The most important metric for most technology companies is annual recurring revenue (ARR). The sum of all recurring revenue in a year, ARR accounts for new sales and renewal value, representing both what an individual customer pays each year and the total of all customers’ annual payments. Growth in ARR measures a healthy software business, bringing together major elements, such as renewals, components of renewals (e.g., price increases and churn), and new business.
For established technology companies and software vendors, renewal volume will be greater than new sales. Retaining customers—and their long-term subscriptions—provides the greatest opportunity for running a growing software business. Too often, the benefit of making existing customers successful and driving world-class renewal rates gets undervalued. Technology companies have a lot of opportunities to make a difference.
Success in 2023 and beyond relies on customer retention. Prove the value of your software to drive ARR and strengthen your customer retention initiatives.
1 Create an Effective Path to SaaS and Subscription.
Many software companies are moving toward software-as-a-service (SaaS) deployments. Done right, it will help them deliver more value to their customers and grow ARR. SaaS removes the headaches of local hosting for customers and can drive faster innovation. SaaS and subscription models are popular with producers and customers alike, partly because of the opportunity to purchase software as operating expenses (OpEx) rather than the capital expenditures (CapEx) model that often gets used for perpetual licenses. The main benefit of SaaS, though, is the frequency of updates and innovations that deliver value to the customers. That, in turn, should drive renewal rates up, create ARR growth for software suppliers, and help them grow their business.
As reported in the Revenera Monetization Monitor: Software Monetization Models and Strategies 2022, SaaS is the deployment model showing the greatest anticipated growth in the coming 12–18 months. At the same time, the monetization model showing the greatest anticipated growth is subscription. Companies moving to SaaS often do so while still offering on-premises deployments, historically monetized through perpetual licenses, where revenue is recorded up-front. Software vendors must be prepared to support hybrid offerings that meet customers’ varied needs, continuing to support on-premises deployments while moving toward SaaS.
Successful transitions to SaaS and subscription require implementing a well-defined plan across the entire quote-to-cash (QTC or Q2C) process. The QTC process, representing the full sales cycle, is most efficient when automated through all steps: quote and deal, contracts and terms, fulfillment, revenue recognition, billing, use, and renewal. Most importantly, the customer experience throughout that cycle should always be seamless, logical, and as easy as possible. Friction in operational processes causes frustrations that can lead to churn.
2 Guide Customers Through Change.
Technology companies that move from on-premises models to SaaS should focus on the user experience and the transition path between both products, including a customer-friendly way of managing customer entitlements and licenses. Customers need time to adjust to change. When a technology company changes deployment models from on-premises to SaaS, it must ease customers through the transition.
Don’t push too hard on customers without having—and communicating—a clear plan. Guide customers through the change so they know what to expect and aren’t surprised. For customers, the change is more than a financial one. It’s about how they use and interact with your software product(s). Provide an engaging user experience.
Design the transition with their needs in mind, addressing the following:
- What will the transition look like for existing customers?
- Will the change be instant and forced? Or will customers have a year-long transition period?
- Will you offer the SaaS solution, concurrently with the on-premises offering, to allow them an opportunity to play around with the options as they’d like?
Your answers will depend on variables (e.g., business model, industry, type of customers.) But you must have an answer for questions like these.
3 Prevent Customer Churn.
Customer churn leads to revenue loss. To prevent churn, software companies must ensure that they’re delivering value to their customers, providing reason for customers to renew. Today, as found in the report cited above, less than a third (32%) of software producers feel that pricing is “totally aligned” with the value delivered to customers. Without that alignment, customers may look elsewhere. Clearly, there’s room for improvement.
To get a sense of the value customers perceive they’re receiving, software vendors need accurate, data-driven insights into how customers use software. Software usage insights provide visibility into how customers are using what they’re entitled to, quantifying answers to questions such as:
- Are customers even using the software?
- Which version is each customer using?
- Is their usage growing or declining?
- Which features have they adopted?
Insights about usage help make data-driven predictions of whether a renewal is likely or if an upsell may be viable. Lacking this insight makes it questionable whether or not a customer will renew. Renewal decisions may then become dependent on less reliable predictors, such as their relationship status or the number of support tickets they’ve had over the year.