What is Your Renewal and Upsell Rate?

Your renewal and upsell metric is a critically important aspect of your company’s overall operational dashboard. This metric tends to be a key indicator of many things that may be wrong within your company’s product/service delivery, your finance people/systems, and your distribution model.

As a mentor to expansion stage CEOs on behalf of OpenView Venture Partners, I pay very close attention to this metric to figure out when to hone in on the operational support issues it may be highlighting. These issues could be any of:

* Inadequate finance leader who is not able to put in place the right finance process, figure out the right definitions or identify the metric’s operational significance
* Inadequate finance system that facilitates the accurate measurement over time
* Inadequate licensing and contracting procedures that result in poor forecasting of renewals/upsells
* Lack of a renewal and upsell processes or lack of adherence to a process
* Misaligned incentives and/or process within the sales department resulting in inconsistent focus on renewals/upsells
* Poor product/service positioning or delivery leading to churn
* Etc. etc. etc.

Lets make sure that we’re starting with the basic definitions:

* New customer booking: this one is pretty straight forward. A new booking is one where a brand new customer purchases a certain amount of license/service for a certain dollar amount. Beware here of a mix of license bookings that involve a renewable subscription or maintenance. Beware of one time services that don’t renew. In this post, we will focus only on renewable bookings.
* Renewal booking: this is a subsequent sale to an existing customer based on the whole, or a subset of the original license/service previously purchased. A whole renewal represents a subscription licensing model. A subset represents a perpetual license with maintenance renewal. Typically, that is…
* Upsell booking: a sale to an existing customer whereby the customer is purchasing an additional amount of license/service over and above the original purchase. A subsequent renewal of an upsell license/service becomes a renewal at that time. Therefore, an upsell can be seen as a one time event, just like a new customer booking.

Here’s a simple example… Acme Corp. engages your sales team as a new prospect. In January ’09, Acme places an order for 10 one-year subscription licenses at $100 per year each. This becomes a new customer booking of $1000. In January 2010, Acme renews 8 of the original 10 licenses. You book a $800 order and report it as a 80% renewal with a 20% churn. Acme places another order in June ’10 for 5 licenses. This is booked as a $500 upsell. At the end of 2010, you report a renewal/upsell impact of 130% ($800+$500/$1000). In 2011, Acme renews all 13 licenses and does not buy more. You report a renewal/upsell impact of 100% ($1300/$1300).

The Renewal/Upsell metric tends to vary in its definition and in its accuracy by company. Let’s start with the complexities of definition.

Here’s a made up company scenario (based on a portfolio company example)… AcmeSaaS is a company that struggled with what to do with the following situation: New customer purchases $10,000 license in January 2009. Then buys $1,000 of additional licenses in June ’09. The company tracks its new business metrics using the one year value of a new customer booking (See Profitable Distribution Model). So what is the new booking in that year — $10,000, where the $1,000 is an upsell; or $11,000 with no upsell? They chose $11k in new bookings, as long as the subsequent purchase happened within 12 months of the first new purchase.

Now, if you count all the licenses as a new booking, would the denominator of the January 2010 renewal be $10,000 or $11,000? (they chose $10k in Jan 2010, and $1k in June 2010).

But what if a new department within the customer’s company bought a new set of licenses in 2010? Is that an upsell or a new sale? It depends… AcmeSaaS happened to have split its sales team into two, one selling to new customers, and one upselling to existing. So, AcmeSaaS used the new department purchase as an upsell booking and allocated it to the upsell sales team. By the same token, the sales costs were allocated by team, and the associated bookings tagged accordingly… which then flows through to the economics of new business sales versus existing business sales. See Sell More to Existing Customers.

As far as monthly, quarterly, and annual license mix, it really depends on how the company contracts with its customers. If you have different types of contracts (annual and monthly), you should calculate the renewals for each license group separately, since the dynamic of each might be quite different. Blending them all together will still give you a rate, but the trends won’t give much insight if there is a flux in one type of contract vs another.

In the end, the precision of the definition does not matter as much as its consistency over time. So make sure that:

  1. The definition of the renewal and upsell numbers are specifically defined (provide examples).
  2. Do not change the definition once you’ve settled on it.
  3. If you must change the definition, readjust the historicals accordingly.
  4. Closely monitor the trend over time, and look for aberrations. They typically point to process issues.

Now lets talk about accuracy, or lack thereof… Many of our portfolio companies have trouble with the calculation of the renewal/upsell metric. Technically, finance departments should be able to separate the renewal portion of a contract from an upsell portion. But that assumes that the company’s contracting process has that feature.

Finance systems can also be an impediment here. Most early stage companies resist the cost of investing in a sophisticated finance billing/licensing system. In my view, this can be very short-sighted and costly… Especially for SaaS companies.

Ultimately, when I see a company that is not able to pull together the upsell/renewal analysis quickly, consistently, and with associated insights, I invariably blame it on the lack of a qualified finance resource (i.e. a CFO). I have written in the past about the importance of having a qualified software CFO as early as possible in a company’s evolution.

There is so much more we could go through on this topic… Hopefully this gives you food for thought.

And when was the last time you visited the OpenView Labs site?