People all over the world are learning now to navigate the new normal while mired by uncertain times, volatile market conditions, and a sudden movement to remote work. Meanwhile, leaders of companies are trying to figure out what will happen next, how to protect their company’s future, and how to sell to customers who don’t want to commit.
Oftentimes uncertainty leads to conservatism in spending and decision making which impacts the way that you’re contracting with your customers. Taking a break from our series of posts on how contract terms may impact your company’s revenue recognition accounting, today we will focus on a new trend we see: increasing volume of contracts with non-standard clauses from an accounting perspective.
Ramp / Step Up Pricing — Many companies typically sell multi-year contracts with flat discounts and pricing across the contract term (such as an ELA), but certain customers may want to pay less up-front now for less usage and more in the future as they ramp up users over the life of the contract. This customer desire can be used as a tool to decrease discounting or gain favorable terms on another negotiation point. Ramped pricing for a multi-year contract may have an impact on your income statement and certainly will impact how you present the transaction on your balance sheet.
People all over the world are learning now to navigate the new normal while mired by uncertain times, volatile market conditions, and a sudden movement to remote work
Subscription Term — A potential customer’s subscription term may come up as a hot topic as companies move toward less commitment and more flexibility. Some customers may want a shorter term commitment so that they can feel free to get out of the contract earlier rather than later. Drawing a hard line as an organization on the shortest subscription term you are willing to accept will help your narrative with customers. It would also be helpful to instill comfort in the customer that your company is well equipped to manage the current situation, and any exacerbation thereof.
Multi-year contract — Some potential customers may go the opposite direction and want to lock in the biggest discount / best pricing that they can get. Negotiating for such a discount comes in many forms, but one of them may be a multi-year contract which will solidify commitment for your organization while providing a much needed break on pricing. This could be a powerful tool to use while negotiating other terms.
Credits — Negotiations for use of credits in the current and / or future terms may arise as companies look to spend less and hold onto their cash. Having a dedicated credit policy that is either externally facing, or can be explained to the customer clearly, will help in your discussions. For instance, if a customer has earned credits toward their renewal, and your public facing policy states that no credits can be used for the current contract term, a customer can be pointed to the policy if using the credits now becomes a talking point.
Rate Card / Price Protection / Discounting — Customers may be looking for extra discounting and / or to lock in pricing for a longer period of time. In this scenario, it’s helpful to have specific discounting thresholds established internally in line with company goals. It’s also worth noting that the life of the product, your product roadmap, and your pricing strategy may come into play when making a longer term commitment to a customer.
Option to purchase additional goods or services — Providing a rate card might also give the customer an option to purchase additional goods or services at a specific rate / fee. It is worth noting that this option may create a separate performance obligation in the form of a material right which your accounting team will have to assess at the beginning of the contract.
Payment Terms / Billing Frequency — You may find yourself in a negotiation for longer payment terms and a more frequent billing cycle so that the customer can delay payment and break up payments into smaller increments. Again, your company’s policies and goals will come into play. Generally your company will have a price level at which you will be willing to extend payment terms or increase the billing frequency to satisfy the customer and get the deal done.
The key thing to note is that if your company has policies and procedures in place to ensure that your business is protected during negotiations, and internal education on these policies and procedures for those involved in the conversations, you should be able to come to a common ground with your customers that will make both parties happy.
Termination for Convenience — More customers will be asking for termination for convenience rights. Depending on your business model, it may be worth taking a hard stance here as this negotiation will impact the term of the contract and your balance sheet and could impact your income statement.
The specific terms above are just a few that may come up more often than usual in an economic downturn or during times of uncertainty. Some other terms that may be more heavily negotiated are: refund rights, preferred pricing or most favored nation clauses, overage waivers, unique forms of variable consideration, acceptance, non-standard service level agreements, and early cancellation. Pick and choose which terms you’re willing to negotiate, and for which ones you will draw a hard line. If you give on something, the customer should be willing to give on something else. The key thing to note is that if your company has policies and procedures in place to ensure that your business is protected during negotiations, and internal education on these policies and procedures for those involved in the conversations, you should be able to come to a common ground with your customers that will make both parties happy.
