Restoring sanity to your customer contracts
Our largest customer pushed us for years, in a good way, to make our product industry-leading. The problem? Our contract was severely tilted in their favor: termination for convenience, exclusivity, most-favored-nation pricing, discounted software. They refused to renegotiate when I raised it. So we called their bluff and terminated the agreement before auto-renewal kicked in. Four months of negotiation later, we’d removed every one of those unfavorable terms and landed a 50%+ price increase and a multi-year renewal.
“Should we fire a customer?” is a crazy question, right? It’s one I’ve asked myself repeatedly as a CFO of vertical market SaaS businesses. Great referenceable customers are the backbone of any SaaS business, and asking this question is what helps you focus your energy on building more of them. Every time I ask it, it leads to great cross-functional projects and great outcomes for both the business and our customers.
Here’s when I think it’s worth asking:
- Non-market contract terms. Termination for convenience, exclusivity, MFN pricing. The kind of clauses that quietly erode your leverage every quarter.
- Underwater contracts. Customers who aren’t profitable once you load in all the resources you’re putting against them.
- Doesn’t fit your ICP. Your ideal customer profile evolves as you mature. The customers who fit at year one don’t always fit at year four.
- Dollar-to-drama ratio is upside down. Pay attention to whether a customer’s support needs are in line with what they’re paying. When the balance flips, the rest of your team gets pulled away from the customers who’d benefit most from their time.
These conversations are hard. Your customer-facing employees will push back. But handled professionally with good messaging, they’re extremely beneficial to the long-term health of the business. One customer said it best: “We always knew this conversation was coming. We just hoped you’d defer it another year.”
After we had these conversations across our customer base, gross margin lifted by multiple percentage points in less than 12 months.
Have you ever asked yourself this crazy question? I’d love to hear what’s working in your customer book, where it’s broken, and I’d love to share what I learned restructuring our customer relationships into something that worked for both sides.