Why Renewal Revenue alone is not enough for a SaaS Business

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| Last Updated: June 09, 2015 |

Reading time: 2 minutes

Renewal Revenue

Are you unsure of the average renewal rate for your subscription business? According to SaaS expert Gadi Shamia, that’s a significant problem. Business analysts have long understood that the value of current clientele is typically under-praised by small and medium-sized business owners. In more traditional product or service-based business models, current customers have an average lifetime spend that’s around 67% greater than new business.

Additionally, it typically costs around 5 to 10 percent more to acquire a new customer than retain clients. The SaaS model is uniquely client-focused, and while the ability to churn can be based on your clients needs, a low retention rate will wreak havoc on a subscription business’ financials.

100% Renewal Isn’t Enough

To simplify the math for illustrations’ sake, imagine if the entire focus of your subscription business was retaining your current clientele. There were no changes in your personnel or overhead costs, and you managed to achieve a churn rate of 0% at the time of renewal.

Not only are these figures unrealistic, they’re not especially beneficial to your organization, because you’ve achieved 0% growth over the course of the year. Retaining your current clients is critical to maintaining your business, while focusing on up-selling leads to growth.

Churn Happens

It’s natural to achieve some churn rate. You can minimize churn by improving your uptime and customer support, and building better relationships with current clients. You will lose some business due to factors that are outside your control, which range from companies closing or being sold, to changes in management or business needs over the course of the subscription period.

In order to achieve the growth you want, the combination of your up-sell and revenue renewal should exceed 100%. In the words of Shamia, a healthy subscription business has “a small churn and relatively high up-sell rates, so the total is more than 100% renewal value.” If you ultimately achieve your goals of 90% renewal and a 15% up-sell  any new revenue will contribute to your company’s bottom line.

Place Clients in the Driver’s Seat

SaaS places the client in the driver’s seat. According to Christopher Cabrera, President of Xactly Corp, due to these unprecedented, low levels of client lock-in, your subscription business is faced with the unique challenge of keeping client happiness high throughout the subscription period. Cabrera recommends that you establish programs to make the customer your advocate, so do we.

From soliciting feedback to rewarding referrals to bringing your happiest clients into the center of your sales process, make the client your subscription business’ advocate. By creating a relationship where they’re entirely involved in every aspect of your sales and development, you can ensure that you never find your blood line cut off (Renewals).

Author of the post

John Solomon

Marketing Leader / Sales Enabler. Head of India Operations for @Infrascale / @sosonlinebackup.

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