How to manage and increase renewal rates
As a managed service provider (MSP), you know cash flow can be a common issue, and customer renewals are an integral part of the business model. Renewals help you maintain long-term relationships while keeping your bottom line healthy, and in today’s market, the importance of implementing a robust renewal strategy cannot be overstated.
With that said, what happens when clients don’t renew? What can you do to increase renewal rates and make sure that you’re keeping up with retention and renewals? This article will examine pain points, best practices, and how to increase renewal rates for your MSP business.
Pain points: Why do clients churn?
Before we jump into the best practices to manage customer renewals and increase your renewal rate, it’s helpful to understand why clients cancel their contracts in the first place. Some of the most common pain points include:
Poor communication: When clients sign up with an MSP, they're entrusting a third party with critical infrastructure. Even if you meet the customer's technical needs, poor communication can lead to dissatisfaction. Make sure that you remain proactive in providing updates and keeping the customer informed throughout the contract.
Unclear expectations: One of the most important communication elements is setting and managing customer expectations. Make sure that your team understands the terms of the agreement, what services are included, and how long it will take to deliver them.
Inflexibility: Your clients' needs will evolve as their businesses grow, so make sure that you have the flexibility to adjust or add services as necessary. MSPs that are inflexible or unable to adapt to changing client needs may struggle to meet evolving business requirements, which can lead to dissatisfaction and loss of business. At the same time, though, you still want to manage customer expectations as your relationship evolves.
Market or economic downturn: Market changes, macroeconomic shifts, and other external forces affect profitability for all businesses. Having a good understanding of the trends and conditions that clients face and being able to offer flexible solutions that can help them cope is vital to maintaining customer relationships over the long run.
Managing customer retention and renewals
Many business owners, MSPs included, may hyperfocus on expanding their customer base. While this is key to growing your business, you shouldn’t neglect the customers you have. In fact, existing customers are 50% more likely to try new products and spend 31% more compared to new customers.
By paying attention to customer renewals, you’ll help increase overall retention, which, in turn, supports your recurring revenue and general cash flow. For more advice on staying on top of your renewals, download our eBook, Building a Successful Renewal Engine.
Customer retention and renewal rates describe similar metrics, but what’s the difference between these two indicators?
Your retention rate covers how many clients signed up for any of your offerings and maintained the services through their entire contract, even when they had the freedom to cancel. Your renewal rate covers the number of clients that opt to renew your services when their current subscription period ends.
Retention and renewals work hand in hand to build strong, lasting relationships with your customers and improve your bottom line. Understanding the importance of customer retention is key to delivering the maximum value to your customers, and ultimately swaying them to renew their contracts.
Understanding and calculating your renewal rate
Renewal rates should ideally be measured across different time periods—be it days, weeks, months, or even years. This is because each of these periods has different value and meaning to your business. Adjusting your renewal rate formula helps you target potential problems in your process, whether it’s onboarding issues in the short-term versus a pricing problem in the longer-term.
We’ve provided some baseline renewal rate formulas for measuring the different types of rates MSPs commonly deal with:
Customer renewal rate:
Divide the number of customers who renew at the end of the specific time period by the total number of clients who were up for renewal, then multiply by 100 to convert that number to a percentage. Note that in this case, this rate can never go above 100%. A 100% renewal rate means that every customer you have renewed their subscription or contract.
Revenue renewal rate:
This figure represents how much revenue you renew out of the total possible revenue to renew over a given period. Not every customer is worth the same amount—which is why the revenue renewal rate is so important. To calculate this, divide the sum of renewed revenue during the specified time period by the total amount of revenue up for renewal, then convert to a percentage.
Monthly recurring revenue (MRR) renewal rate:
This is similar to your revenue renewal rate but condensed to a one-month period. This helps you track consistently, especially when customers might be on contracts of differing lengths. Calculate this by dividing the renewed MRR by the total renewable potential each month and multiplying by 100 to get a percentage.
Best practices to manage renewals and increase your rate
Once you understand client pain points and how to calculate your renewal rate, implement these best practices to manage customer renewals more effectively:
Maintain regular communication: MSPs should maintain regular communication with their clients to keep them informed of any potential issues, changes to services, or new offerings. Scheduling regular check-ins and providing proactive updates on service performance can help keep clients informed and engaged.
Proactive relationship management: Prioritize building strong relationships with your clients and demonstrate a deep understanding of their business needs. When service providers identify and address pain points proactively, they can build trust and improve customer satisfaction. Providing customized solutions and going beyond expectations will make clients think twice before canceling.
Robust reporting and analytics: MSPs should use data and analytics to monitor service performance and proactively identify areas for improvement. This includes generating reports on service availability, response times, and other metrics that demonstrate the value of their services.
Strategic pricing: A strategic pricing model that aligns with client needs can offer flexibility to clients during periods of volatility. By developing customized service packages and pricing models that reflect the value of the services provided, MSPs can offer customers the ability to scale up and down as needed.
Demonstrate continuous improvement: MSPs should be committed to continuous improvement, investing in training and development for staff, implementing best practices, and staying up to date with the latest industry trends and technologies. This includes seeking feedback from clients and incorporating that feedback into service delivery and process improvement.
Retaining customers is essential for MSPs to ensure long-term success. Incorporating these best practices can help you develop a strategy that’s effective, but also scalable as you grow.
How to build and scale your renewal strategy
Renewal management begins with understanding the needs of your customers. The first step in building an effective renewal strategy is to identify the key drivers of customer retention. Analyzing customer feedback, monitoring service performance, and identifying pain points that may be preventing clients from renewing their contracts can all provide insight into customer needs and preferences.
Once you’ve identified the primary drivers of customer retention, you can develop a renewal strategy that is tailored to your clients' needs. This may include developing customized service packages, pricing models, and support plans that align with client requirements, and offering flexibility in terms of service delivery and pricing.
To scale a renewal strategy, you need to implement processes and tools to support growth. This may include:
- Implementing a robust customer relationship management (CRM) system to track customer interactions and monitor service performance.
- Investing in automated tools for marketing, sales, invoicing, and customer service processes.
- Seeking feedback from customers and incorporating that feedback into your services.
- Automating renewal reminders with CPQ (configure, price, quote) software.
Building and scaling a renewal strategy requires a customer-centric approach that is grounded in a deep understanding of client needs. To that end, MSPs need to think ahead and use best-in-class solutions to help develop their strategies.
Managing customer renewals with ConnectWise
Leveraging professional service automation software like ConnectWise PSA can help accelerate the workflow and provide important insights into customer behavior.
With help desk automation, cloud billing, and sales & marketing integrations, ConnectWise helps MSPs automate the renewal process, reducing manual effort and ensuring contracts don’t expire. To learn more about how the right software can help you improve your business operations, sign up for a ConnectWise PSA product demo.