One of these common forms of engagement is the humble contract.
Contracts are a formal way of engaging the customer over a period of time. They establish an on-going relationship between customer and vendor where the customer agrees to engage with the vendor on future purchases and the vendor agrees to supply agreed products or services.
The good thing about contracts from the vendor point of view is they often exclude competitors or, at least, make it more difficult for other vendors to engage the customer at a deep level.
Consider how many personal contracts you have which, in a sense, lock you into a vendor. Most of us have a mobile phone agreement, insurance policies, mortgages and credit cards, each of which has monthly or periodic payments associated with them over one or more years.
These agreements are interesting in that they have penalty clauses in them for early termination. We have willingly given up some competitive rights to gain the benefits of a longer term agreement. At the same time, under the agreement, we have an expectation of some level of support.
B2B contracts can vary in the level of commitment made between the vendor and the customer. Some cover maintenance, support, after sales support and training, priority access to services or facilities, preferred supplier agreements or various forms of discount or rebates under prescribed conditions or volume purchases.
Many software products have maintenance and support agreements which cover updates, help desk and error correction. These tend to be renewed each year for the life of the product. Often upgrades to the software are included within the annual maintenance fee or, if not, are offered at a discounted upgrade fee.
Preferred supplier agreements can be sole supplier, dual source supplier or simply some form of accreditation. Preferred supplier agreements can have various forms of discounts for volumes on each order, cumulative purchases over some period of time or rebates on some formulae on purchases. In some agreements, the customer is seeking assurance of access to services on some priority basis or a commitment to supply capacity at some agreed level.
For the vendor, this is a significant commitment and ensures a reasonably deep level of engagement over the life of the agreement. Most agreements which result in a satisfactory experience are renewed so the vendor has some level of confidence of ongoing revenue. It is the most powerful of all forms of engagement with the customer and assists greatly in the sustainability and resilience of the business.
Such arrangements typically have very high switching costs for the customer and normally lead to repeat sales because of that. They also have high levels of referral rates if the customer has a satisfactory experience.
However, ongoing business can never be taken for granted and other engagement activities should be used to add greater value to the relationship.
In the next article we will have a look at the effectiveness of loyalty schemes.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.
