Average Contract Length

Definition

Average contract length is the average timeline of a signed customer contract. Most startups prefer to price their products/services on a monthly basis. Short contract lengths are preferred by new businesses while longer contract lengths are common among SaaS businesses and those selling B2B products.

Example

To estimate its average contract length (ACL), a company must total the length of all its contracts and divide this by the number of contracts. Let's say, Vareto has 3 customer contracts of lengths 12 months, 24 months, and 36 months. The ACL will therefore be = (12 + 24 + 36) / 3 = 24 months.

Why it matters

ACL is a crucial metric that tells how long a company’s customers are agreeing to pay for its services. Generally, for start-ups, the ACL is lower (12 months or less) and rises over time as customers are willing to sign longer-term agreements for using the company's products/services.

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