What is a Renewal Strategy?

A renewal strategy is a proactive plan companies implement to retain their customers and grow revenue by encouraging the continuation and expansion of subscriptions or services. It involves ongoing efforts to maintain and strengthen the relationship between a company and its customers.

The key components of a renewal strategy have quite a bit of overlap with those of customer retention:

Proactive customer engagement
Usage monitoring
Upselling and cross-selling opportunities
Incentives and rewards for loyal customers
Tactics to retain at-risk customers
Customer feedback and satisfaction surveys

This concept is particularly prevalent in the SaaS industry, where recurring subscription revenue is the main source of income. It’s also common in B2B manufacturing and service-based businesses, where customers have time-limited contracts with their suppliers and service providers.

Synonyms

Contract renewal strategy
SaaS renewal strategy
Subscription renewal strategy

How SaaS Renewals Work

If you sell a SaaS product, renewals are going to be a huge source of revenue for you. Of course, there will be customers who would have stayed around anyways, but this is your opportunity to upsell/cross-sell them, as well as save at-risk customers.

The SaaS contract renewal process generally follows these main steps:

Renewal notice

In the first step, you’ll notify your customers that their subscription is coming to an end. This serves as a reminder for them to take action and renew their contract.

The notice includes:

Renewal date
Pricing details
Changes to the terms or service (if applicable)

It’s best practice to prepare renewal reminders weeks or even months before the renewal date, depending on the subscription length and complexity. Notices are often sent 30, 60, or 90 days in advance.

To really drive retention, this is a good opportunity to reinforce the value you’ve delivered to the customer over the course of their subscription. It should reflect usage history (e.g., how often the software) and ROI metrics (e.g., time/cost savings).

Review and negotiation

After receiving the notice, the customer takes time to assess the terms and consider how the software meets their evolving needs.

During this review, they’ll focus on several key elements:

Pricing: Is the cost aligned with their budget or perceived value?
Features and benefits: Are the offered features still relevant, or are upgrades/downgrades needed?
Service level agreements (SLAs): Are there any changes in service commitments or uptime guarantees?
Contract length: Does the proposed contract term fit their current plans or strategy?

If the terms of the original agreement no longer suit their needs, they may initiate a contract negotiation process through an account manager or your customer success team. You’ll evaluate these requests, considering factors like the customer’s renewal history, account size, and potential for long-term growth, before striking a deal.

Payment

After finalizing the terms in the negotiation process, you’ll issue an invoice with the new contract details. In SaaS, invoicing is done automatically through subscription management software with automated billing capabilities.

The invoice typically includes:

Renewal amount, reflecting any negotiated discounts or adjustments.
Payment schedule, specifying the due date and any installment arrangements.
Detailed breakdown of services, features, or tiers included in the subscription.

Upon successful payment, the customer’s subscription is officially renewed, and their account reflects the updated status. Your SaaS product (integrated with your billing system) automatically updates the customer’s billing and account information to prevent any service interruptions.

Automatic renewal

Most SaaS contracts include an automatic renewal clause to avoid service interruptions that inconvenience the subscriber. Unless the customer opts out, the contract is auto-renewed upon its expiry.

To make sure this process runs smoothly, you’ll need to monitor credit card expiration dates and reach out to customers for updated information if needed. You’ll need a system that can automatically generate invoices and send renewal notices before the deadline. And your users need a clear path to manage their accounts without jumping through hoops.

Importance of a Renewal Strategy in SaaS

Renewals are one of the most essential components of SaaS contract management because software companies depend on recurring subscription payments to support their business model.

A customer only becomes profitable once you’ve retained them long enough to recoup the cost of customer acquisition (and then some). The optimal LTV (lifetime value) to CAC (customer acquisition cost) ratio for a SaaS business is 3:1. If you can’t retain users long enough to pay you back 3x what it cost to acquire them, you’re never going to have the reserves and cash flow to scale your business.

Some users plan on staying with you for a while, so their renewal is not a matter of if but when. For these people, it’s all about facilitating the subscription management process through automation, clear communication, and a focus on delivering ongoing value. These are the subscribers for whom you can use the renewal time to sell additional products as well.

For those who are no longer happy with the previous contract terms, your renewal process is an opportunity to win them back and find something that works for them. By having a well-planned renewal strategy, you can identify and address their issues before they become deal-breakers, and work towards a mutually beneficial solution.

It’s also worth mentioning that a high percentage of customers deciding not to renew is also indicative of larger problems with your product, service, or customer experience. Proactive renewal management helps you address these issues early on and possibly retain those users who were at risk of churning.

Benefits of an Effective Contract Renewal Strategy

Besides the fact retention is the deciding factor in whether you can become profitable in the short term and scalable in the long term, renewals have other advantages for your SaaS business:

Lower subscription churn (both voluntary and involuntary)
It costs up to 5x less to retain customers than to acquire new ones
More upselling and cross-selling opportunities, thanks to the established relationship with your customers
Expansion revenue from upsells/cross-sells and the possibility to achieve net negative churn
Chances to prevent at-risk customers from churning
Strengthened customer relationships, leading to more positive reviews, referrals, and brand loyalty
Greater cash flow predictability, since you can predict with relative certainty a portion of your future revenue from renewal subscriptions

All these factors come together to create a more sustainable business model, a better brand reputation, and a stronger market position.

Renewal Strategy KPIs

To know whether you’re accomplishing anything tangible with contract renewals, you need to track KPIs. Chances are, your CS team is already looking at most of these to understand retention/churn, but you need to attribute renewal-specific activities to increases and decreases in those areas.

Renewal rate

This metric has the most direct relationship to your renewal strategy, since it’s a percentage of contracts that have renewed after their initial term. Since renewal rates can vary significantly between industries and products, it’s best to measure it on a per-product or per-market basis.

Expansion revenue

Expansion MRR is calculated by combining the total revenue from upselling and cross-selling to existing customers. Ideally, you have enough expansion revenue to offset the value of churned MRR. At that point, your net revenue retention rate is > 100% — an indicator you’re a strong company with a loyal customer base, product-market fit, and lots of future potential.

Customer churn rate

Customer churn is the percentage of customers that don’t renew after their initial contract term. Naturally, this can vary significantly depending on what you’re selling and to whom. However, any company striving for healthy growth should aim to keep customer churn below 10% annually.

You should also pay attention to revenue churn — the monetary loss from your churned customers. This tells you the true financial impact of churn, and whether you’re doing enough with renewals to offset it.

Also, remember there are dozens of factors that affect churn. When using it to assess your renewal strategy, make sure to isolate certain activities, then figure out whether they resulted in a net increase or decrease in churn.

Annual contract value (ACV)

The annual contract value tells you the average value of each of your contracts over the course of a year. It’s calculated by multiplying the average monthly recurring revenue (MRR) by 12. Seeing as how most contracts run on an annual or multi-year basis, ACV gives you a benchmark for how much you should be making from each customer if they stay with you for a full year (or multiple years)

It also gives you a way to identify underperforming customers (i.e., those with an ACV significantly lower than the average). And since one of the main focuses of your renewal strategy is expanding your current accounts, you know you’re on the right track if you see an increase in ACV.

Customer lifetime value (CLV)

Customer lifetime value (CLV) is one of the most important SaaS metrics because it tells you how much revenue you can reasonably expect from each customer over the course of their relationship with your company. When your renewal strategy is working, your CLV will increase significantly because renewals are what guarantee recurring revenue keeps flowing in from each customer.

Upsell and cross-sell rates

While expansion revenue gives you insight into the value of your upsells and cross-sells, you’ll want to look at the level of success you have with them from customer to customer. The upsell and cross-sell rates tell you what percentage of customers took advantage of your offers, as well as how much revenue each activity brought in.

Customer satisfaction scores

Customer satisfaction is directly correlated with retention, which is why it’s so important to measure. The customer satisfaction (CSAT) score is a simple way to gauge customers’ level of satisfaction with your product or service. It’s usually based on a survey that asks customers to rate their experience and overall satisfaction.

By monitoring CSAT scores, you can identify issues with the product, customer experience, and other areas that may be contributing to churn. In addition to your renewal strategy, you can use this info to inform product improvements and overall customer success efforts.

Developing a Renewal Strategy

To develop your strategy for renewals, you have to consider what’s currently limiting your ability to renew the contractual relationship, how you can improve that, and the sales tactics you can use to not only increase renewals, but also create a more profitable subscriber base.

These are the steps you need to take to successfully accomplish that:

Conduct a thorough customer analysis

Before anything, you need to know who your customers are, what they want, and how their needs may change over time. As a SaaS vendor, this is actually a lot easier than it is for other businesses because you can use your own product as (a) a data source and (b) a way to solicit feedback.

So, to get started:

Use your product data to identify trends in usage, features utilized, and overall engagement.
Reach out to customers for feedback either through in-app surveys or regular check-ins.
Monitor customer satisfaction scores and use them to identify areas for improvement.

Once you have this info, segment it to make more sense of it. First, segment by subscription tiers. Then, go a level deeper and segment by customer type, vertical, product usage levels, and other relevant characteristics.

Identify renewal opportunities and challenges

What’s holding you back from renewing existing contracts?

Look into the reasons customers are churning in the first place, what would have prevented them from doing so, and how you can avoid those same mistakes in the future.

Here are some factors to consider:

Did the customer not fully understand what your product could do for them? It could be a communication issue.
Was the product meeting their specific needs, or not? You might have a messaging, product development, or customer success problem.
Did the customer have a negative experience with your company? You might need to look at onboarding, service, and other processes.
Are there better offers out there for what they’re looking for? Consider what you charge per month/year vs. subscription tier features, and compare it to what competitors offer.
Was managing their account simply too complicated? Maybe the problem is with the software you’re using.

Also look within. Look at how effectively you communicate renewals, how far in advance you do so, and how effectively you sell the benefits of your products and negotiate contract renewal terms.

Define your renewal goals and objectives

You need to have a realistic idea of where you want to be in terms of renewal rates, MRR, ACV, and CLV for each customer segment, upsell/cross-sell success rates, and other relevant metrics. You also need to find a way to isolate your renewal initiatives as a factor in these growth figures.

Let’s say you want to increase CLV by 20% over the next year. To isolate your renewal initiatives so you can measure their impact, you’ll need to segment the data on new customers and existing ones.

Develop renewal tactics and processes

Based on the problems you’ve unearthed and goals you’ve set forth in the previous steps, determine where you need to put the bulk of your focus.

For instance:

If product adoption is the problem, make it a priority to improve your customer success processes.
If customers don’t see the value in their subscription tiers, take a look at how you’re communicating feature updates, product improvements, and customer ROI.
If competition is the issue, research what other companies are offering and determine where you stand in terms of product positioning.

Also implement the workflows that will help you reach your goals. The same way your sales team has a methodology, your CS team should have one for renewals. It should address expansion opportunities, objections from at-risk customers, and negotiation tactics for those who want to amend their original agreements.

Choose your pricing model and product strategy carefully

To increase revenue from subscription renewals, you have to think beyond retention. There are two main elements of this: your pricing and your product.

How you charge for service in the first place can make a huge difference when it comes to renewals. If you charge per user, for instance, adding additional seats can be an easy way to increase revenue and customer satisfaction (assuming they actually need those seats).

However, if customers don’t typically need more seats, you’ll have to find other ways to upsell and cross-sell. You might consider adding additional features or introducing a microservice architecture (DealHub, for instance, offers CPQ, Billing, and DealRoom separate or together).

Or, you could offer additional tiered pricing options (Basic, Pro, Enterprise) to cater to different levels of customer needs.

Implement a renewal management system

A renewal management system takes out all the repetitive administrative work by automating the renewal process.

With a good system, you can automate tasks like:

Sending out automatic reminders
Identifying and flagging at-risk customers
Sending personalized renewal offers based on customer data
Generating reports to help you track your renewal strategy performance

This allows you to focus your efforts on more strategic tasks like upselling and cross-selling, improving customer satisfaction, negotiating better contract terms, and improving your product.

Continuously monitor and adjust your renewal strategy

As with any business strategy, it is important to continuously monitor and adjust your renewal tactics as needed. Keep track of how the abovementioned metrics change, and which elements of your approach need refining.

Technology Supporting Renewal Management

Of course, modern-day subscription renewals are only possible with software. SaaS subscription billing and renewals have to be automated because otherwise it’d be impossible to manage everyone’s billing cycle and contract terms.

You need the following tools in order to build an effective renewal management strategy:

Customer relationship management (CRM) systems

CRM software helps you manage customer communication, segment your customers, and keep track of which ones are due for a renewal. From CRM, you can see which of your users are almost at their renewal date, whether they’ve recieved the proper communication, and metrics like ACV, lifetime value, and churn rate.

Automated billing software

Automated billing systems put subscription renewal management on autopilot. With billing automation, you can automatically charge each subscriber’s card or bank account on their renewal date. They’ll recieve a branded invoice for their records, and your team doesn’t have to lift a finger.

Subscription management software

Recurring, automated billing is usually a feature of SaaS subscription management software. But there are other things it can do:

Integrate with your in-app customer portal, so customers can update their billing information and subscription preferences
Offer pay-by-invoice options
Provide metrics on customer retention, churn rate, revenue growth, and more
Help you develop custom pricing models for different types of customers (small business vs. enterprise)

With a platform like DealHub, you can also implement usage-based pricing and consumption models (which differ from standard subscription billing).

Renewal automation tools

The platforms mentioned above will have tools for renewal automation. For instance, your contract management software will know when each contract is up for renewal. You can design a renewal reminder email or in-app message, and create a trigger for it to send X number of days before the renewal date.

And through subscription management platforms, customers can already make changes and accept their renewal in a few clicks.

For more personalized communication and upselling opportunities, you should also create triggers based on usage patterns and customer data. For instance, if a customer has added lots of new users over the past year, you could offer them an upsell to a higher tier of your product with more features for growing businesses.

Analytics and reporting tools

Analytics tools like Tableau and Looker can help you centralize, track, and report on renewal metrics. Dashboard software like Geckoboard and Klipfolio can pull in metrics from different platforms to give you a comprehensive visualization of your performance, which you can present to your team.