What is a multi-year contract?
It’s simply a contract with your customer that lasts longer than one year and gives you both some financial stability.
More importantly, it eliminates the need for them to look for new contracts or deal with annual renewals of existing contracts.
Multi-year contracts have the added benefit of reducing the time you need to spend looking for new customers each year and give you the certainty of sales in future years, enabling you to plan better.
Beware of rising costs
Market forces and inflation can cause supply costs to increase. Therefore, you may want reassurance and some type of guarantee that the value of the contract can increase as future costs rise.
You may agree to adjust the price annually based on the inflation rate. Still, if your costs are tied to a particular external factor (e.g. the price of oil or exchange rates), you may need to devise a more sophisticated formula for price rises.
For example, you can set a fixed rate of increase each year ahead of time. Or, you can tie payments to the specific inflation rate each year by determining a specific date for when prices will change and come to an agreement on a particular inflation index.
The advantages of multi-year contracts
There are some great advantages to multi-year contracts from a buyer’s point of view, and you can make them a crucial part of your marketing messages.
Multi-year contract benefits:
- Enable you to plan ahead and secure better supplier discounts, thus keeping your prices down;
- Avoid future unknown price fluctuations;
- Save resources, effort, and time; and
- Help develop strategic alliances between suppliers and customers, which will be beneficial for both in the long run.
In other words, they represent a valuable Win-Win arrangement between suppliers and customers and, used correctly, can hugely enhance the value of your business.
