How strong is your support renewal program? Many service executives think they know the answer based on a few statistics and some anecdotes from their sales team. However, these measures are often inconsistent and rarely instructive on how to improve the business. ServiceSource believes that the real yardstick of renewals performance lies in a comprehensive set of key performance indicators (KPIs) that can tell a much broader story including:
- Performance over time and across teams, product lines, and geographies
- Trends and information about the customers’ buying habits
- Key levers for driving future performance
A comprehensive dashboard provides executives with a clear view of their renewal program along with insight into how to drive improvements – and future revenue. ServiceSource leads the industry in consistently tracking and measuring the critical metrics required to drive maintenance renewals. In our customer engagements, we leverage a dashboard that includes these KPIs, segmented into five categories of metrics:
Table: Key Performance Indicators
Renewal Opportunity Metrics
These metrics tell you the true baseline opportunity to renew.
1. Total Opportunity Amount. The total opportunity amount is defined as the total potential contract value that can be renewed in a period. While this sounds elementary, the only way to accurately assess performance is to capture the true baseline value of your opportunity. The biggest obstacle to a reliable total opportunity value is preset exclusions.
Companies often systematically exclude a set of contracts from their opportunity base. For example, one of our customers previously excluded customers who hadn’t used the support desk in the last year. These auto-exclusions are highly subjective and potentially arbitrary. By excluding any part of the total opportunity, renewal results can be inflated and unreliable in trending analysis. As a result, teams will not have all of the information they need to maximize performance.
2. Adds Ratio. The adds ratio is defined as the proportion of renewals from unexpected sources. These “bluebird” transactions, some companies will argue, are impossible to predict. A customer may mistakenly think he has a support contract and then need to purchase one; another may initially refuse the support contract and decide to purchase it later. A recent analysis of the ServiceSource portfolio showed adds ratios for our customers as low as two percent and as high as forty-eight percent. This large swing is dependent on the quality of the renewal data and how accurately total opportunity is measured.
If tracked rigorously, the adds ratio becomes more predictable over time and can be included in the original opportunity base. It is also a critical component of your sales team’s forecast.
Simply using last year’s maintenance revenue as the baseline is the traditional approach to calculating total opportunity. But this may underestimate your opportunity and therefore overestimate true renewal performance. Have you factored in pricing increases to the opportunity base? New purchases? Add-on services? An accurate starting point ensures that renewal rates will be truly reflective of your teams’ performance and therefore provide a better benchmark over time.
Renewal Results Metrics
These metrics tell you about performance against the true opportunity.
Historically, the industry has relied on the ”Bookings Renewal Rate” (defined as the total amount booked divided by the total amount expiring in a period) as the standard measure for renewal performance because it is easy to calculate and often paints renewal rates in a favorable light. However, this metric is often misleading because it includes closed deals from a variety of sources, including expired business, future contracts, and other projects. We believe that the two most accurate measures of renewal rate are the In-Quarter Renewal Rate and the Final Renewal Rate.
3. In-Quarter Renewal Rate. This metric is defined as the percentage of opportunity expiring in the current quarter that is actually closed before the end of the current quarter.
For example, if a company has $100 worth of contracts expiring in the quarter and books $90 by quarter’s end, its renewal rate appears to be 90%. However, when $5 of those bookings represent contracts expiring next quarter and $3 worth of contracts are from the previous quarter, the true in-quarter renewal rate is actually 82%.
Companies often hesitate to measure renewal rates in this pure state because results can be lower. However, it is the most accurate measurement of what contracts were successfully renewed on time in an identified “batch” of business, and it is extremely useful when examining historical trends.
4. Final Renewal Rate. This metric indicates the percentage of the opportunity expiring in that quarter that is closed at all. This renewal rate suspends the time element and allows you to calculate how much of a quarter’s business was ultimately closed. This can be important because large transactions can run beyond expiration in order to maximize a user’s negotiating leverage. Your success in closing those transactions will be captured in the final renewal rate and is critical to analyzing performance.
Using the above metrics enables standardizing renewal rates across the customer portfolio so that you can appropriately benchmark performance across teams, channel partners, and geographies. It also allows conducting more insightful long-term trending analysis.
Sales Process Metrics
These metrics tell you the time line and quality of the customer experience.
A key driver of a successful renewal program is giving customers sufficient time to have a thoughtful and deliberate conversation about support. The earlier that contact is initiated, the more likely the customer is to renew. Calling early also gives the sales team adequate time to overcome any customer objections. Driving efficiencies in your sales approach and improving your customers’ experience with your sales team can only be achieved through measuring Contact Days in Advance, Sales Cycle Length, and Contracts Renewed before Expiration.
5. Contact Days in Advance. This metric measures the average number of days in advance of contract expiration that your sales team is contacting end users. The earlier you contact a customer to renew, the greater the probability of a successful renewal. Based on our portfolio analysis, we have learned that at 120 days before expiration, every additional week that passes before you contact customers reduces your renewal rate by 2.5 percent. The Contact Days in Advance metric allows you to continuously improve your customers’ experience and drive improvements in overall renewal rates.
6. Sales Cycle Length. The Sales cycle length is defined by how many days, on average, it takes for customers to renew their support contract. If you know a customer typically requires 75 days to successfully run a renewal through its internal channels, you can optimize the process you set with your sales teams. Insufficient planning against a long sales-cycle time can lead to expired service agreements, which ultimately impacts support revenue and significantly reduces customer retention.
7. Contracts Renewed Before Expiration. This metric is defined as the percentage of contracts being renewed on or before expiration. This number should be as high as possible and consistently improved. Once a customer’s contract lapses, each day without an incident helps “prove” they don’t need a support contract. From our analysis, once the contract hits the backlog (defined as 30 days past expiration), renewal rates are typically cut in half. Even if the company renews later, it means you’ve lost revenue for every month that the company did not have coverage.
Sales process metrics allow you to measure whether your sales teams are doing the right things to maximize support revenue.
Performance Driver Metrics
These metrics tell you where to drive future performance improvement.
ServiceSource analyzes three critical subcomponents of renewal rates to determine what levers to pull to increase future revenue. Our whitepaper, “Deconstructing Renewal Rates,” outlines a best-practice approach for dissecting overall renewal rates in order to drive improvements in performance. A brief summary of these metrics is as follows:
8. Retention Rate. The resolution rate is defined as the percentage of opportunity where the sales cycle has been definitively completed, either by closing out the transaction successfully or canceling the contract. By tracking the resolution rate, companies focus on contacting every customer and bringing all available opportunities to closure prior to expiration.
9. Close Rate. The close rate assesses the percentage of customers who accept the value proposition and agree to renew maintenance. Companies can optimize their close rates by educating end users on the risks of having an unsupported product and by selling the value of their service contracts.
10. Conversion Rate. The conversion rate reflects the difference between the booked value of closed contracts and their original estimated value. Companies maximize their conversion rate by selling the value of service upgrades, outlining multiyear options, and ensuring that all assets are covered under the service contract.
The net renewal rate is equal to the resolution rate times the close rate times the conversion rate. By analyzing these three renewal components, you can move from results reporting to scenario planning. You can then use “what if?” questions to identify the areas that hold the greatest potential for improvement.
Customer Feedback Metrics
These metrics tell you key lessons about your customers’ buying habits.
Knowing your renewal rates and cancellation rates is valuable, but future improvements in performance come from gleaning valuable business intelligence about why contacts have renewed or cancelled. The only way to do this is to establish and track a standard set of reason codes that reflect why customers are making the decisions they do. This customer insight comes from tracking and analyzing.
11. Conversion Reason Codes. Conversion codes are defined as a set of driving forces in the transaction value of a successful renewal. ServiceSource tracks a specific set of reason codes to evaluate how the final renewed value compares with the original opportunity value of every closed contract. Did they upgrade to a higher level of support, buy a multiyear agreement, or push for a discount? By tracking this information, you can evaluate how effectively your sales team is selling the value of service and better understand customer buying habits. A company can then use this data to make informed decisions about how to structure, market, and sell their service offering.
12. Cancellation Reason Codes. Cancellation codes are defined as a set of reasons why customers decided not to renew their service agreement. At ServiceSource, we tailor cancellation codes to track such things as competitors, deployment issues, and budget constraints. This information can then be analyzed to understand where competitors are making inroads, why companies are removing equipment from service and, ultimately, how such insight can be factored back into a company’s long-term product strategy.
The 12 KPIs described above allow an executive to think more strategically, to focus on how to refine the company’s service offering, and to help shape its overall product strategy.
Driving Future Performance
Many companies have a good track record at defining and tracking metrics around renewal opportunity, renewal rates, and sales process. These metrics are critical to building a renewal dashboard that provides an accurate, consistent assessment of historical performance. It enables thoughtful analysis of trends and allows you to compare performance across products, geographies, and channel partners.
But, ultimately, the value of an executive dashboard lies in the ability to leverage this historical data to drive insight and to enhance future performance. A world-class renewals dashboard also applies performance-driver and customer-feedback metrics to help executives set strategies for the future. These metrics provide indicators on buying habits, the competitive landscape, and the customer experience. By tracking these 12 essential KPIs, service executives can think more strategically about their business and institute creative practices for driving future maintenance performance.
ServiceSource focuses on driving increased service revenue, profitability and customer satisfaction for technology and technology-enabled healthcare and life sciences companies. We manage the sales process for renewals of maintenance, support and subscription agreements on behalf of our customers.