Renewal Sales 101 | The Business Opportunities and Practical Challenges
Renewal sales are now a large proportion of overall sales for many companies. This is especially true in mature product/service categories, within developed markets. Here, renewal sales can account for more than 50% of all revenue. As such, renewals are a critical part of a business to effectively manage. Yet most companies are leaving money on the table, when it comes to renewal sales.
In this first blog post in our series on Renewal Sales, we take a helicopter view of an IT Vendors Renewals Structure, a 101 of Renewal Sales so to speak. The same principles could also apply to any company, in any sector.
Renewal Sale Categories
- Physical Products – sold with an attached Support or Maintenance Contract, such as industrial equipment, IT & Telecoms hardware or vehicles.
- Non-Physical Products – includes Software Right-To-Use (RTU) Licensing, which can be sold with a Technical Support Contract. Often referred to as “on-premise” software license sales, they entitle the buyer to perpetual usage of the product.
- Services – includes Insurance, Utilities and the fast emerging ‘as a Service’ method of selling, especially in IT. Here, hosted (Cloud) offerings such as Software-as-a-Service (SaaS), Communications-as-a-Service (CaaC) and Infrastructure-as-a-Service (IaaS) are becoming increasingly commonplace.
Nuances in How Sales Teams handle Physical and Non-Physical Product Renewals
– Typically, the price for a support or maintenance contract is considerably lower than the product it relates to. With on-premise software, typical support/maintenance contracts range from 18-25% of the original Manufacturer Suggested Retail Price (MSRP). However, for hardware products, the range can be even lower, often as low as 10 – 20% of the MSRP. In some organizations, the primary focus is around the sale of the “product”. This results in less emphasis on selling the support/maintenance offerings.
– Most products come with a warranty. Customers however often misconceive warranties as being the same as support contracts. Warranties often offer nothing more than (limited) faulty parts replacement in the case of hardware purchases and indeed may not even become active if the buyer forgets to first register their product with the manufacturer after purchase.
In the ‘as a Service’ offering, renewals may have an immediate impact on your business continuity. Typically, with SaaS as an example, if the renewal is not secured, before or on the anniversary date, the customer loses access. But worse still, the vendor potentially loses the customer to a competitor.
Multi -Year Usage
Most people purchase products with an expectation for multi-year usage. In the IT world, this can range from 3 to 5 years, due to the fast moving nature of technology. Therefore, it’s important that the sales team create the conditions for ensuring the purchase of ongoing support and maintenance contracts, from the outset. However, in reality, missed sales opportunities happen for numerous reasons.
Missed Renewal Sales Opportunity Reasons
- The initial sales cycle misses out on the opportunity to sell a support & maintenance contract
- The buyer forgets to register the product, hence the visibility to the end-customer’s product installation details (referred to as the “assets” or “installed-base”) can be lost for future renewal sales opportunities. This often happens when the vendor’s sale team doesn’t follow-up with timely reminders to register the product.
- The buyer is not aware of, or forgets, when the support & maintenance contract or subscription is about to expire. If the vendor has no “system-of-record” to track dates on their side, the renewal may be lost.
- The vendor’s sales team omits to educate the buyer on the importance of the support contract, from the outset. The buyer therefore fails to see the added value of renewing.
Maximizing Renewal Sales
Vendors typically have a CRM (Customer Relationship Management) platform that contains details about known customers. Sometimes, this is extended to include previous purchases (assets or installed base) along with references to any support & maintenance contracts or subscriptions they have purchased. This however is not always the case. All too often the recording of these records is in a separate system or database. But regardless of how the vendor retains this information, the key factor to maximizing renewal sales is to ensure the relevant information gets into the hands of the sales teams, in a concise and timely manner. As with any process, being able to measure success or failure is key. To get the right outcomes, vendors should devise and publish metrics which motivate and incentivize the renewals sales teams.
Sales Renewal Rate
There are various methods when it comes to calculating a “Renewal Rate”. One such method is to simply count the number of assets with coverage VS the number of assets without coverage, in any given period. This metric can be augmented to drive behaviours such as creating a time based “Renewal Sales Rate” metric. For example, “In-Quarter” or “On-time” Renewal Rate (meaning what % of contracts expiring in a Quarter are renewed on or before expiry). Other metrics can be devised in a more mature process to measure late or “trailing” Renewals and “early” Renewals.
Whichever method you select, the “Renewal Rate” metric should be “weighted” to take into account the value of each individual contract, so as to focus sales on the larger opportunities. In addition, Vendors need to have a well-defined renewals outreach calendar. These can vary by industry but the common goal is to get out in front of the buying cycle. Many organizations start the process at least 120 days in advance of the renewal date and then have follow-up outreach milestones at 90, 60, 45 and 30 days.
Renewal Sale Policy
Vendors should document and publish a clear policy on their renewals process for customers. The policy should detail such considerations as “Grace Periods” or any penalties (such as a “re-initiation fee”) to be incurred when contracts/subscriptions expire or are renewed late. Enabling your sales team with consistent information allows them to explain to customers whose support & maintenance contracts or subscriptions have lapsed, how to regain service. There must also be clear rules for your renewal sales team on how the policy might be “over-ruled”. For example, to win back a critical customer from a competitor, you may choose to invoke the reinstatement fee.
Renewal Sale Metrics
Those responsible for renewal sales should equip themselves with key metrics. This will enable them to answer any question posed. Questions might include:
- The percentage of their installed base they have up to date records for?
- What Service Contracts or Subscriptions each customer has purchased?
- When do contracts or subscriptions expire and what is the value for each?
- Has there been any customer engagement in the past year? Has a notice or quote for Renewal been issued?
- What is their current overall “Renewal Rate”, by market/sector/region?
To learn more about how market leading vendors automate and manage their renewal sales programs, contact Channel Mechanics today and transform your channel tomorrow.
Our Top 5 Tips for Maximizing Renewal Sales
Whether you are a renewal sales hero or only starting along this journey, there is much information to digest. So here’s our top 5 Tips for maximizing renewal sales:
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- Maintain a detailed database of all your end customers. Record what products and/or subscription services they purchase. In addition, record any associated support or maintenance contracts they purchase along with expiry dates.
- Educate your sales team on how to position and sell your support and maintenance contracts as a “value offering” to buyers. For example, with an in-force support & maintenance contract, the customer is automatically entitled to all future product upgrades or new features released in the period.
- Appoint a dedicated renewal sales team leader
- Have a well-defined renewals outreach schedule: 120 / 90 / 60 / 45 / 30 days
- Have a well-defined and understood suite of renewals metrics to demonstrate performance.
Further Reading on Renewals Sales:
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