In my travels, it is amazing to me how many software firms are surprised when a client renews a subscription term or chooses not to renew a subscription term. I can’t count how many times I have heard one of my clients say, “Wow, can’t believe they renewed.” or “Why didn’t they renew? We thought they were happy.” Too many companies still use a highly outdated approach to customer engagement to manage their customers, even though there has been a monumental shift in their business model, thanks to the advent of software-as-a-service, and the related subscription payment model. Customer retention is, arguably, the most important factor in a successful subsciption business.
Unlike the old maintenance model, where your customer would renew a 20% fee every year as an insurance policy to get the latest versions/updates and access to support if they needed it – the subscription business model requires far more proactive engagement to ensure high retention year after year. Not hearing from or talking to your customers throughout the year, is a very bad thing.
Over the past nine and a half years, we have helped our clients develop a Customer Lifecycle methodology that puts a finger on the pulse of customer retention and renewals. Although not 100% exact, as there are always variables outside of your control, we have developed a formula to track and score the key indicators to proactively understand, and react to, variables that will impact retention.
BDA + QVI – (U + ES) = Likelihood of Renewal
BDA = Business Driver Attainment: Your clients bought your product/service for a specific business reason(s) – There are usually one to three of them and they are often not the same as what your marketing materials say. This is a 5 point scale:
- Doesn’t meet key needs or is not used.
- Meets some key needs but with major issues/gaps.
- Meets most key needs but with some significant issues/gaps.
- Meets most key needs but with some noteworthy issues/gaps.
- Meets all key needs with no noteworthy issues/gaps.
QVI = Quality and Value of Interactions with your company (sales, support, etc.). Your client may have had several interactions with a multitude of people from your company. Overall how would they rate their experiences dealing with you?
- Very unsatisfied with all interactions.
- Quality and Value of interactions are unsatisfactory.
- Quality and Value of interactions are inconsistent.
- Satisfied with Quality and Value of interactions.
- Very Satisfied with all interactions
U – Usage Rate - Rate them on a 3 point scale on their overall usage, based on what should be expected with your specific application/service. Obviously this will vary from company to company. A firm that sells an ERP system to a finance department would have a different usage expectation then an application that only needs to be used a few times a month.
- High Usage (no impact to score)
- Medium Usage (no impact to score)
- Low Usage (subtract 2 from score)
ES – Executive Sponsor – Did the executive sponsor who was a big factor in the initial purchase leave the company or was otherwise replaced by someone else? This can have a significant impact on a pending renewal, especially if his/her replacement wants to put their own stamp on the organization instead of following the status quo a predecessor.
- If Yes – Subtract 2
- If No – no impact on score
So, adding BDA (1 to 5) + QVI (1 to 5) minus (U + ES) = Renewal Health Score:
- 1 or 2 – Will not Renew
- 3 or 4 – Renewal Very Unlikely
- 5 or 6 – Renewal At Risk
- 7 or 8 – Renewal Likely
- 9 or 10 – Will Renew
Obviously this method isn’t perfect, as it doesn’t bring into account variables outside of your control such as budget cuts, buyouts, acquisitions, etc. But what it does do is give you an indication of the overall renewal health based on the variables you do control or influence. For your specific business, you may need to adjust the weighting to account for your unique situation – but give it a try and adjust and tweak it until it becomes a pretty accurate tool for predicting renewals on a client by client basis. Make sure that the answers to the BDA and the QVI come directly from your clients (via survey, business review, in-person meetings, etc.), or there is no point going through this exercise. Also, for simplicity sake, you could simply put your clients into two buckets for the purpose of intervention. A score of 6 or under, circle the wagons. A 7 or over, continue to nurture the client, and don’t take it for granted.
Again, this is based on our experiences and is a component of our overall Customer Lifecycle methodology. With a few tweaks, based on your specific business, we believe this is a very helpful approach to better understand your business risks and client health and put you well on the way to securing high client retention over the long term.
