Average Contract Length (ACL) is the average duration of all signed customer contracts. Most SaaS products are biased towards monthly plans. Enterprise SaaS companies, or B2B products with higher average contract value can expect to see more annual and multi-year contracts affecting their ACL.
To calculate ACL, add up all of the total committed contracts in months (monthly plans count as 1 month) and divide by the total number of contracts.
For example, Company Z has 10 customers on a monthly plan, 2 customers on annual contracts, and one 2 year multi contract.
Total number of months: 10 + 24 + 24 = 58 months Total number of contracts: 13 Average contract length: 4.5 months
The only way to increase average contract length is to encourage customers to move to annual and multi-year contracts. However…you might not always want a longer ACL.
What’s a good Average Contract Length?
As with all SaaS metrics, the best average contract length depends on your business. New SaaS companies tend to have shorter contracts. When your product development cycle is short and you’re developing new features frequently, a shorter ACL allows you to renegotiate more frequently.
When you’re still searching for product-market fit, monthly feedback (in churn or renewals) means you can adapt more quickly to user concerns. If you’re reliant on annual contracts for your churn rate, it might hide a potential problem for a full year.
As your business begins to mature, and pricing decisions have been cemented, aim for longer multi-year contracts. When you’ve built an experienced sales and renewals team, they can convert monthly customers to long term contracts. This means more money in the bank and more capital upfront to put towards business growth.
Average Contract Length can also be used as a salesforce efficiency metric. The more confidence customers have in your product, brand and service, the more likely they are to commit to longer terms.