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The importance of recurring revenue models to technology firms has been growing for decades. The business shift from product to services, and eventually to XaaS, has shifted how we sell, and how we transact business, across all sectors of the technology industry.
In fact, recent TSIA benchmark data shows that approximately 17% of revenue for hardware companies is derived from recurring revenues and 38% of revenue for software companies is derived from recurring revenue but, for SaaS companies, the recurring revenue sources are mid 90%.
First, if you’re going to grow your revenue in a recurring revenue or subscription model, it’s incredibly important to keep the customers you already have on the platform. If you have a goal to grow 15%, but you lose 10% of your customer dollars to downsell and churn, you have to actually sell 25% more to grow that 15%. It’s still better than a transactional model, where every quarter you start at zero, but if you want the growth promised by the subscription model, you have to effectively renew the customers you already have.
Recurring Revenue Waterfall Chart
Recurring Revenue Waterfall Chart
To manage the constantly expiring nature of recurring revenue, technology companies must build “renewal engines” with business capabilities that enable them to effectively touch every customer every year, reassess the value fit of the product or services to the customers evolving needs, then sell the renewal transaction.
No longer are we living in a sell-and-forget business model, but a “constant contact” model and that means having the appropriate business capabilities to refresh the recurring revenue constantly. For SaaS companies, this means renewing over 90% of the ARR every couple years.
Over the course of the past 20 years, we have experienced a shift in business capabilities associated with managing recurring revenue. Originally, we saw a business model in which technology companies employ field-based sales or services sales organizations to renew maintenance contracts. This was largely a brick and mortar experience in which individuals traveled to an office location to interact, strategize, collect data, train; then utilize office, phone, and face-to-face visits to complete renewal sales.
With the maturation of the internet and electronic communications, and the digitization of contracts and quotes, technology companies began the shift to call centers with an aggregation of virtual renewal specialist that could lead, or support, much of the installed base business; leaving only the complex and enterprise work to product and services sales representatives who are in the field.
In the past few years, we have seen a hardening of the call center approach, often distributing work types between call centers around the world and utilizing work from home models. This remote model, focused on digitalization, process, and technology, makes it ideally suited for work during a crisis like the current one.
With hundreds of thousands of people infected, governments and businesses around the world are calling for isolation and restrictions on working in groups. Are you prepared to continue business operations under these conditions? Do you possess common business capabilities and practices to operate in a virtual and remote configuration of your workforce?
A poll conducted this month suggests that Renewal Specialist and CSM organizations are built to thrive in a remote / digital business environment. (See figure A – Are you mobilizing work from home models?). 87.5% of respondents are actively conducting business from home in response to the COVID-19 pandemic.
Figure A: Source – Quick Poll: TSIA Virtual Summitv-Transforming your Customer Engagement Model for Growth
Source – Quick Poll: TSIA Virtual Summitv-vTransforming your Customer Engagement Model for Growth.
At TSIA, we have followed a number of common capabilities utilized to continue business under remote work from home environments
The ability to recreate a business-like environment from home means enabling employees with secured computing, networking, telephony, and teleconferencing assets and applications so that they may securely and consistently access data, systems, and tools required to do their work. This may mean evaluating network connections and bandwidth and implementing policies to purchase or reimburse network connectivity. This may look like supplying cell phones or allowing usage of existing phone infrastructure.
Using or activating teleconferencing / video conferencing applications can be extremely beneficial to remote employees as it helps them connect with customers and peers in virtual meeting settings. One of the key detractors for remote work is a sense of isolation and even loneliness. Individuals used to the social interaction available in a central workplace may find working from home with their spouse, children, pets, etc. a difficult setting. Establishing the ability to see team members and to see customers is a great way to make connections visually and to maintain a sense of relationship. Additionally, it’s important to establish a work boundary in the home environment; a place that others understand is your work life as opposed to your home life.
A key element of virtual working is maintaining alignment on tasks, progress for strategic initiatives, and cultural activities. It’s easy for employees to get lost and implementing techniques to maintain connection to plans and charters is important.
The COVID-19 pandemic is changing the world and the way we conduct business moving forward. This is a time for the Customer Success and Renewals organizations to step forward and lead the effort for virtual work practices, and to be models for other functions that may not have built the muscle to do so yet. Teach the other parts of the organization what you know, and leverage your own remote and digital capabilities to assist and develop this muscle in other parts of your sales and services organizations.
We understand that our member companies, the technology industry, and the world at large have been impacted by COVID-19. Now, more than ever, we need to work together to get through these challenging times. TSIA is committed to providing visibility as quickly as possible into the changing industry trends and practices that come as a result of COVID-19. Visit our Rapid Research Response Initiative resource page for more information.
If you have any questions related to how COVID-19 is impacting your organization, we’re here to help.
Post Date: April 7, 2020
Jack Johnson is the vice president of service revenue generation research for TSIA. In this role, he works closely with member companies to deliver research and advisory programs focused on helping them optimize their renewal organizations and effectively deliver revenue outcomes. 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.