January 10, 2014 | By Steve Silver
In their book Loyalty Myths: Hyped Strategies That Will Put You Out of Business – and Proven Tactics That Really Work, authors Timothy Keiningham, Terry Vavra, Lerzan Aksoy, and Henri Wallard attempt to disprove the conventional wisdom that it costs five times more to acquire a customer than to retain a customer. I'd argue that even if it doesn’t cost less to keep an existing customer, but customer retention and contract renewal are vitally important, especially for companies that operate in recurring revenue, subscription, or software as a service (SaaS) models. (Investors and executives love these models, because they provide a steadily growing, cumulative and predictable revenue stream.)
The Achilles’ heel of a recurring revenue-business is customer churn; even a small change in the renewal rate makes a big difference in the performance of the business. For example, a company with a $1 million revenue stream and a 90 percent annual renewal rate will lose $344,000 in recurring revenue over the course of four years. If the renewal rate drops to 85 percent, the loss increases to $478,000. At an 80 percent renewal rate, the loss jumps to more than $600,000.
Here are four keys to improving customer renewal rates:
- Assign responsibility. Some companies struggle to identify exactly who is responsible for managing customer renewals. Is it the field sales rep, account manager, customer service or a renewal team? We typically see an account manager for large accounts and a renewal team that manages multiple smaller accounts, but it’s critical to ensure clear responsibility for each stage of the customer lifecycle.
- Establish a single, global process for managing renewal opportunities. Similar to the sales process for new opportunities, the renewal process must be a closed loop, from end to end, with observable outcomes at every stage. The process begins immediately upon transition from prospect to customer, with specific activities and recurring touchpoints (e.g. customer kickoff meeting, engagement plan, quarterly account reviews, usage/risk assessments).
- Manage the process within the sales force automation (SFA) platform. The renewal opportunity record should include customer data (e.g. forecast amount, close date, risk assessment, contract start and end date, details about what the customer bought, usage data, customer satisfaction scores). Dashboards for reps, managers and executives should track and highlight critical renewal information.
- Develop a data-driven risk assessment and early warning system. This should be based on critical metrics (e.g. customer login activity, adoption, usage information, customer satisfaction scores). Is the customer getting value from the purchase? Have changes in circumstances occurred that will impact the renewal (e.g. executive turnover, mergers, acquisitions, regulatory changes)? If the risk profile is “red,” escalate, share best practices and engage experts and executives.
By keeping a customer longer, you can provide a stable base for profitable growth and deliver other benefits as well (e.g. improved levels of advocacy, positive brand perception, lower support costs). Use well-defined accountabilities, processes, metrics and tools to manage existing customers, keep renewal rates high and allow field sales to focus on new revenue vs. replacement revenue.