Tracking and applying your renewal rate is a metric that will help you understand your renewals performance against the true opportunity. The challenge for most executives is calculating an accurate rate that identifies problem areas and will drive improvement.
Historically, the standard renewals KPI was based on bookings (i.e., total amount booked divided by the total amount expiring in a period) because it is easy to calculate and often paints renewal rates in a favorable light. However, this is often misleading because it includes closed deals from a variety of sources, including expired business, future contracts and other projects.
Instead, here are more specific ways to calculate your renewal rate that will provide a greater degree of accuracy:
In-Quarter Renewal Rate
This metric is defined as the percentage of opportunity expiring in a certain period that closes before the end of that period.
For example, if a company has $100M worth of contracts expiring in the quarter and has $90M of bookings by quarter’s end, its renewal rate appears to be 90%. However, when $5M of those bookings represent contracts expiring next quarter and $3M worth of contracts from the previous quarter, the true in-quarter renewal rate is actually 82%.
Companies often hesitate to measure renewal rates in this pure state as results can be lower. However, it is the most accurate measurement when examining historical trends.
In-Quarter Annual Renewal Rate
This metric is defined as quarterly transaction values annualized divided by the available opportunity.
Looking at renewal rates on an annualized basis offers more of an apples-to-apples view of what customers are spending year after year.
Training Annual Renewal Rate
This metric is defined as the sum transaction values for the prior year divided by the available opportunity.
Net Renewal Rate
This metric indicates the percentage of the opportunity expiring in that time period that it closes.
This renewal rate suspends the time element and allows you to evaluate how much of a quarter’s business was closed. This can be important because large transactions can run beyond expiration in order to maximize a user’s negotiating leverage. Your success in closing those transactions will be captured in the net renewal rate and is critical to analyzing performance.
Using the above metrics, ServiceSource standardizes a renewal rate across your entire portfolio so that you can appropriately benchmark performance across teams, channel partners, and geographies. Then the important work of designing and implementing the processes and teams to drive sustainable improvement.
To learn the full list of renewal rate metrics you should be tracking download the full ebook today.