As a SaaS founder, your ultimate goal is to grow (and keep growing). One of the best ways to do that? Make sure they stay with you for as long as possible. We will explore how to increase your average SaaS contract length.
Studies have found a correlation between contract length and churn rate. The longer the contract, the lower the number of people who cancel their subscriptions.
Today, we'll explore five effective ways to entice customers to stay longer.
Let's dive in.
Table of contents
1. Start With a Good Product
Of course, this is an obvious one.
You need to offer something people want and are willing to pay for. Your chances of retaining customers are slim if you don't have that.
Product/Market Fit is essential.
If you spend all your time chasing after a particular customer segment and never find it, you'll end up with churn.
It would help if you focused on making something that people want to use over and over again.
To ensure that you're offering something valuable, try some of the following:
- Understanding your customers' problems and what they want to do differently.
- Talking to potential users (whether you have a prototype or not), and getting feedback on what would make their lives easier/better.
- Testing assumptions about how people use products like yours.
- Observing people as they use your product (or similar products) and asking questions about their experience.
- Using personas to create a mental model of what the ideal customer looks like.
- Using customer journey maps to understand how people move through various states of awareness and consideration and how they might interact with your product.
Also, consider making a minimum viable product, or even an offer hypothesis. This can be as simple as a landing page describing your value and asking people to sign up for updates.
You'll use this to test assumptions about who will use your product, what they need, and how much they're willing to pay.
2. Make Sure Your Product Is Sticky Enough
The best way to keep a customer from leaving is to ensure they don't want to leave in the first place.
If your product delivers value and solves problems for them, then chances are they won't cancel their subscription. If it doesn't meet those two criteria (and even if it does), consider adding additional features or functionality so that users stay engaged longer with your product.
For instance, you could add a feature that helps users solve a problem they didn't know they had.
Slack offers integrations with other apps so users can seamlessly connect the two.
You could create new functionality for your product—like Instagram Stories or Facebook Messenger bots—that makes it more useful for customers than before.
Brainstorm ideas to upgrade your product or add new features so users get more value from their investment. This doesn't just mean adding more features for the sake of it. It means ensuring all the features are easy to use and understand.
If you have a complex software product, consider launching an introductory course or webinar series to help new users get acclimated.
3. Offer a Discount for Extending Their Contract
You can do this by offering a one-time or recurring discount.
This is one of the most popular ways to keep customers around longer, but it might not be worth it if your margins aren't high enough to cover the loss from the discounted price.
For example, if you're selling a $100 product and giving away 10% off for extending the contract, you'll make $90 on each sale.
If your margins are 30%, you lose $30 from every extended contract.
The more money you make per unit sold, the better this strategy works for you.
Depending on your business model and how much profit you make per customer, this strategy can be a great way to keep your customers around longer.
4. Show Them Value Upfront
One of the best ways to ensure that customers stay with you for a long time is by showing them value upfront.
The earlier you can show them how your product can help solve their problem or make their lives easier, the better off everyone will be! If they see results right away, chances are they'll stick around longer than if they don't see any value.
For example, if you're selling a software product that helps people manage their finances, show them how much money they'll save by using your product.
If someone is paying $50 per month for your service, but it saves them $100 per month in fees and interest payments by getting rid of debt more quickly, then the value is clear.
Sit down with your customers, and make sure you know their situation. Ask questions about their lives and how they use the product or service.
This will help you figure out what other problems they may have that your product or service could solve. Once you know those problems, it'll be easier to show people how your product can solve them!
Some other strategies might include:
- Conducting surveys and polls. This can be as simple as asking your customers how they use the product or service or what they think. You can also ask them if they have problems you could solve using your product or service differently.
- Conducting focus groups with customers. This is a more formal approach to asking customers what they think of your product or service. You might also want to ask them how they use it and what other problems they have you could solve by using it differently.
- Interviewing customers. This is the most thorough approach, but it can be time-consuming. You might want to interview a small group of customers who represent different demographics and use cases for your product or service.
- Interviewing past customers. You might also want to interview customers who have stopped using your product or service and ask why. Doing so can help you identify pain points and areas for improvement.
5. Offer a Bonus or Additional Benefits
Discounts work great for increasing contract length, but you don't necessarily want to give away your product for free.
However, you can offer a bonus or additional benefits exclusive to existing customers. This will make them feel special and appreciated.
For example, suppose you're selling a SaaS platform that helps companies automate their marketing efforts. In that case, you could offer access to an educational series on creating the best possible campaigns for your customers' businesses.
Or, if you sell a product that helps businesses automate their accounting, you could offer a free consultation with an expert who can help them optimize their time and money.
The key here is to come up with something unique that your customers will appreciate but also be able to use after the contract has expired.
Doing so will help you create a sense of goodwill and make your customers feel valued, even after they've stopped paying you.
SaaS Contract Length FAQs
What does ACL stand for?
ACL stands for Average Contract Length and is a metric used to measure the longevity of a customer’s subscription to a SaaS service. It is calculated by dividing the total number of months customers have subscribed to the SaaS service by the total number of customers.
This calculation will provide you with the average contract length in SaaS.
How do you calculate average contract length in SaaS?
Calculating the average contract length in SaaS is relatively straightforward.
First, you must identify the total number of customers currently subscribed to the SaaS service.
Once this number is known, you will need to identify the total number of months each customer has been subscribed to the SaaS service.
Finally, you can calculate the average contract length by dividing the total number of months customers have subscribed to the SaaS service by the total number of customers.
Why should you increase the average contract length of your SaaS?
Increasing the average contract length of your SaaS can provide several benefits:
- It can help to improve customer loyalty, as customers are more likely to stick with your SaaS when they have a more extended contract.
- It can increase revenue, as customers will likely make larger upfront payments when signing up for a longer contract.
- It can help reduce customer churn, as customers are more likely to remain with your SaaS service for longer.
All these benefits can help increase your SaaS business's overall success.
In the end, as with any good SaaS contract negotiation, it comes down to a clear understanding of what your company can deliver and what your customer needs.
If you can provide them with the right product and service at a price point that works for both of you, then there's no reason why an extended contract length shouldn't be possible.
Hopefully, this article gave you some ideas to improve your offer and increase your average contract length.