Recurring revenue is a significant element of any business. For most companies, it accounts between 30% and 40% of their revenue. But because revenue is often so market rich, it can sometimes account for over 50% of profits. Some of the major technology companies now generate more profit from their existing customers than they do from new business.
A recent study by ServiceSource found that companies can boost true renewal rates to an average of 18% by managing data, analytics and selling processes of their direct and channel teams. With the help of their software, Renew On Demand, ServiceSource is helping to close a renewal for customers every 47 seconds.
Martin Moran, managing director international at ServiceSource, explains why it is so important to manage recurring revenue effectively and how to put an effective customer model in place.
Q) Why is recurring revenue management so important?
A) We've seen that it's significantly more expensive to acquire a new customer than it is to keep a customer, so companies are finding that there is a much greater need now to focus on customer satisfaction and how they drive value from their installed base because it's something that they have some degree of control over. Because of the nature of the revenue stream and its high profit content, it is much more appealing for companies to look at recurring revenue as a way of driving the business.
Q) Why are technology companies neglecting to successfully manage their ongoing contracts?
A) When you look at most tech-enabled companies, the majority of investment seems to be on the recruitment side of the business. They invest in CRM systems that look at opportunity management and the sales cycle and spend more around the acquisition of new customers. They can then neglect the customer lifecycle and they have much less investment in recurring revenue. It is often viewed as an administrative task and doesn't even sit in the sales environment. There's very little investment because they're trying to focus on that top line growth. They then tend to suffer from customer attrition and they're not really accelerating the revenue they could be driving from that line of business.
There's a risk sometimes that you just assume the renewal is just going to happen. You can assume if they've bought our technology then they will just renew. This is why a lot of companies treat the renewal not as a sales process at all but as an administrative process. At ServiceSource, all of our managed services are highly trained execs and we put a lot of development into their selling skills because our view is that a successful renewal is based on a successful selling skills.
Q) How can data help manage subscription and service contracts?
A) Data is one of the key elements to successfully managing recurring revenue. If you think about it, for most companies part of the challenge they have is that the data they need to manage a recurring event usually resides in a plethora of different systems.
The problem is that most customers don't have an overall view of their data, what we call opportunity ready data. Being able to take that data, consolidate it and then provide the insight and analytics on that data becomes pretty critical and so it is really about having the right data in the right format and being able to do something meaningful with it.
Q) Is data visibility an issue when managing recurring revenue?
A) The lack of investment in recurring revenue management in a lot of companies and the lack of visibility of data can create a very sporadic activity. Companies are missing out on driving significant revenue uptake because they don't know who their customers are, don't know what assets they've required and what services they're using, and they don't know the base level at which they first required that asset. So they don't know how to then renew this customer.
Q) What is an effective customer model?
A) It depends what industry you're in. There are some basics and best practices that would help drive renewal rates significantly, and this dates back to how you manage your wider channel, the region your responsible for and having visibility through that channel that allows them to have that insight into the business.
In the world of SaaS, there's a different model where you're much more likely to have a more high touch model because SaaS is largely based around consumption. So you buy a subscription but whether or not you continue that subscription after the initial term is often determined by your consumption patterns. Under recurring revenue management, it's more important for us to understand the end customer and understand their usage and data patterns.
Q) What can large businesses such as Dell do to effectively manage recurring revenue?
A) Dell has deployed our technology Renew On Demand. Dell is a very big technology organisation and part of the sales organistation is focused on ensuring that their existing customers stay with them, that they renew their contracts and support maintenance contracts and so on.
What Dell is doing is looking at the way they can manage massive amounts of data, particularly as some of the customers have multiple assets, so there's a huge amount of data involved and they need to be able to manage that on a single platform. And that single platform is being renewed on demand and giving all their sales organistations, management and their channel complete visibility into how they're managing their customer base, how it is renewing and what the metrics are and how the existing customer base is being affected. So it's bringing a whole new level of customer visibility to the business and the channel operation.
Q) Can the same practice be applied to SMBs?
A) If you're running a company with 10 customers you should be pretty intimate with all your customers. But the thing with technology is, its changing all the time. So an example of an SMB is a new cloud company. They are pumping all their money into acquiring new customers as they've got to show they can grow their business because that's what attracts further investment into their business.
But a lot of companies are doing that at the expense of understanding the back end of the customer lifecycle of their business. There is nothing worse, especially for a cloud company, than to acquire all these new customers on subscription and then see them retreat very quickly because they're not being looked after.
Q) Support and SaaS subscriptions account for a large amount of companies' revenues. What other sources can technology companies profit from?
A) Most tech companies are focused around the acquisition side of their business, which in a way makes recurring revenue even more important, because for every customer I have, I know that there's probably 10 to 20 companies out there who would love to take that company if given half the chance.
So I've got to make sure that I know and understand that customer by understanding their behavior and making sure their supported so they continue to renew their support contract. As times have been tough, its been more difficult to drive new product sales, so as a result of that, companies are coming to the conclusion that its much easier to discover how to manage your customer base better and have focus around the information of your customers and make sure you can drive increased revenue from that installed customer base.
Even now we're seeing potentially how much money is being left on the table by technology companies and the things they could do through best practice, through analytics, through good data, good processes and how they could improve their renewal rate and drive significant bottom line growth into their business.