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Service Revenue Generation
It is clear that over the past decade many technology companies have been shifting away from product-centric economic engines in which they sell products as units of assets, supported by attached support. Instead, companies are moving to services-centric and XaaS-centric economic engines in which products are sold as a service with customer success and adoption services (Figure 1). What does this shift mean for your business?
Business capabilities are shifting in response. Companies are changing from large heavy field-facing sales organizations responsible for selling capital products and attached support, to virtual sales organizations capable of selling products as a service, enabled by robust digital-based technology and marketing.
Education, Professional Service, and Support organizations are taking on new looks and new capabilities, and Customer Success functions are among the fastest growing organizations in the industry.
An interesting dilemma created in this shift to “as a service” is that every net new sale of a subscription must be perpetually renewed for the life of the contract. This dynamic is requiring companies to evaluate who manages this renewal revenue opportunity and how they manage it.
(Figure 1 - Revenue Mix Trends Graph)
In 2020, COVID-19 focused the attention of these considerations as well. After a decade of an expanding economic environment, COVID-19 shocked the system and caused many technology companies to experience resistance to renewals unlike anything they have experienced for a while.
Renewals are now demanding, more than ever, a mature disciplined approach to defend and to grow recurring revenue. Our TSIA members report that it is routine practice for procurement offices to ask for discounts, even to the point of sending out generic form letters.
The bottom line: renewing recurring revenue requires a dedicated and refined approach in turbulent economic times. Renewal teams, whether customer success manager roles or renewal specialist roles, have to step up their game.
Trending benchmark data indicates a reduction in renewal rates for hardware-centric companies of about 2 points from prior year, while software-centric companies experienced a slight improvement in renewal rate performance. Similarly, discounts provided by hardware-centric companies increased 5 points this past year while software companies reduced discounts slightly. Clearly, hardware companies are having a tougher road to travel, while software companies seem to shrug off COVID-19 with no financial impact.
Workload is increasing, financial impact on company performance is becoming more important, and the renewal transaction itself is becoming more difficult in some markets.
Often, we find technology companies have deployed the highest capable “LAND” Sales experts in the effort to renew the subscriptions and attached support contracts, even if the subscription is very simple and has a low dollar value. Why? Sales sells and everyone else supports. And if you want to protect the company’s revenue stream, you want the most capable sellers on the task, right? Besides, Sales owns the account, so they need to set the strategy.
This mantra, often repeated, is costing technology companies anywhere from 3 to 20% in Customer Retention Cost* (CRC) over similar companies that deploy a mature Customer Success or Renewals organization. Research shows that performance improvement in renewal rates is less than 1% relative to customer success managers or renewal specialists.**
The “obvious” choice is not so obvious. In fact, our natural inclinations to utilize sales executives can actually be detrimental to the overall health of the renewal business. It’s akin to using a combine harvester to mow the grass around your house when a lawnmower is just right.
Sales executives are outstanding at breaking open new accounts, displacing current technologies with newer alternative technologies, and maintaining complex relationships, yet they demonstrate no discernable advantage when deployed to manage a set of renewal opportunities. These are opportunities that require significant administrative coordination, depend on convincing a customer to not change out their current solution, and are not as complex in composition.
Anecdotally, a leader of a mature renewal specialist team recently told me that they much prefer to handle the renewal negotiations for two reasons:
While this is not a universal condition, it does speak to the multiple charters competing for a sales executive’s performance.
At TSIA, we find that best practice requires companies to:
(Figure 2 - LAER Sales Efficient Diagram)
This approach asks companies to set aside current or legacy approaches of starting with the sales executive as the primary owner. Instead, companies should start with a broad-spectrum strategy led by customer success managers or renewal specialists, then augment the strategy with sales executives as needed. Start fresh from the work type and build from the bottom up.
This approach also encourages companies to get very serious about the maturity of their renewal model. People, process, and technology all must be optimized to meet the challenge of an increasingly more complex charter.
Purpose-built renewal organizations have long since been accustomed to “owning the number” and have demonstrated competence and capability to effectively drive greater revenue performance at lower cost. We predict that as Customer Success organizations take on more revenue responsibilities, they will also build similar capabilities and should be tasked with “owning the number” – either in a generalist CSM model, or a specialist CSM model in which some CSMs are dedicated to renewal.
Join TSIA and your industry colleagues at the TSIA Interact virtual conference, set to take place May 4-6, 2021. We will be sharing the latest data, research, and trends to help you navigate the current economy.
Building blocks for renewal sales
Who should own renewals?
*TSIA SRG Benchmark H2 2020
**TSIA LAER Efficiency Benchmark H2 2020
Post Date: February 17, 2021
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Jack Johnson is the vice president of customer growth and renewal research for TSIA. In this role, he works closely with member companies to deliver research and advisory programs focused on helping them grow and renew services revenue effectively. Throughout his career, he has held Renewals, Customer Success, and Operations leadership positions at technology companies providing enterprise software or hardware, or in business services companies helping technology companies growing recurring revenue.
The Technology & Services Industry Association (TSIA) is dedicated to helping technology and services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at (858) 674-5491 or we can call you.