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The Science Behind Customer Retention

The Science Behind Customer Retention
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Did you know that there is a science behind acquiring and retaining valuable customers? 

No matter the industry, contract renewals, and expansions are critical drivers of growth and value for any business. Keeping clients satisfied over time helps increase recurring revenue and according to Bain & Company, even a 5% increase in customer retention can lead to a 25-95% increase in overall profitsRenewals are more than your customer extending their service contract with your business, in reality, a renewal is a calculated decision based on the entire customer lifecycle.   

In a recent webinar, we uncovered the science behind customer retention and discussed how to use real insights to drive a successful renewals program. We invited experts Daniel Riley, Senior Director of Business Intelligence, and Michael Connolly, Director of Solution Consulting, to lend their decades of experience and share their best practices that helped them build profitable retention programs for companies such as DellRed Hat, and VMware. 

Are you looking to improve your business’ renewal performance? Keep reading to learn how to drive success by first understanding metrics. 

 How do you measure a renewal?

This may seem like a simple question, but for many companies, “renewal” can have several meanings.  It’s important to acknowledge that there is a lot of confusion that surrounds renewals. When identifying the data that should go into your overall renewal rate there are four main questions to consider: 

  • What is being renewed?  
  • What is being excluded from your retention data? 
  • How do you define the amount of the opportunity? 
  • What is the time frame that you are measuring?

Consider that before developing a renewal process, you must outline the elements that create the customer retention data. While this might look different for each company, determining this data first will avoid later confusion on how performance is measured.  

Who should own renewals?

It can be argued that customer renewals should be owned by an organizations sales team, otherthink that it is the responsibility of the customer success team, and there are those that believe only a dedicated renewals team should manage this important task.   

However, regardless of the department owner, the most important questions include: 

  • Can thecover the full pipeline? 
  • How do they scale the renewals approach? 
  • How can they ensure retention and growth outcomes? 
  • Can they identify where and why they are losing customers? 

Instead of focusing on which department should handle customer retention, think about which of your talent teams has the scale and ability to manage your entire book of business effectively.  

The power of segmentation

 It all starts with the data. When you segment your renewal performance you can then provide actionable insights into your business. These insights will help determine the best strategy to use when building your customer retention plan.  

You can segment your customer data by the following views: 

  • Customer & contract size 
  • Region and country 
  • Channel vs. direct 
  • Expiration window 
  • Customer profile 
  • Customer age 
  • Business unity & product family 
  • Industry or vertical 
  • Other available data 

“The recommendation we are throwing out there is to lead with the time segment. If you are able to break out your customers in time windows you can really drive the science behind why channels aren’t closing quickly enough.” -Daniel Riley 

 

Once you understand your different segments it’s important to then dive deeper into each opportunity. Our experts believe that the best way to analyze this data is to look at each segment using time as your leading filter.  

Best-in-Class is Aligning Focus on Maximizing Batch Performance to Achieve Goals - This infographic outlines the best practice of measuring your current batch against your booking period to determine your renewal program efficiency.

How do you calculate renewal rates?

 Now that we have gone over the types of data that should be included in the analysis of your retention program, let’s review how to calculate your business’ renewal rate 

 You can measure renewal rate using the following formula:  

Resolution Rate x Close Rate x Conversion Rate = Renewal Rate  

There are also two key metrics to use in order to understand the renewals business: In-Quarter and Final Renewal Rates. These are rates are very telling of what leads to the renewal and which levers to pull to drive or improve performance. In-quarter renewal rates are calculated before the expiration batch and measure what is closed within that quarter. The final renewal rate measures your post-in-quarter results and is calculated after the expiration batch. 

 subcomponents to renewal rates

To drive the best performance, the person owning renewals should pull these key performance indicators. 

  1. Resolution Rate = Measures how well a sales team is able to cover a “batch” of business. This is a true measure to ensure your full pipeline of customers is reaching an answer, whether “yes” or “no.” 
  2. Close Rate = Measures how well sales teams are selling the value of the renewal contract. This could be as simple as viewing how many customers say “yes” from the group or have given you an answer at all.  
  3. Conversion Rate = Measures how well teams can increase the value of a contract using multi-year service upgrades or uncovered assets.  

In-Quarter vs. Final Renewal Rate - This image shows the formula for calculating "In-Quarter Renewal Rate" and "Final Renewal Rate".

In summary, a high-performing renewal program is developed using the data and insights from your customer base. When you segment your customer data, and clearly batch business into specific time frames you can use those insights to create a plan of attack for any underperforming area in your retention program. Finally, being able to measure the resolution, close and conversion rates help you identify where to focus and coach your sales team to close renewals quicker and more effectively.  

 ServiceSource has developed a comprehensive approach to setting key performance indicators (KPIs) to improve a renewals programcheck out The 12 Essential Renewals KPI’s here. 

 Click here to watch the entire webinar.  

 

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