Recent industry-wide trends have shown that the top 50 technology companies are experiencing shrinking revenue by as much as $8 billion. Revenues are flattening as technology companies shift their business models to include cloud computing subscriptions. From TSIA’s perspective, new playbooks are needed in order to make this difficult transformation and begin delivering profitable revenue growth.
In my webinar “Ignite Your Service Revenue”, I discuss current revenue renewal rates in the industry, what companies can do to increase their renewal rates, and how you can contribute to your company's overall growth with expand selling strategies.
What is your company’s renewal rate? There is a simple formula for calculating your revenue-based renewal rate. Apply the formula below to your most recently completed fiscal year:Revenue Renewal Rate = Booked Dollars Renewed ÷ Total Order Value Available to Renewal × 100
Industry performance of global maintenance & support contract revenues.
Using this formula, we calculated the revenue renewal rate for global maintenance and support contract revenues for both hardware and software companies. As you can see, there’s quite a delta between the best performing companies and the average for the rest of the benchmarked companies—a 7-point variance for software companies, and a 14-point variance for hardware companies.
When we translate that to dollars, it’s clear that as an industry we’re leaving hundreds of millions of dollars on the table due to renewal sub-optimization. Improvements are crucial when you consider that every one point of improvement in renewal rate can contribute a tremendous amount of renewal revenue for your company.
There are also three recurring service portfolios across the industry: maintenance and support contracts, subscription plans, and managed service contracts.
Pacesetter & median renewal rates.
In this chart, the top-performing companies in cloud models are renewing subscription plans over 100% because they are expanding the subscription with existing customers. They’re not only focusing on retention, but also expanding and growing revenue.
Managed service offerings are also very “sticky”. Once you enter into a managed service relationship with a customer and all goes well with that delivery model, they are more likely to continue to renew the contract.
Maturity Model for Renewing Recurring Service Revenues
The good news is there are more and more opportunities to sell recurring services to customers. Ensuring we are optimizing the renewal of these annuities is more important than ever.
The B4B operating model construct is made up of four different levels of suppliers.
In our recent book B4B, we’ve identified four different levels of suppliers that make up our B4B operating model construct. On the left side of the spectrum, Level 1 and Level 2 companies are focused on selling as many products in the market as possible. Their services capabilities are oriented around making the product available to the customer, but it’s up to the customer to figure out how to obtain their desired ROI. On the right side of the spectrum, Level 3 and Level 4 companies are implementing the incremental services, which help their customers to achieve their outcomes. For example, helping customers grow their revenue, optimize their costs, or comply with their industry's regulatory requirements.
The renewal maturity model is focused on the renewal of maintenance and support contracts for Level 1 and Level 2 suppliers, and the most successful of these companies are also investing in emerging practices that are helping them move toward becoming Level 3 and Level 4 suppliers.
The top performing companies have dedicated teams for managing customer renewals.
The most successful companies have taken steps to move from being solely product-focused Level 1 or Level 2 suppliers, to transforming themselves into Level 3 and Level 4 suppliers. They are leveraging their expertise with managing maintenance and support contracts into their cloud business models, given that both of these revenue streams are recurring revenue models. And when it makes more sense for the customer, they focus their energies on re-engaging offplan maintenance customers to their cloud computing platforms, instead of re-engaging them on to an active maintenance and support contract.
Why exactly is expand selling important? Here are a few points to consider:
- There is a lack of profitability in cloud-computing business models - high sales costs are a contributing factor.
- Tech companies are attempting to carry Level 2 sales models into Level 3 and 4 business models, but they lack scale and are too expensive.
- Companies are learning that increasing customer spending at a low cost of sales is the key to Level 3 and 4 growth and profits.
- Product and service revenues from existing customers are sub-optimized, but have significant potential.
- Lines are blurring between products and services. Taking a more holistic approach to increasing overall customer spend is warranted.
In the current cloud business models, sales and marketing costs increased year over year, and continue to rise. TSIA believes that these high sales costs are contributing to unprofitable sales models, and that they are not sustainable.
When it comes to cloud models, the initial size of the deals tend to be smaller, as customers are preferring pilots and trial runs instead of making large investments all at once. We believe in effective account expansion strategies that will not only contribute to strong revenue growth, but will also lead to increased profitability of these models.
Everyone in your company has a role to play when it comes to revenue growth. At TSIA, we are broadening our research in the SRG discipline. In fact, we will be renaming it from "Service Revenue Generation" to "Customer Revenue Expansion" to reflect the broader scope of our research, helping you grow both service revenue and product revenue with existing customers.
Watch the full webinar to learn more about what pacesetting companies are doing to increase their service revenue and how you can begin your journey to success. I will also be giving a Power Hour session at the TSW Service Transformations conference in Las Vegas, on Monday, October 20 at 4:15 p.m., called “Connecting Service Offers to Customer Business Value” where I will talk about the techniques and strategies you can use to help your business develop its outcome-based service offerings.
About the Author
Julia Stegman is vice president of research, Service Revenue Generation, for TSIA. She has over 25 years of experience in the high-technology industry, and is responsible for driving the TSIA research agenda related to the growth of maintenance, SaaS, and managed service revenues as well as the expansion of product revenues with existing customers.