Why Customers Agree To Long Term Contracts

A long term contract is not usually the first choice of a customer — but vendors often insist on it. Customer will agree in exchange for improved pricing, a sweetened offer, additional value or pricing lock-in.

They’re Not Dying To Commit

The ideal for any customer is a one sided contract — discount and pricing protection without commitment to remain with the vendor.   Any commitment they make is predicated on their confidence that your product / services will continue to meet their expectations during the life of the contract.   There is a recognition among customers that a compromise is being made – one that reduces the incentive for the vendor to continuously focus on getting closer to customer expectations (even as they evolve).

Power Imbalance

Perceived or otherwise, customers see a reduced level of leverage with vendors when they are in a long term contract.  Sure they have the “nuclear option” — they can withhold payments if on an installment or monthly plan — but their ability to switch vendors is held to a higher standard of default rather than dissatisfaction. Depending on your size of business and the number of customer relationships your company has this can create a strong power imbalance in your company’s favour.

The Boomerang Effect

On the surface, this type of power imbalance can seem like a good thing for vendors — like a successful maneuver in the endless dance between vendors and customers.

Some companies fail to recognize that this imbalance should be counterbalanced by a strong ongoing attention to customer satisfaction (especially those in longer term contracts).

In the event that contracted customers are finding that their expectations are not being met, they may make contact with the vendor to address the shortcomings. But it’s an equally common occurrence that silent compensation takes place behind the scenes, where the customer begins to exercise their options outside the contract’s scope.

Vendors with the power of so called long term contracts are sometimes confronted with insurmountable hurdles at renewal time.  They can discover that a parallel relationship has been developed with  another vendor (in anticipation of a switch at the time of contract expiry) or than another department or division excluded them from consideration for another contract. At a higher level, both preferred vendor status and referrals cease as the customer is trapped by a unsatisfactory long term contract.

Surveying Your Contracted Customers Keeps You In the Game

The only way to head off this type of silent erosion is to keep connected to your contracted customers.  Seeking their feedback early and often and addressing critical issues helps to retain the growth opportunities that existing customers can offer to your business.

Protecting A Key Asset

We’ve been through plenty of management meetings when several long term contracts are expiring at the same time — creating both practical and perception challenges for companies.   You’ll always get one shortsighted genius who’ll insist that long term contracts are evil.  The question to be asked is: why didn’t we just keep on top of the customers expectations and satisfaction and take advantage of the time to adjust to them.  That makes for much happier contract renewal times.