The first section of the paper discusses the effects of renewals and customer retention on revenue, profits and company valuation. The second section explains the reasons companies lose existing customers. And the third section provides a strategy to keep renewal rates high.
The paper (and the software industry in general) refers to losing existing customers as “churn.” Churn results from unsuccessful renewals. The paper states:
The impact of churn on your company valuation may be greater than you think. Churn impacts four key valuation drivers in the same direction:
- Revenue level
- Growth rate
- Profit capacity
Obviously, losing customers is bad. The authors explain that in addition to losing revenue, there are three other factors to consider. Moreover, since these factors all affect the value of your company, the effect of lost renewals compounds.
The paper compares two illustrative companies: Retention Inc. has a 5% churn (it loses 5% of its customers each year); Churn Co has a 20% churn (it loses 20%). The paper states:
The key concept to note here is the compounding effect of churn. Over 5 years, the difference in revenue between Retention Inc. with 5% churn and ChurnCo with 20% churn isn’t 15% – it’s nearly 30% despite booking exactly the same amount of new business. It’s compounding interest in reverse and the impact becomes very large over time.
The authors name three factors that lead to churn:
So what can you do to improve renewal rates?
To address these sources of missed renewal opportunities, the authors recommend giving someone in your company responsibility for maintaining existing customer relationships. This customer success and renewal manager can proactively contact customers to find out how satisfied they are with your company’s products. They should also monitor whether customers are fully using your product.
In addition, the authors’ research showed higher renewal rates when customers go through a formal implementation (which often includes training). They note that the investment a company makes during initial implementation can pay for itself many times over in improved customer retention. Whatever you can do to help your customers derive the most value from your products will help your renewal rates.
The paper concludes:
A company’s valuation is highly sensitive to changes in renewal rate because it impacts all the drivers of the company’s value. Any reduction in churn will have a multi million dollar impact in valuation in a relatively short period of time.
To read the full white paper, you can download it here.
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