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Dean Kaplan
President, The Kaplan GroupIf you are a SaaS provider or customer, you probably know auto-renewal contracts work well. For vendors, auto-renewals provide a steady cash flow and income stream. Auto-renewals also prevent vendors from undergoing repeated sales cycles. For customers, auto-renewals prevent the nightmare of coming in one day to discover that a key service is no longer available because someone forgot to renew the contract. Despite being the best for all parties, there are many issues surrounding auto-renewals, and it’s important to fully understand them before entering into a contract.
There Are A lot of Laws, and They Change
As more things become available via streaming, and more companies move to a SaaS model, there are more complaints. Both individuals and businesses can feel taken advantage of if auto-renewal terms are not clear and obvious. Because of this, many states have laws governing their use. These state laws are in addition to the federal laws. As a consumer, it’s important to be aware of your rights. As a business owner, it’s important that you follow the law. Business owners need to be aware of the most recent laws in their state and the states in which their customers live. One of the easiest ways to make sure that you’re compliant with all state laws is to choose the state with the most restrictive laws (currently, California) and make sure that you are following those laws.
Examples of some common auto-renewal laws include:
- Presenting the terms of the automatic renewal offer in a clear and conspicuous manner before a subscription or purchasing agreement is fulfilled. Meaning, you cannot trick someone into an auto-renewal.
- Providing an acknowledgment that includes the terms of the automatic renewal offer and information regarding how to cancel in a manner capable of being retained by the buyer.
- Providing a cost-effective, timely, and simple procedure for cancellation, which must be described in the acknowledgment.
Strangely, several states do not currently have auto-renewal laws on their books. If you are located in any of these states, please make sure you research the federal laws and carefully read your contracts before agreeing to an auto-renewal. Without a state law on the books, your ability to contest an auto-renewal situation may be limited. The states currently without auto-renewal laws are Alabama, Alaska, Delaware, Idaho, Indiana, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming.
Customers Need Software to Help
If your company uses several services with auto-renewal provisions, you need a system to help you keep track. Defaulting on a payment could trigger an acceleration clause in your contract. You might find yourself owing for an entire year’s worth of service at once. To avoid this happening, make sure to establish a system that warns you before a contract is up for renewal so that you can confirm continuation with your team or cancel before the deadline.
Generally speaking, vendors are allowed to specify how you inform them of your desire to cancel your service (in writing, the length of time needed, etc.). Make sure to read your contracts carefully and that your software system can handle the various contracts.
Annual Payments Might Be Best
Many SaaS contracts auto-renew on a monthly basis. While it makes sense that clients would prefer to pay monthly, it can cause problems for both clients and vendors. Paying monthly costs, time, and money to process payments. Having a year’s worth of payments upfront is obviously better for the vendor’s cash flow. The benefit of having cash upfront makes it worth it to vendors to offer discounts for customers who are willing to pay annually.
When Auto Renewals Don’t Work
When an auto-renewal agreement turns into a dispute, it’s usually for one of three reasons:
- The customer did not give the right amount of notice before ending the service.
- The customer did not give notice in the way that the vendor required.
- The customer did not realize there was an auto-renewal in place. This can happen when the person who originally set up the service leaves the company, or the customer was expecting a reminder, or when the customer did not have a system in place to track contracts.
All three of the reasons can be avoided with a little attention to detail. When they work well, auto-renewals are best for software customers and vendors. Whichever side of the agreement you are on, it’s important that you understand the laws and set your business up for success.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He is an expert in the technology industry and has 35 years of manufacturing, international business leadership, and customer service experience. Today, he provides business planning, training, and consultation to a variety of global companies.
