At my last SaaS company, the leadership team was fond of saying, “Our clients don’t actually become clients until they renew for the first time. Until then, they’re just testing us out.”
Renewal business is one of the single biggest factors in growing a successful Software as a Service (SaaS) company. It’s pretty simple: If you had $1,000,000 in business in 2020 and your renewal rate is 70%, you have to sell at least $300,000 in net new revenue in 2021 to hit the same multiple — AND THEN YOU HAVE TO GROW! This is why ARR businesses with high renewal rates command such high multiples with investment firms or strategic buyers.
Sales managers at SaaS companies can use data points to help manage a strong renewal business. Here are seven important metrics to consider:
1. Onboarding statistics.
How long does it take for a client to become active and engaged on your platform or with your product or service? How does this number impact your renewal rate? If you’re finding that clients who take longer to onboard aren’t renewing, this means it’s time to look into ways to speed up the onboarding process.
2. Usage statistics.
Of your active users, how many engage your platform, how often do they engage, and how long do they engage? How does this statistic impact renewal rates? Regularly finding new ways to engage your users can increase renewals.
3. Upside data.
Do you know your clients’ “upside”? In other words, are there more opportunities to earn additional revenue from the client? If a client is utilizing your product, is there an opportunity to add additional users, services and solutions? A lot of SaaS companies overlook this.
4. Industry or client trends.
Do you have the ability to diagnose any trends in renewal percentages by industry or by client size? Finding out that a particular type of industry tends to renew more will enable you to focus your sales efforts on prospective clients within this industry.
5. Decision-maker engagement.
How often is your team engaged with the decision makers and primary point of contact? How does this activity impact renewals? You may find that engaging people in certain roles within a company will influence renewals (positively or negatively). Account executives at top SaaS companies always look to engage with the most critical decision makers on a timely basis.
6. First year renewals vs All other renewals.
You should track renewal rates between clients who have used your products for different amounts of time (i.e. clients who have been clients for one year versus four years). You will probably see interesting data which will highlight when a company actually becomes a “client”. This may also point you to signing more multi-year deals and incentivizing the sales team in that respect.
Don’t be afraid of them; they’ve become standard operating procedure at many SaaS companies and they’re especially essential for predicting revenue for ARR businesses. They’re also a great tool to ensure your team has a chance for a conversation in the event that a client opts out. You should have enough time in the renewal cycle to head off potential problems. If there is a true business issue, you can always choose not to enforce the auto-renewal.
Note: Auto-renewals are not meant to trap a client and they must be discussed upfront.
When you analyze this data, you’ll find that renewal business is anything but random. When you can find common denominators between clients who are renewing, and clients who are not, it can help you target your sales efforts and improve any issues with the product or sales process.
For more useful metrics for sales leaders, see why Sales Leaders Need to Maintain These 3 Metrics for a Healthy New Business “Top of the Funnel”