Use Term Renewal Acceleration to create sustainable profits.
Current economic indicators are unfavorable due to a massive stock market correction, high inflation, and shock waves emanating from the war in Ukraine. These factors create economic uncertainty for product managers who must maintain sustainable profits. This blog series, Recession Proofing Your Profit, will share specific strategies that product managers can employ to fulfill their responsibility of creating sustainable profits amid economic crises. Let’s start by exploring how to accelerate renewals.
This post will focus on Term Renewal Acceleration, a technique in which a specially designed offer is used to motivate customers to renew their licenses before their term expires. Subsequent posts will cover Multi-Term Acceleration and Pre-Term Development.
Term Renewal Acceleration works best for software products with a time-based access value exchange model. Time-based access grants the right to use the software for a defined period of time, even if the software is not used. An increasingly common application of time-based access is the monthly term recurring revenue subscriptions offered by software as a service (SaaS) companies, often with a discount when the user pre-purchases a full year’s subscription (an annual term).
Steps to accelerate term renewals:
- Determine the number of customers with upcoming monthly subscription renewals for the next six months
- Model pre-economic and post-economic hardship outcomes. In the example below, the average annual license revenue is $79. The average churn before economic hardship is 5%, with an expected increase to 20%. The potential revenue loss due to economic hardship is over $1.3 million.
- Create a compelling offer and calculate potential outcomes to validate the feasibility of the offer. In the example below, the offer is 10% off for early renewal during the month of July to “pull forward” as much revenue as possible.
- Estimate the volume of customers who will take the offer by month. One may expect 100% of customers due to renew in July to accept the immediate 10% discount while only 90% of customers due to renew in August may renew, followed by 50% of customers in September through December.
- Calculate the outcome with the offer, including the impact of increased churn due to economic hardship.
In this example, $5,259,623 in revenue is “pulled forward” in July, and a total of $584,403 in revenue is protected from the impact of economic hardship.
This is a rough estimate to discuss with other senior leaders to move forward. A well-constructed model allows for sensitivity analysis based on different churn levels, discounts, and the volume of customers who accept the offer. Now is the time to creatively consider how to accelerate term renewal.
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Interested in using Term Renewal Acceleration? Download the free template (.xlsx)