3 ways to improve renewal rates

Whether we're talking about churn, retention or renewal rates, the fundamental aim is the same: keep the revenue you already have.

The gravity of this challenge can not be overstated: if you aren't able to improve your renewal rates to a sustainable level, your business will bleed out and die.

Okay, maybe that was a bit dramatic but you get the point: the stakes are high. Failing to improve renewal rates can result it:

• Decelerating growth

• Poor unit economics

• A battalion of former customers that never found value in your product and talk about it

• Low employee morale

• Severe fundraising problems

• Bankruptcy

Over the last 10 years, the proliferation of software solutions, business models, and pricing strategies has resulted in a plethora of new revenue retention metrics, so let's first align on our terminology. I am defining renewal rate as:

Renewal Rate = 100% - Lost ACV/(Lost ACV + Total Renewed ACV)

[ACV: Annual Contract Value]

Let's do an example where we have $5M ACV up for renewal in Q1-2017 and your team is able to successfully renew $4.6M of it, but alas $400k is lost to the churn monster:

Renewal Rate = 100% - Lost ACV/(Lost ACV + Total Renewed ACV)

Renewal Rate = 100% - $400k/($400k + $4.6M)

Renewal Rate = 100% - $400k/$5M

Renewal Rate = 100% - 8%

Renewal Rate = 92%

Easy enough, right? Good. Related to this, if you're interested in seeing all the different ways that SaaS companies report these metrics to the Street, I highly recommend bookmarking Pacific Crest's report: Public SaaS Company Disclosure Metrics for Retention and Renewal Rates.

It's become fashionable to report on "net" revenue metrics. "Net" metrics are created by simply combining two numbers, typically expansion and churn. The risk here is that expansion from existing accounts can mask a churn problem. Or as I like to say, "Nets can cover things up."

Therefore, "net" metrics are out of scope for this article as they increase the complexity of something simple: keeping the revenue you already have.

3 Ways to Improve Renewal Rates

1. "Screen the team." This strategy has to do with the rigor your company applies to screening customer teams during the sales process. Given the hundreds of software options in the crowded cloud, the real battles aren't being fought over technology, but rather program resources. Similar to organizing an effective sports team, your Sales Engineers and Account Executives must evaluate:

   • Does this potential customer have the right players on the field?

   • If not, how do we make a business case for additional resources whether that be internal or external agency help?

   • Do they have access to developer resources? If so, how many hours per week? How many sprints per release? How many stories per epic? Specificity is key here.

   • Who is going to own the day-to-day adoption and evolution of the program to use your software, i.e. who is the program manager?

   • Does the potential customer have strong executive sponsorship and a desire to make this work?

2. "ROC your renewals." If you aren't familiar with ROC curves, now is a good time to start. The goal of this strategy is to perform data science analysis to identify the 1-2 customer attributes and/or behaviors that are highly correlated with retention success, e.g. renewal rates, and then mobilizing your entire company—marketing, sales, customer success, design, engineering, everyone—to prioritize and improve these metrics:

   • For Facebook it was 7 friends in 10 days (video, if preferred)

   • For Twitter its was follow 30 people

   • For Slack it was sending 2,000 messages

   • For Zynga {cough} it was 1 day retention (user returns day after signing up for game)

   • For Dropbox it was adding 1 file to 1 folder

3. "Pay the retention piper." Incentives matter. No matter how inspirational your company or product vision is, the behavior of your employees are primarily driven by how they are compensated. If your Account Executives are comp'd 100% on growth, they will spend 100% of their time closing new business (and 0% on retention). If your Customer Success Managers are comp'd 100% on usage metrics, they will spend the vast majority of their time on improving usage (and little time on lead generation, customer references, etc). 

Want to blow up your SaaS business? Ignore C4.

Story Highlights:

• There are MANY SaaS metrics to consider these days. Today we will review "C4"—which includes CLV, CAC, CRC, and Churn—and explain why they matter to a SaaS subscription revenue model.

• Any one of the C4 elements can blow up a business.

• Therefore, we must have a deep understanding of C4, how each element is calculated, and what we can do to manage and improve them.

Want to confuse your board along with all your employees? Start by showing them the below table of 59 different SaaS metrics.

These days, SaaS metrics are abundant if not overgrown. Similar to the investment industry, you can go down the metric rabbit-hole pretty quickly before you realize, "Wait a minute, what are we actually trying to accomplish here?"

View fullsize

But there are four key metrics that rule them all. You guessed it: C4. What is C4? 

This explosive composite combines four vital SaaS diagnostics:

1. CLV: Customer Lifetime Value

2. CAC: Customer Acquisition Cost

3. CRC: Customer Retention Cost

4. Churn

Churn—which typically garners most of the limelight—is the most cancerous, yet easiest to calculate. Churn is typically expressed as either a dollar figure or a percentage of revenue over a certain time period.

For example, let's say a SaaS startup has $1MM in monthly recurring revenue (MRR). Last month, a customer paying $10k/mo churned. Therefore, churn could be expressed as:

• $10,000 MRR

• Gross churn = 1%

Simple enough, right?

Churn is insidious, even maddening at times. But once properly understood and effectively managed, churn can materially improve how your run your business. The key is to treat every churned customers as an archeologist might approach a dig. The good stuff is down below, and you'll have to institute a process to have these conversations, diagnose root cause, and ultimately arrive at a LEARNING that will improve how you do business.

For example, you will likely lose a customer for product reasons. Perhaps you lacked the feature, functionality or performance they seek. This information MUST reach the ears of the Product and Engineering teams so that they can prioritize such items in their release planning.

Is there anything worst than a churned customer? Yes: when you fail to learn something as a business. That, in other words, is the greatest disservice of all.

Why NPS is crucial to scaling Customer Success

Simply put, building a Net Promoter System (NPS) will give your business a sustainable, competitive advantage. This insightful management tool can be used to gauge the loyalty of a your customer relationships. It serves as a modern alternative to traditional customer satisfaction research.

To calculate your NPS score, you begin by asking your customers a simple question: How likely are you to recommend [Your Company] to a friend or colleague? (Scale 0-10). You then bucket your responses based on their score:

• Promoters: 9-10

• Passives: 7-8

• Detractors: 0-6

Next, take the % of promoters (# promoters / total responses) and subtract the % of detractors (# detractors / total responses). The best NPS is 100%. The worst NPS is -100%.

But why does this matter? A few reasons:

1. Retention: detractors are 2-3 times more likely to churn. Therefore, you should treat detractors like ticking churn grenades.

2. Growth: promoters account for 80-90% of positive word of mouth. Therefore, you should treat promoters like referral machines which buoy your company's reputation in the marketplace.

3. Feedback: this is arguably the most important, and the most actionable. Detractors will provide you with feedback on WHY they don't recommend your product, service or company. You will then have a decision: take action, or don't take action. This feedback loop is critical in the evolution and improvement of your functional teams.

4. Alignment: the NPS framework is a great way to align EVERYONE in your company—from the intern to the CEO—around a common dialect that reinforces a "customer first" mentality.

On a tactical level, DBT recommends the following vendors to build out NPS:

• Get Feedback: survey tool (integrates with Salesforce; sample survey)

• Salesforce: CRM

• Marketo: automated distribution of NPS email with link

• Qualaroo: use for obtaining in-product NPS scores

But what does a good NPS look like? Well, it depends on your industry. Since DBT primarily works with high-growth technology companies, we can share that most of our clients are targeting a NPS score in the 50-65 range.

NPS by industry

Some companies, particularly in the mobile space—like Uber—use a modified NPS system. A ten-point scale doesn't design nicely within the limited real estate of a smartphone, so a lot of companies use a five-point scale and require a reason if you are a 1-3. For example, Uber's mandatory NPS feedback loop looks like this:

Lastly, here are several of the companies considered (by some) to be NPS leaders in their space. B2C companies tend to have significantly higher NPS than B2B customers.