How Much Are You Lending Your Customers?

Have you ever thought about the fact that when customers don’t renew your product or service on time, you’re effectively giving them an interest-free loan?

The truth is that every time a renewal is pushed out, the period between when the coverage expired and when the renewal is eventually booked is like a short-term loan.

The problem with renewing service and support contracts on products is that customers sometimes struggle to value them until they actually need it. Often, the trigger to renew will occur only when an issue requiring support arises that precipitates the need to contact the service help desk. Regardless of whether it is intentional or not by the customer, the reality is that delaying payment can be a good way for them to keep cash in their books rather than yours. And if you or your channel partners are not motivating them to renew it, what’s incentivizing them to pay it?

To give this concept some context, let’s take an example. We’ve recently examined the renewals profile of some large US IT companies that experience late renewals. On average we’ve noted that anywhere between 10-30% per quarter of renewal business is typically pushed out. Anything below 10% is considered best practice.

With a $100 million renewals book value per year, around $25 million per quarter, the amount that is approximately being "loaned" to customers can be anywhere between $2.5 million to $7.5 million per quarter. And what tends to happen is that a "long tail" starts to appear, meaning the pushed out renewals start to accumulate; and while it might only be $2.5 million for the first quarter delay, by the second it’s become $5.0 million or more depending on what your pushed out percentage is.

Realistically, a couple of months delay in payment is not unusual, but the longer it takes for customers to renew, the likelihood of the renewal being paid decreases (until such time that an issue arises which prompts a need for support). We typically find that post 90 days, the likelihood of booking that renewal drops to almost zero.

So how you can attack what may be a growing problem in your business?

In an ideal world, you and/or your channel partners will be pro-actively monitoring the renewal opportunities to determine what’s been booked and what’s at risk of being pushed out. However, as easy as this sounds on paper, in practice managing this process through your channel partners can be challenging.

As a suggested first step, you may wish to consider carry out our unique "renewal health check." By undertaking a comprehensive review of your renewals business, you will be able to easily determine what your actual renewal rates are and how much business is being pushed out per quarter. Only then, will you be able to actively capture those “pushed out” renewals to ensure customers not only remain covered but also compliant.

If you are struggling with understanding your own renewal business and how it can be better managed, contact us and we’ll run a free "Renewal Health Check" with one of our industry leading consultants.