Average contract length is the average length of a signed customer contract. Commonly, most startups price their products on a monthly basis. Earlier-stage businesses and businesses selling lower annual contract value tend to prefer short contract lengths.

Longer contract lengths are common in enterprise SaaS businesses and B2B products with a higher average contract value.  As SaaS businesses grow, they tend to increase contract lengths. To calculate average contract length, you simply add the total number of contracts in months and divide by the total number of contracts. Monthly plan count as one month. 

Example of average contract length

Company A has 20 customers on a monthly plan, 5 customers on annual contracts, and one 3- year multi-contract.

Total number of months: 20+(5 X 12)+(3 X 12)=116 months 

Total number of contracts : 26

Average contract length = 116 /26=4.46 months 

WHATS THE OPTIMAL AVERAGE CONTRACT LENGTH FOR A SAAS STARTUP?

The best average contract length will depend on the business you are running. New SaaS businesses tend to price their products on a monthly basis. It’s best for businesses with a short product development cycle to opt for shorter average contract length SaaS. This is important because it allows for renegotiation of contracts more often.  If you have not figured out where you can fit in the market, it’s best to choose short average contract length SaaS. Short average contract length SaaS allows you to adapt more quickly to user concerns. If you price your products on a monthly basis, you’ll have to find as much information as you can about the strength of your products in the market.

When a business has established a product-market fit and has cemented pricing decisions, they can upgrade to longer multi-year contracts. Once you have put together an experienced sales and renewals team, you can upgrade to long term contracts. This can help a business to raise more revenue upfront to put towards business growth.

Annual contracts comes with several advantages. First, an annual contract brings predictability in a SaaS business. Revenues committed for annual contracts allow businesses to perform better budgeting. The cash flow associated with annual contracts can significantly boost the operations of a business hence reducing the amount of financing a business might need to raise. Besides, annual contracts allow SaaS businesses to develop better long-term relationships with customers. It also reduces the likelihood of problems that could lead to loss of revenue.

A business’s average contract length SaaS is based on factors such as the age of a business, the type of product/service provided, pricing, and many more. Average contract length SaaS is one of the metrics that SaaS businesses should track closely for purposes of making necessary adjustments.  A business that wants to achieve more predictability should aim to get annual or multi-annual contracts. 

Average contract length SaaS is a critical metric in SaaS business. FirstOfficer provides advanced analytics tools that enable SaaS businesses to understand and track their Average contract length SaaS.