Customer Agreements as Tools to Increase and Protect Business Value

Customers are the sine qua non of business. They are the difference between a booming Blockbuster Video store in the 90s and that strange building your kids ask you about sometimes. Customers bring revenue and, hopefully, profit.

However, even though it may sound paradoxical, businesses outside of the mass-retail or related industries, don’t want every customer that comes their way. Some customers have completely unrealistic expectations or don’t understand how your business provides value or are solely focused on price and nothing else. Worse yet, some might also not intend to live up to their end of the bargain by paying.

These businesses really only want those customers or clients:

• For whom they can provide great value, and
• Who recognize that value and are willing to pay for it.

These are high-quality customers. Typically, these will also be repeat customers. Profitable relationships with high-quality customers are an essential component for a valuable business because business value is tied to both profit and the likelihood of that profit continuing into the future.

How Is This a Legal Issue?

At this point you might be thinking that attracting and retaining high-level customers and clients sounds more like a marketing and sales issue rather than a legal issue. And you would be mostly correct.

However, like all relationships that your business creates—with the landlord, the banks, the employees, the suppliers—there are legal issues at play as well, and it’s important to have a well-written legal agreement or contract in place to spell out the relationship.

In particular, a properly-implemented and well-written customer agreement can facilitate both the acquisition and the retention of high-quality customers, and so will help increase business value.

Customer Agreements Are Tools

A good written customer agreement is a business tool that will:

• Educate customers and set expectations about what your business provides,
• Delineate what the business will do for the customer and what the customer must do to achieve the result,
• Act as defensive shield should a customer seek to abuse your business, want more than you’ve promised, or make a legal claim,
• Weed out bad customers or ones that aren’t appropriate for your business,
• Make buying from you simple and easily repeatable, and
• Help ensure you get paid on time and without headache.

The difference between a good customer agreement and a poor one is detail and readability. There must be a level of granularity to what, when, and how things are to happen that covers the process from beginning to end. The agreement must also be readable without a law degree. If it’s not, the customer won’t read it or will send it to legal counsel.

All the important aspects of the relationship must be detailed in the agreement, including:

• Your deliverables: What your business will do and when and how it will do it. Be sure to set specific and detailed expectations to avoid misunderstandings.
• Metrics: The specification against which the results of the services or the operation of the products will be judged. Again, the more detail the better to avoid changing customer requirements as services are being rendered or products are being manufactured.
• Customer deliverables: What the customer must do (above and beyond paying) for your business to render the service or provide the product (e.g. meetings, materials, documentation, etc.).
• Inspections: A set period during which the customer will inspect the results of the services or the products. This is important to avoid extended inspection periods and, possibly, delayed payment.
• Warranty process: Rights and conditions for the warranty process (e.g. who pays to ship the product back for warranty repair).
• Money: Payment terms both broadly and the exact costs. You should include the timing for payments as well as the interest and late fees in the event of untimely payment.

The process should also be streamlined with a set of “standard terms” that are used for the life of the customer relationship and with variables that are modified to reflect the special circumstances of each purchase. Standard terms ease the process of buying multiple times by eliminating the need to agree on new contracts for each purchase.

Caveat for an Online World

New challenges have presented themselves in an increasingly online world. It’s just as important in this online environment (as it is in the world of brick-and-mortar stores) for a business to establish the legal relationship between itself and its customers.

Businesses have to pay extra attention to how customer agreements are presented and agreed to by customers on their websites. If you expect the users of your website to abide or be bound by certain provisions, two things must happen. 

1. Those provisions must be conspicuously available for the user to read.
2. The user must actively agree to them before they can make a purchase.

You can’t rely on a browsewrap statement for your website’s customer agreement. It doesn’t matter if you sell products, services, or access to information through your website. You must require the purchaser to affirmatively agree (i.e. by clicking a box) before the payment is received, the service is booked, or the information is accessed.

Use This Tool to Build Value

A well-prepared, detailed, and readable “standard” customer agreement is a fundamental tool for building business value. It will help you acquire high-quality customers and will lead to consistent sales from repeat customers.

A similarly well-crafted online agreement presented to your customers as a clickthrough agreement will ensure that your online agreement will be able to provide the same benefits to your business as your paper customer agreements.