If you have followed TSIA for any length of time, you have probably seen data from Thomas Lah’s Technology & Services 50 Index, which tracks financial KPIs from 50 of the largest, publicly traded, global providers of technology services.
His findings are very clear: The source of revenue for these companies is shifting from capital procurement of product to services and procurement of products sold as a service. As you can see from the chart below, recurring revenue as a percent of total technology revenue sources is growing. (Figure 1)
The implications of this shift have a profound impact on how technology companies build, market, and sell their products and services. When products and services are sold on a recurring revenue model, they are subscribed to (consumed and paid for) over a longer period of time and they are perpetually renewing. This shift in how products and services are consumed has transferred the burden of risk to the supplier and placed the consumer in a powerful position in the relationship.
Value and outcomes promised in the sales process become the focus for an ongoing relationship and ultimately the driver for lifetime value of a customer. If value is not delivered or recognized, or if outcomes are not achieved, the customer ends the relationship and moves on to a competitive subscription. While they may be inhibited by the cost of change, they no longer have huge upfront capital expenditures to hold them “hostage” until a reasonable payoff is achieved.
Increase in recurring revenue models have profound impacts on post sales business capabilities.
WIth the emergence of Customer Success organizations and the transformation of renewals organizations,technology companies are now investing heavily in Customer Success to promote the adoption of the product sold to the customer. This early lifecycle capability has proven to be effective in helping the customer understand the product, use the product, optimize the product output, and ultimately transition into a sustained adopter of the product.
Customer Success organizations have also found they are in a unique position to understand the customer’s experience and needs. Better than almost any other function, the Customer Success Manager (CSM) has a view into the value delivered, outcomes achieved, and the emerging landscape for the next purchase. As a result, CSM’s have become the nexus for caring and selling from the same seat.
The New Face of Renewal
Renewal organizations have also been impacted by the shift to recurring revenue models. While renewal organizations have grown up understanding the dynamics of reselling the support contract for attached services, they have not necessarily built capabilities to renew products sold as a service. The traditional charter of defending the installed base revenue by optimizing their ability to transact high volumes of renewals in a captive period of time is not sufficient in the face of this value conversation.
To have product management build products on a value platform, sales and marketing sell it based on value, customer success onboard and care for the customer based on value, then have renewals teams approach the challenge with a traditional “cost of transaction” method, simply misses the mark. They must adopt an ability to assess and sell based on this same value conversation. And further, they must take the opportunity to recast the original solution sold to the emerging solution needed.They must be adept at not only defending the renewal but also selling the expanding services or products needed.
This is a nuanced shift in approach that has powerful implications on the profitability and growth of services-oriented companies. Renewal specialists must approach the charter from a value delivered context, then move beyond just defending the revenue to expanding access to value.
The ability to expand access to value and grow premium relationships with customers is absolutely essential for long term viability of technology companies.
Recent data shows that when CSM’s, and or Renewal specialist, manage the value conversation and expand the relationship with premium services or additional product capabilities a customer is more likely to renew their relationship with the supplier. (Figure 2)
So, how do we manage the renewal and expansion of value in the renewal motion? The following framework helps describe the process required.
It starts with a company strategy commitment to value and outcomes for customers, then investment in fully functional customer success / renewals capabilities that orchestrate and coordinate activities across the Adopt – Expand – Renew lifecycle.
Renewal starts with product management building products that are built to deliver value, easy to adopt or consume, and easy to expand. Then, the Customer Success organization starts the renewal process by setting the stage with adoption and possibly expansion of the relationship, followed by a tight handoff to the renewals process to continue this value conversation and reassess “fit” for the next phase of the relationship.
Ultimately, the traditional renewal event becomes a continuous effort to determine the current state of value delivered and outcomes achieved with a focus on recasting the relationship with the current product or service fit for the customers requirements. This continuous cycle requires a series of playbooks built to address the customer’s condition and a constant contact strategy that facilitates the relationship.
The classic “sell and forget” strategy does not work in a XaaS business model. TSIA has found that a customer is more likely to renew when there is a constant contact strategy in place. Companies that have a monthly contact strategy have an average of 6.5 points less customer attrition than those companies that do not have a contact strategy.*
- Commit to a value and outcome business approach and align around this strategy.
- Delivering value and enabling customer outcomes should start at product management and cascade across the whole of the company.
- Build a capability to launch products and offers with the concept that they must be continuously renewed.
- Incorporate a fully enabled ability to recognize, discuss, and sell additional value in the Sales, Customer Success, and Renewals organizations, each using the same playbook for their purposes.
- Build a time-based and event-based renewal process that incorporates a constant contact strategy. This strategy should include inspection for additional expansion opportunities along the way.
*TSIA SRG benchmark H1 2020
*** Thomas Lah – T&S 50 Q1 2020