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The XaaS/SaaS subscription model has been growing for years. As more and more tech companies have embraced this trend, the focus has shifted to growing revenue from renewal customers. Make sure your company has the expand and renew capabilities it needs to succeed in a subscription economy.
If you have been following TSIA research for any length of time, you are familiar with Thomas Lah’s work on industry trends; specifically, the Technology and Services top 50 and the Cloud top 40 indexes. In these quarterly reports, Thomas highlights financial trends from publicly available data that indicates sources for revenue, broken down by services revenue vs. product and license revenue.
Service vs. Product SpendingThis chart, showing the latest TSIA T&S 50 index, is particularly interesting. It clearly documents the shift from products being sold in a single capital acquisition event to products being sold “as a service” under a recurring revenue model. Additionally, we see the contribution from traditional support and services continue to grow as well.
These trend lines can also represent workload and work type for your customer-facing teams, not just source of revenue. Up until 2013, technology companies were built on a concept of selling units of products and attaching support or services as needed. The workforce was built around the concept of product-centric customer acquisition with a relatively modest renewal capability. Renewals were a byproduct of the annual maintenance contract renewal event and largely an afterthought from a sales point of view.
After 2013, we saw growth in the Service (recurring revenue) engine. In short, each sale transacted under an XaaS/SaaS basis is a renewable subscription. Each year the amount of business flowing into the recurring revenue basket has been growing and this means the renewals have been growing as well.
The implications are dramatic for technology companies. Corporate strategies that ignited this trend have now turned toward sustaining this trend. How do we grow revenue from a perpetually renewing customer base? What KPIs do we follow? What are the key practices needed to continuously expand and renew our customers? Organizational structures? Skills? Compensation?
All aspects of technology companies are transforming to accommodate the recurring nature of our business. Whereas the primary source of revenue was once derived from the land contribution of sales account executives, there is a shift to land the deal and then grow the majority of the lifetime value via expand and renew.
Transactional vs. ContractualWhat Key Capabilities Are Needed to be Great in a Subscription Economy?There are dozens of key practices that aggregate to top performance in expansion and renewals. No one practice will stand alone to drive results. At TSIA, we benchmark technology companies and correlate business practices to business results. Let’s have a look at four steps you can take that are fundamental to high performance expansion and renewal in service-oriented companies:
#1 - Deploy Customer Success to Include a Revenue Charter
CSMs are routinely deployed to attend to adoption, particularly in XaaS business models. While this is a key strategy and capability for successful SaaS companies, data indicated that when customer success also has expansion responsibility, not only do growth rates increase, but renewal rates also increase.* Selling expansions off the renewal cycle also shows a positive impact on renewal rates.* Further, when CS organizations shift into a P&L center vs. a cost center, they tend to be more self-sustaining and contribute to the bottom line.
#2 - Establish Expansion KPIs
The singular practice of establishing expansion KPIs and then actually tracking them has a significant impact on revenue growth. Surveys show that enabling the capability to track upsells and cross sells produces a 9-point improvement on annual revenue per account (ARPA) growth.*
#3 - Document a Segmented Renewal Cadence
Once KPIs are determined, it is critical to establish the rules of engagement and the contours of the playing field. Who is doing what, and when? Until the renewal cadence is formally documented and communicated between the business functions attending to the renewals, there will be conflicts and inefficiencies in the process.
The land and renewal motion of the traditional product business model is being amended under the XaaS motion to include adoption and expansion in the renewal process. Value realization and customer outcomes become a very real element of the renewal and shifts the focus from units of transactions to also include value realization.
#4 - Remove Account Executives from Renewals
The use of account executives in low complexity renewals is NOT advised. In fact, data shows that when account executives who are responsible for landing new deals also earn commissions for renewals, revenue growth is retarded, profitability is depressed, and renewal rates are virtually the same.*
Therefore, TSIA recommends that account executives are deployed to manage only the highest complexity renewals and the balance of the work is placed with CSMs or renewal specialists who perform just as well and cost half the compensation expected by senior account executives. Expand and renew with CSMs / renewal specialists and sell net new with account executives.
To learn more about subscription expansion and renewal strategies, please see the “Expand and Renew” research report I recently co-authored with Steve Frost. Also, be sure to sign up for the “Two Worlds Colliding: Bringing Together Customer Success and Renewal Teams” webinar I will be presenting with Phil Nanus on December 16, 2020.