Creating and Maintaining Term Commitments

A contract is a legally binding document that should be drafted and/or reviewed by a properly qualified lawyer. While this topic discusses contracts, it does not constitute legal advice. Businesses wanting to implement contracts between buyers and sellers should get legal representation.

What is it?

A formally binding contract is a legal agreement that commits both parties to a certain agreed outcome over a defined period of time. A contract between a buyer and supplier for the supply of products or services would normally include such elements as:

  • The term of the contract (this will often be industry dependant)
  • The effective date the contract begins
  • The products and/or services covered by the contract
  • The contracted customer prices for products or services provided
  • The minimum purchase quantities and/or spend commitment
  • Penalties or exit fees that apply for early termination of the contract
  • Details about contract review mechanisms

A contract is normally negotiated between a supplier and a buyer when the following types of conditions are present:

  1. Supply may be otherwise difficult or unreliable (there may be few providers or there may be environmental uncertainties relating to supply, for example);
  2. The buyer may wish to specify methods of production or operation (such as the agricultural industries for example);
  3. The price that the buyer receives is more favourable than if the buyer does not agree to a term commitment.

Contracts offer both buyers and sellers some distinct advantages around supply and price. Some of these advantages are as follows:

term-commitments
This is not an exhaustive list of the things a business may do to protect its contracted base of customers.

Rather, it is a list of tips that you may use as the basis to your contract management program of work.

REVIEW CONTRACTS REGULARLY.
Keep in open dialogue with your customer. Just because you have a contract doesn’t mean you should set and forget. Even better to be proactive. If you notice that the customer is not using products in its contract, suggest alternatives or migrate the customer to a different plan.

PROVIDE RESPONSIVE SERVICE.
Improvements that have been agreed as part of a contract review must be implemented quickly and professionally. Don’t drag your feet and send the message to your customer that you don’t really care.

CONSIDER PROACTIVE PRICING.
If market prices for the products supplied are substantially lower than the contracted rates, consider lowering the contract rates as a sign of goodwill. The customer is far more likely to extend contracts with you if they don’t feel ripped off.

CONSIDER PROACTIVE CONTRACT NEGOTIATION TO AVOID BUSINESS GOING TO TENDER.
If you are operating in a price-competitive market, consider renegotiating the contract six months prior to expiry. Even if you take a rate reduction early, it may be less of a reduction than if the business goes to open tender and competitors have the opportunity to bid for your business.

SEEK TO EXTEND REACH.
Look to extend the reach of your product into the customer during the contract term. For example, in the telecommunications industry, a business-to-business contract may include installation of broadband services in executives’ homes and equipping them with devices such as mobile phones and other handheld devices. This helps makes your brand “sticky” (in other words, less easy to walk away from).

ALLOW CONSISTENCY OF RELATIONSHIP.
In the B2B market, don’t continually change the relationship manager that interfaces between you and your customer (unless your customer requests it). Your customer shouldn’t deal with a different sales rep every time they call your business.

READ: more about Pricing and Sales.

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