The service contract: Learn how to do the right thing for your business

A service contract is the document which outlines the services a company will provide to its customer. This document is essential for ensuring that the rights of the company and the consumer are guaranteed, thus facilitating the desired outcome.

However, a service contract is not the same for all businesses. Here’s everything you need to know to create the service contract that best suits your company and to properly manage signatures. 

Find an attorney

The service contract should generally be evaluated by the sales team and managers, but this won’t replace hiring a lawyer who has the necessary legal background.

While your salespeople and managers can (and should) help build a service contract that truly fits your company, it is critical that an attorney is primarily responsible for creating the contract so that every clause is drafted in accordance with the law and the company is protected from legal issues such as cancellation or breach of contract.

Consider negotiating contracts

When thinking about defining the service contract, one must keep in mind that in many cases, it may be possible to customize the contract according to the characteristics of each client. In this sense, the contract can be divided into three options: the flexible, fixed, and semi-fixed contract.

Flexible contract

This type of contract allows terms to be negotiated according to each customer and their needs. Although this could be an advantage that further differentiates your company from the competition, the truth is that this type of contract exposes the company to more risk and is less efficient. 

Fixed contract

The fixed contract, on the other hand, brings more benefits to the company by being easier to manage. If all company contracts are fixed, you will know exactly what each customer signed, avoiding the need for deeper assessments. For the customer, however, this is the most limiting option and may lead them to select a competitor.

Semi-flexible contract

This type of contract establishes a mixed sale and only some clauses can be discussed according to some previously established criteria. This type of contract can also be known as a service level agreement (SLA), since it allows your company and customers to negotiate the level of service that will be provided. 

The main concern, however, is that it is not always possible or recommended to offer any other option besides the fixed contract. In order for negotiations to be accepted, you need to think about targeting your audience in order to reduce the risks to your company. On one hand, making a highly customized contract for a customer who does not have much interest in the product can cause your company to end up with an operating loss. On the other hand, not offering the possibility of customization to loyal or high-paying customers can end up driving customers away.

Taking in consideration characteristic like average contract size, interests, and features can help create the possibility of customization for the right customers. Still, it is possible that the customer might request changes that can disrupt the sales process, making the process very time-consuming. Therefore, best practices include offering pre-defined contract templates and limiting customization options, ensuring that it is beneficial to both parties.

Determine the contract period

It is also important to determine the duration of the service contract and, in addition, to determine whether or not the contract will require a loyalty clause. Although contracts without a loyalty clause attract more customers willing to test your services, this model also leads to  cancellation rates, or churn, at levels above the acceptable limit.

In addition to causing more stress for the sales and retention staff, this makes it more difficult for the company to plan for the future, since it is not possible to know how long the customer will use the services.

Conversely, a contract with fidelity guarantees better results for the company since it attracts clients more committed to continue using the service and allows better planning. Despite this, requiring a minimum contract length may deter some customers who are on the fence.

Set fines for fidelity contracts

In the case of fidelity service contracts, it is necessary to establish the amount of the fine to guarantee better results for the company. While a very low fine won’t offset deter customers from cancelling, a very high fine can make the customer feel too intimidated to contract the service. In general, the optimal price of the fine must have three objectives.

1. Recover customer acquisition costs (CAC)

The sales team efforts in prospecting for and closing customers generate costs for the company. If a customer cancels their contract early, then the company has to absorb that cost, leading to a possible loss. The amount of the fine can be set to recover the cost of acquisition of the customer.

2. Decrease cancellation and retention costs

The fine can also be set so as to reduce cancellation and retention costs by recouping some of the expenses incurred by the team in keeping the customer active. Setting the amount based on this can also help the team lower the churn rate because it will be possible to offer more facilitated conditions based on the fine if the cancellation takes place. That is, with a fine of great value, the team can make some retention efforts like offering discounts.

3. Create a barrier to entry

The fine of the contract also needs to be established in order to create a barrier to entry so prevent customers who are not very committed from signing the contract just for casual testing. The fine helps in this sense because, by being sufficiently high, it prevents the customer from being persuaded to contract for services they are not sure about.

Generally speaking, the fine should work as a customer filter, ensuring that only interested parties close the contract. This reduces retention costs and also improves overall business results.

To make the service contract, the first step should be to define the liability for a lawyer in order to protect the company from possible future situations. The next step is to defines how flexible the contract is and whether it will be a fidelity contract or not. In case you decide to have a flexible or fidelity contract, you must establish the optimal fine so that it does not deter customers from purchasing your services and at the same time, discourage customers who are not interested truly interested in your services.