Contract Terms That Prevent Common Auto Renewal Payment Issues
By Dean Kaplan, The Kaplan Group
If you sell a product as a SaaS provider you’ve probably already realized that auto renewal contracts make the most sense for both you and your customers. As a vendor, auto renewals provide a steady cash flow and income stream and keep you from having to undergo repeated sales cycles. Instead of chasing down existing customers, your sales staff can spend their time pursuing new business.
Auto renewals also benefit customers. If your customer is using your software then the last thing they want is to come in one day and find that a key service is no longer available because someone forgot to fill out the paperwork and send a check. So, if auto renewal is best for everyone, why does it so frequently result in payment problems?
As a commercial collection agency, we handle a lot of claims in these situations and have found there are four common reasons for auto renewal disputes:
- The customer did not give appropriate notice before ending the service. The most common auto renewal provision is 30-day notice, but occasionally a vendor requires 60- or even 90-day notice.
- Notice of cancellation wasn’t given in the way the vendor requires. For example, a customer claims they told the vendor over the phone that they wanted to cancel, but the vendor requires cancellation in writing and has no record of the phone call.
- The customer did not realize there was an auto-renewal in place because they didn’t have a tracking system for contract termination dates and auto-renewals or somehow this contract was not in their system, or the customer was expecting a reminder.
- The customer is a smaller or newer company who desires the service but can’t afford it.
As the service provider you need to be able to distinguish between a customer who has honestly attempted to cancel their service in the correct manner and one who is trying to argue their way out of money they owe you. The fourth case is fairly straightforward and you can make a decision about whether or not you wish to invest in this business by offering a lower price or extended payment terms. But in the other three cases things can be more complicated.
It’s important to remember that, while this seems like a straightforward debt to you, the customer who wants to cancel and didn’t do it correctly often feels taken advantage of when told that they still owe money. Although you may be able to force the customer to pay you, doing so could hurt your reputation. Creating clear and reasonable contract terms will go a long way toward helping you recoup any money owed and protecting your reputation.
When accepting a new client there are two main tools you can use to help prevent auto-payment related collection problems.
The first is to make sure that your contract includes clearly spelled out terms regarding cancellation. Whether you want 30-, 60-, or 90-day notice to cancel a contract, make that clear and make sure your sales staff is open about the policy. It’s important that your auto renewal language be in the agreement that the customer actually executes. If the auto renewal is in terms and conditions that are not in the executed agreement, but only referenced by a link to the terms and conditions, collection agencies like ours may not even take the claim.
Auto renewal is such an important provision that judges tend to look down on having it hidden behind a link. Although we try to avoid going to court whenever possible, the truth is that if we don't have a case that we can go to court on, it’s a lot harder for us to collect on the account. Given how lengthy and costly a court case can be, the threat of a potential court case is often a powerful motivator for both sides to come to the table.
Very few contracts require the vendor to give advance notification of an auto-renewal, but if you can easily set up a reminder notice in your email system, it might benefit both you and your client to do so. A reminder notice not only prevents misunderstandings about auto-renewal, it can help provide a clear chain of communication.
We recently collected payment in full of nearly a half million dollars because the customer responded affirmatively to the annual reminder notice, not being aware that the parent company was planning to shut the division three months into the new term. The parent company tried various arguments to avoid paying the full amount, but we had the documentation to show that if we went to court they would lose and it would actually cost them much more than just paying what was owed.
A reminder notice also can serve as a form of regular communication, which can be a great way to stay top of mind with your clients. News about available upgrades or other company information can easily be incorporated into auto-send emails.
The other element to include in your contract is an acceleration clause. An acceleration clause means that if one party ends or breaches the contract before the term, the full amount is still due. For example, let’s say you have a client with a one-year contract for your service. The contract is for one year, but you bill monthly. If the client doesn’t pay you for several months you can now invoice the client for the entire year. If you turn the overdue invoices over to a collection agency like ours, the acceleration clause gives us negotiating leverage. The full amount of the contract is due now, instead of just the past due amount and monthly payments until the end of the term.
Auto-renewal contracts are a natural fit for both vendors and customers. Creating clear and reasonable contract terms will help ensure that you get paid with limited hassle.
About The Author
Dean Kaplan, President of The Kaplan Group, has 35 years of business leadership, training, and consultation to many industries including software companies.