed contract periods
02 February, 2024
Innovative subscription models are finding their way into ever-new industries.
From streaming services and contact lenses to software solutions, cars, and office furnishings.
And when you sell on a subscription basis, you also choose a contract duration strategy.
There are many advantages with a well-designed fixed contract period scheme, and they are particularly relevant for actors in segments with a moderate to high degree of innovation and business development.
In this article, we will look at the five main benefits of fixed contract periods.
However, in some industries, a flexible exit option is such a crucial part of the value proposition that profitability needs to be ensured through other contractual methods. But for most companies, a fixed contract period is worth more than one might think.
1. Economic Predictability
One of the main advantages of fixed terms for companies selling on subscription is economic predictability. By having a predefined contract period, companies can better estimate their revenues and plan their business in the long term. This is crucial for startups or companies on strong growth trajectories, as it provides them with stability and thus the ability to invest in future development projects.
2. Reduction of Churn Rate
Churn rate, or attrition rate, refers to the percentage of customers who terminate their subscription in a given period. A fixed contract period can be an effective tool for reducing churn rates. When customers commit to being subscribers for a certain period of time, they are less likely to switch to a competitor or cancel your service. They become invested in you.
Similarly, if your customer is acquired by another company, there is a high probability that your service will be cut if there is a short or no contract duration. With fixed terms the customer will keep you on for the contract duration, giving them room to experience the value of your services and thus increasing your chances for retention.
3. Coverage of Initial Investments
Some products or services require significant initial investments, such as expensive production processes or software development. A fixed contract period allows companies to cover some of these costs over time. The customer commits to paying for the service for a specified period, and the company can recoup some of their invested funds.
4. Customer Engagement and Adaptation
Through a fixed contract period, companies can leverage increased customer engagement. Customers tend to be more invested in the product or service when they have committed for a longer period of time. This also opens up the possibility for customization and improvements based on feedback from customers who have become well acquainted with your offerings.
5. Marketing Advantages
Fixed terms can also provide a powerful marketing advantage. You can offer discounts, free trial periods, or other incentives for customers who commit to longer contract durations. This will attract new customers and increase the company’s overall revenues.
However, excellent customer satisfaction is imperative!
A fixed contract period provides many benefits, but forcing your customers to commit for a longer period of time leads to dissatisfaction if the service or product does not meet their expectations. All businesses depend on providing good customer experiences, but for those selling through a recurring revenue model, it is critical to offer quality products and outstanding customer service to nurture and strengthen customer relationships over time.
In the big picture, a fixed contract period provides valuable benefits for companies selling through a subscription model. Economic stability, reduced churn rate, and the ability to cover initial investments are just some of the advantages that makes this strategy a valuable part of your business model.