Multi-Year Contracts Only Work for Whom?
We have all experienced the nightmare of being locked into an unreasonably long contract, in the Magento eco-system, in the eCommerce industry and beyond. Customers are now more sensitive about being locked in and are rapidly becoming aware that when providers fail to deliver on the promised value and they try to leave, life suddenly becomes very interesting.
In these short video Osvaldo Spadano, Akoova’s CEO, will be talking about Multi-Year contracts.
Why were Multi-Year contracts a thing?
What are the implications?
Are they obsolete?
Is there a better approach?
WHY WERE MULTI-YEAR CONTRACTS A THING?
Multi-Year contracts were standard practice, especially with tech vendors.
Let’s take the the Hosting industry as an example:
- Before the cloud, procuring hardware was an expensive process. Capital investments had to be made
- Retailers were keen to capitalize costs, so not to impact on the EBITDA
- Due to high setup costs, margins were lower for the first year
CLOUD, SAAS & SUBSCRIPTION ECONOMY
Cloud, SaaS and the subscription economies have caused three fundamental paradigm shifts:
- Move from capital expense to operating expense
- Move from fixed costs to pay-as-you-go pricing
- Replaced multi-year contracts with monthly rolling contracts or at a click notice
You only pay for the service you consume.
No long-term contracts or complex licensing. It’s all about choice.
Cloud is not in question anymore; it is the obvious choice.
OLD PRACTICES IN THE ‘NEW WORLD’
So, why are there still retailers out there complaining about being locked into a multi-year contract that they now regret?
Old commercial practices haven’t adapted to the “new world.”
Dangerous assumptions made by merchants when signing a multi-year contract are:
- It will save money over a long period of time
- The solution fits current and future needs.
- The solution works as promised.
- Brand X use that service, so it must be good.
Take them with a pinch of salt.
Disruption is constant, and making decisions based on future predictions is riskier than ever.
Adapting to changes and accelerating the pace of innovation is key.
This level of agility needs to be reflected at any level.
Multi-year contracts don’t bode well, because the lack of flexibility can stifle growth and innovation.
Having options is far more valuable than a 10% discount gained by committing to a long-term contract
THE DREADFUL SCENARIO
It’s not uncommon to come across merchants who are extremely frustrated because they are locked in a solution that doesn’t work.
Recently, one owner of a fast-growing brand said:
“In the second week of November 2019, things were looking pretty dire. Provider X was slowly killing our business, and they appeared to just sit there watching and waiting for it to happen.”
Problems can have a direct impact on business’s revenue, which can be bad enough to dwarf any perceived cost saving.
The biggest cost of all is the opportunity cost.
The cost of holding back the business for fear or because problems are screaming at you
and you put those strategic activities on hold as result.
A BETTER APPROACH
Brands and retailers that value optionality avoid multi-year contracts.
They know that getting stuck in a long-term partnership with the wrong provider is harmful to the business.
A better way of mitigating the risk of a new partnership or solution is to start the engagement with a short contract, for instance, a monthly rolling contract.
This should be table stakes with any modern cloud provider. If clients are not loved, they will soon find out.
To put things in perspective, remember that
contracts, hardware, software and costs don’t solve problems; people engaged in problem solving do.
That’s why the K in our K-Hosting stands for Knowledge.
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