Renewals have long been the cherry on the cake for channel partners, a recurring source of revenue that leads to a strong annuity business. But are partners treating renewals in the right way, and do they deserve the discount vendors provide for overseeing them on an ongoing basis?
Here, veteran channel analyst Larry Walsh breaks down the numbers behind renewals, what vendors are doing to keep partners on their toes, and how partners should respond.
Google Cloud recently became the latest vendor to adjust renewal discounts offered to partners reselling and supporting their cloud-based services and applications.
The change—the discount was slashed by 40%—was to bring partner compensation into alignment with industry best practices.
But that’s not the whole story.
While Google Cloud cut the renewal rates, it also increased the first year of compensation on new contracts by 40%.
The inversion of incentives is telegraphic. Google Cloud wants partners to capture more new customers, especially those in long-term contracts with a high probability of renewal. The total lifetime value of cloud and service accounts greatly outperforms traditional transactional products.
And Google isn’t alone. Many vendors are incenting account acquisition through partners over account renewal and retention. Vendors know that if they can get new accounts through the door, there’s a high probability of those customers remaining in place and revenue flowing for years. Publicly traded services bank their valuations on this concept.
The other reason vendors devalue renewals sold through the channel? They don’t require much effort. Vendors know customers are unlikely to change providers if the service being delivered is a valuable one. They may change partners, but that’s a different issue. So, why should vendors pay partners for something requiring little effort?
Another vendor perception underlying the idea that renewals are easy is that Partners aren’t good at renewals and/or don’t care about them.
"The bottom line: While vendors value service renewals, they don’t see much value in running them through partners."
Vendors lament how they must prod partners to address renewals. Vendors often find themselves chasing the partner to get the renewal done if a contract isn’t auto-renewed (it’s not allowed in all jurisdictions). Alternatively, they have an inside team to make the connection to avoid breaks in service.
The bottom line: While vendors value service renewals, they don’t see much value in running them through partners.
The Math Favors Renewals
Renewal dates and the period that precedes them are sales opportunities. Vendors are correct that most customers are predisposed to renew services if the quality and value remain the same or better. When the renewal date approaches, customers have no choice but to engage in a conversation about renewing, which creates an opening.
The idea that renewal dates are sales events is nothing new. Since managed services took over the channel, MSPs have known they can have substantive conversations with customers about their IT service and support needs at renewal time.
Maintaining high renewal rates is critical for vendors and partners alike. The recurring-revenue model depends on three factors:
· New customer acquisition
· Account renewal/retention
· Account consumption expansion
If a partner can push on those three factors simultaneously, it’ll enjoy a stable and growing recurring-revenue model. The math proves this to be true.
A 90% or more renewal rate is the threshold for a stable recurring revenue model. Companies with at least nine out of 10 accounts rely less on new customer acquisition than those with lower rates.
Companies with renewal rates of 75% to 90% become dependent on replacing customers as much as on renewing. With renewal rates in this range, vendors and partners spend as much time trying to land new accounts as they do retaining existing accounts.
Here’s the red line: If renewal rates fall below 67%, the recurring-revenue model is no longer stable, and a company will find itself scrambling to find replacement revenue to keep pace with companies with solid renewal rates.
What difference does it make if a vendor or partner has a poor renewal rate if it’s still making money? It comes down to growth and profitability.
The average cost to acquire a service customer is $702; the retention cost is up to 25 times less expensive. A solution or service provider with a poor renewal rate must acquire 4.3 new customers to keep up with a company with a high renewal rate.
Vendors think partners want to skate along and live on renewals. But while the math favors partners that offer a positive customer experience and have good retention programs, success doesn’t lie with a single-minded focus on either new-customer acquisition or renewals.
The Trick Is Doing All Three
You can grow your business by acquiring new customers alone with enough effort. Or you can focus on renewals, keeping customers engaged and income flowing. Or you can focus on account expansion, increasing the yield per account.
The ideal scenario, though, is to do all three simultaneously. Doing so requires more than meeting customers when it’s time to renew.
The vendors that Channelnomics works with have been asking for an easy-to-understand model that can help their teams and partners address the service sales and renewal process. That’s why we developed CAPTURE — a new way of describing the account acquisition, customer engagement, and renewal lifecycle.
CAPTURE has components: engagement, when the service provider actively works to win accounts and provide a service; ongoing sales, when the provider upsells or renews accounts; and value recognition when the service provider checks in to ensure the customer knows what it’s getting for its money.
Engagement
· Connect: Technology vendors, solution providers, and partners are, first and foremost, sales organizations. To make a sale, the provider must connect with customers and raise their awareness about offerings, capabilities, and value propositions. Connecting leads to sales opportunities, which leads to the next step.
· Acquire: Signing a new account is the culmination of the connection process. Solution providers have convinced customers of the service value and gotten them to sign a contract.
· Provide: The critical starting stage of a service engagement is getting the customer properly onboarded so you can provide the service. After that, the service provider’s job is to make a high-quality service available and support it continuously.
· Track: Service providers can’t rely on technology alone to deliver value. Left to their own devices, customers will assign their value to a service, which could affect renewals. Service providers must track customer utilization, report on service consumption, and make recommendations that influence value recognition.
Ongoing Sales
· Upsell: At any point during the engagement, a service provider can sell the customer a new service or expand the capacity for an existing one. Service providers can identify new technology needs by tracking utilization, leading to new sales and increasing recurring revenue. The important thing to note is that upsells can happen anytime, not just at renewal.
· Retain: Aside from acquiring an account, a service provider’s top job is ensuring the customer remains active. The retention process should start at least 90 days from the renewal date. This period is an opportunity to get customer feedback, understand future needs, make service adjustments, and ensure continuity in service and revenue.
Value Recognition
· Experience: In services, customer experience — a continuous process, not a single event — is paramount. At each step of CAPTURE, the service provider must ensure the customer is getting a superior experience. Customers are increasingly assigning value based on their experiences with service providers.
CAPTURE isn’t a revolutionary idea. The concepts it addresses are part of our lexicon and many service providers’ practices. What’s different is that it doesn’t emphasize one step over another. It makes everything from first contact to renewal and beyond a fluid and continuous motion aimed at persistent engagement.
From Concept to Practice
The CAPTURE model provides a practical framework for technology vendors, solution providers, and partners to implement the concepts of continuous engagement, ongoing sales, and value recognition. Service providers can develop a comprehensive strategy that addresses the entire customer lifecycle by focusing on each model element.
To effectively implement CAPTURE, service providers must:
· Establish a strong connection with customers through targeted marketing and sales efforts.
· Streamline the onboarding process to ensure a smooth transition from acquisition to service delivery.
· Track customer utilization continuously and provide regular reports to demonstrate service value.
· Identify opportunities for upselling and cross-selling based on customer needs and service-consumption patterns.
· Initiate the retention process at least 90 days before the renewal date to gather feedback, address concerns, and ensure service continuity.
· Prioritize customer experience throughout the engagement, from initial contact to ongoing support and service delivery.
By adopting the CAPTURE model and implementing these practices, service providers can create a balanced approach that drives new customer acquisition, strengthens existing relationships, and maximizes account profitability. This holistic approach to customer lifecycle management is essential for long-term success in the increasingly competitive technology service landscape.
Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide.