Why Management Teams Should Consider Adopting Contract Renewal Rate as a KPI

Why do startup and early expansion-stage company (0-50 employees) management teams pay so much attention to new customer acquisition and often times discount the value of customer retention statistics like contract renewal rate? The main reason is that startups and early expansion stage companies are still in the process of defining their product(s) or service(s), finding their target customers and formalizing their operation processes. In doing so, they often have to alienate or turn away customers to get in-line with their strategy or better position their product(s)/services(s) to meet the needs of their target customer group. As a result, these statistics can be very misleading.

As a company starts to expand and enters the mid-expansion stage period (50-99 employees), its focus becomes much clearer and the company develops a clearer vision of what it wants to do and who it wants to sell to. Consequently, targeting a customer experience management metric like a contract renewal rate becomes much more relevant. However, management teams often times neglect to start incorporating these types of metrics into their key performance indicators (KPIs) at this time and continue to place 99% of their focus on new customer acquisition and inadvertently de-prioritize the attention and funding that the company dedicates towards customer experience management.

In doing so, a company’s management team is exacerbating the risk of a customer exodus as the first few waves of contract renewal dates start to approach. This is because the current customers will have few places to turn with questions and issues and this will drastically undermine the company’s ability to ensure customer satisfaction.

Many management teams take this risk because they undervalue the cost of potentially losing a substantial percentage of the current customer base. They oft times forget that:

• Renewal notification and even billing itself is a marketing opportunity that can lead to more non-renewal business with existing customers. Depending on the business this can potentially be a major revenue opportunity for your company.
• Loyal customers can be an amazing marketing asset for a company early-on, as they can provide testimonials, participate in case studies and serve as current customer referrals. The quality of a customer’s experience will dictate their willingness to participate in the creation of these types of marketing assets.
• Loyal customers can also be great outbound ambassadors for a company’s brand and actually help your company quickly penetrate its target markets by referring similar companies to your products and services.

Others are very aware of these risks and place a greater importance on new customer acquisition because they are racing a competitor or multiple competitors to the market and need every resource available to them to make it there first. In these situations, especially when there is a negligible up-sell opportunity, companies will sometimes be willing to take the risk of under-investing in customer support.

The important factor here is that management teams realize how to effectively account for the potential value of an effective customer support and experience management operation, so that they can adequately determine when it is necessary to adopt a customer retention metric like contract renewal percentage as one of their KPIs.

Contract renewal rate is a great KPI to adopt as a company starts to shift part of its focus towards customer retention and customer experience management.  However, once it is ready to do so and has a more established customer experience management program, a company should consider adopting a nationally recognized customer experience metric as a KPI like the Net Promoter Score (NPS).

There are several different variations of contract renewal rates, below are the most common:

• New customer contract renewal rate
• Overall customer contract renewal rate

Contract renewal rate can be calculated based on total revenue value or on number of contracts.

If you are interested in reading more about contract renewal rates, I recommend reading my colleague Tien Anh’s blog post on why renewal rates are a powerful measurement for strategic decision making. Similarly, if you are interested in learning more about other customer experience management KPIs that your team can consider adopting, I recommend reading my previous blog post on the Net Promoter Score (NPS).