In this article we explore factors that vendors should take into consideration when designing their Renewal Pricing strategy. In previous posts on renewals, we postulated that for many vendors your existing customers are the lifeblood of your business. Therefore, renewals revenue can make up a substantial proportion of your overall annual financial income.
The points we cover in this article on renewal pricing are applicable for vendors operating a direct sales model, a channel go-to-market sales motion or a combination of both. However, one key point we will focus on is the differences in renewals pricing models between traditional “on-premise” perpetual software and/or hardware offerings and today’s Cloud/SaaS/Subscription type offerings.
Best in class vendors offering perpetual software/hardware licences may see annualized Renewal Rates in the high 80 to 90 percentile. High performing SaaS companies aim to exceed even this with close to 100% revenue and customer retention rates. When reviewing renewals business performance, vendors should pay close attention to the 1$ to 1$ ratio. Simply, if your renewals pool for Q1 is of $100 value across 100 renewal opportunities and 80 customers renew, what is your net revenue retention? If it’s anything below the $80 mark, you should be diving into the detail.
It’s good practice to make customers aware of the likely renewal cost at the time of first purchase. You can gain a lot of valuable information from your customer by asking questions such as: “Who is responsible for handing renewals in your organization?“. Often, it can be a different person or team than the original purchaser(s); “What is your annual budgeting cycle process and timeline?”; “Would it be helpful if we share with you the anticipated renewal pricing in advance of your budget cycle?” This allows for the inclusion of any expected price increases typically made each year.
Asking these questions helps your customer to plan their budget for next year and can make it easier for you, as the vendor, to get insights into which customers will renew and forecast your renewals revenue more accurately. Depending on the industry, many customers will expect financial benefits for being loyal to your brand or product. It is quite a common practice to use discounting as the last resort for securing a renewal. This is especially true at month or quarter end. B2B buyers, especially seasoned procurement teams, are well versed in negotiating tactics to push your renewals sales reps to secure better renewal pricing deals. It’s a very familiar trick to delay the renewal decision/order to secure the same service or product at a lower cost or reduced subscription fee.
In many vendor companies, there is a division between the “NEW” sales rep organization and the “RENEWALS” sales rep organization. New sales reps, who don’t sell on value, or are faced with a buyer evaluating competitors offerings, may choose to discount to close the opportunity and move onto the next one. A Net-New discounted purchase will have a tremendous impact on your renewals. A $1000 purchase discounted by 10%, is still set as a renewal opportunity at list price. However, your customer is probably budgeting for $900, as that is the original purchase price. To make things worse, they may also expect an extended discount in exchange for their loyalty at renewal time. As such, it is critical for close cooperation between your NEW business and RENEWALS business leaders to ensure up-front discounting is the exception rather than the norm.
These answers will result in multiple contingencies being put in place to attain overall revenue goals. Revenue goals typically reside with the new business sales team in the form of increased upsell and cross-sell goals.
As with any strategic decision, understanding current results and their root causes will be the key to determining the direction of needed changes or enhancements to the Renewal Pricing Strategy.
Are you the market leader? Competitive position in the market is of great significance. If the vendor’s offering is perceived as best in class, or offers better or additional value to customers, they are in a position to impose strict discounting policies.
When did you last increase the price of your product or service? Price increases are a great way to neutralize Renewal Revenue Leakage. It is not, however, as simple as raising the list price and telling the customer that their renewal price will cost X% or X$ more this year.
In B2B, a higher price tag must always be justified. Including add-ons, product enhancements or additional outcome value to the customer are amongst the most common reasons. Not only does the price increase have to be understandable, it must be communicated appropriately, early and repeatedly. However, the process does not stop there. Continuous monitoring of renewals performance post price increase and close analysis of lost renewal opportunities will allow fine tuning and/or changes of approach. When committed to raising prices, consider also the future cadence. This should not be a one off. Incremental price increases should become part of your long-term strategy as a vendor. This is especially important for Cloud/SaaS offerings – now you are selling a “service” which usually involves people costs. Hence, you incur annual costs in the form of pay rises and operational business costs that need to be recovered.
How well and how often do you train your sales staff on price negotiation? This might seem trivial, but the Net-New, Account Managers and Renewals teams are on the front-lines handling objections day in and day out. ‘Sell on value or customer’s business outcome, not on price!’ is the mantra of every sales organization. Therefore, vendors need to continuously educate staff on competitive offering and how they differentiate themselves from the rest of the market.
To avoid price discounting, can you offer the customer something of an equivalent or higher value e.g. training, certification, workshop?
To conclude, a Renewal Pricing Strategy must be on every B2B vendor’s annual planning agenda. Recognizing and understanding historical trends in the renewals part of the business is just as important as your new/new and new/existing sales motions.