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White Paper: The Challenges with Auto Renewals
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White Paper: The Challenges with Auto Renewals

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The challenges that arise when applying an auto-renewal approach to recurring revenue.

The challenges that arise when applying an auto-renewal approach to recurring revenue.

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  • 1. WHITEPAPER Challenges with Auto-Renewals: The Challenges That Arise When Applying an Auto-Renewal Approach to Recurring Revenue
  • 2. 2ServiceSource Challenges with Auto-Renewals Q3| 2011 When Auto-Renewal Was Seen As a Silver Bullet During the boom in the late 1990s, some technology, healthcare and life sciences companies took a seemingly logical approach towards renewing service contracts. These companies assumed that the customer would always want to renew maintenance, support and subscription services and would continue to pay the invoice each year if it was simply mandated, either through a contractual obligation (often referred to as an “evergreen contract”) that forced the customer to proactively cancel service or through an auto-invoicing policy. The assumptions underlying this approach were wide-reaching. Companies assumed that: •• Systems that manage opportunity and customer data were accurate and that all previous data was up to date. Therefore, an invoice could simply be drawn up and would be sent out to the right customer based upon previous customer data. •• Customers couldn’t live without the contracted maintenance and support. Therefore, there was no need to sell the value of the service agreement. •• A one size fits all auto-invoice and schedule would fit the needs of every customer. Therefore, options such as multiyear contract lengths and flexible billing options were not needed. •• The renewal event was not the time for an up sell or cross sell discussion with a customer. •• Customers would proactively communicate any concerns they had over the value they received from their maintenance contract, such as dissatisfaction issues with the Technical Assistance Center. Therefore, customer service calls and a sales approach to service renewals were not required. •• Customers could be held to contractual obligations and would not object to that, even if they failed to see the value of the maintenance agreement six months down the road. •• Customers would be loyal and would continue to simply pay up – and would ignore the ROI analysis of maintenance agreements, as well as third-party maintenance and support providers offering similar support for less money. Why Auto-Renewal Approaches Are No Longer Used High-tech companies employing best practices have migrated away from an auto-renewal approach towards a more high-touch, value based sales approach. The primary motivator behind this move was learning that their renewal performance in the segment where auto-renewal was applied was 20 to 35 basis points below industry averages – which represented significant revenue and margin erosion. During the last ten years, companies have realized that many of the key assumptions listed above were no longer valid due to a changing economic environment, a more sophisticated buyer, a more complex distribution channel, the maturing of the services market and competitors, and the volume of customer data that was missing or changing. Once an initial customer relationship is established, it is yours to keep or lose. Taking an auto-renewal or auto-invoicing approach deprives you of the opportunity to build customer relationships, to engage in critical dialogue with your customers and to significantly grow revenue.
  • 3. 3ServiceSource Challenges with Auto-Renewals Q3| 2011 The challenges arising from those old assumptions and their associated implications are summarized in the table in Figure 1. Assumption Challenges Implications Impact on Bookings & Revenue Systems and customer data are accurate and up to date. 20-30 percent of the data in every account is outdated due to mergers, reorganizations, job changes, etc. Invoices never reach the customer, resulting in significant revenue leakage. Customers need maintenance and support services, so there is no need to sell the value of your service. Customers forget the value of maintenance and support services and have increasingly tighter budgets. Customers don’t see service as mission critical and will cut it from the budget or request discounts (i.e., following analysts’ advice). One size fits all auto-invoicing will satisfy every customer. No flexibility in contract length or payment schedule. Customers may receive multiple invoices and get confused, or worse, feel they are overcharged. Missed opportunities for sales and relationship building. Higher customer dissatisfaction. Up selling and cross selling are separate sales activities, divorced from the service renewal cycle. Customers do not request higher service levels and may not be aware of your new products. Missed product and service sales opportunities to up sell and cross sell. Missed opportunities to reinforce value and create peace of mind. Impact on Customer Satisfaction Customers will take initiative and voice any concerns over support and service to the sales team. Customers do not proactively voice concerns. They change vendors. Without touching a customer, you do not know their needs and risk losing them or having entitlement issues. Customers can be held to contractual service obligations for auto- renewals. Customers don’t want to be taken for granted when OEMs simply bill them. If they feel they are being taken advantage of, customers will become increasingly dissatisfied and will not pay. Our customers are loyal and aren’t going anywhere else. We perceive them as being locked in. Third-party support providers have active campaigns to sell into OEM installed bases. Customers leave indefinitely. Figure 1
  • 4. 4ServiceSource Challenges with Auto-Renewals Q3| 2011 What is the Proof? On average, companies that formerly took an auto-renewal approach saw renewal rates increase by 20 to 35 percentage points within the first year after partnering with ServiceSource® and leveraging our cloud computing and high-touch managed services sales model. The following table summarizes a few of these customer successes: Customer Profile Previous Approach & Challenges Incremental Improvement Large Hardware OEM Automated renewal process Backlog of expired contracts Losing market share to competitors Improved renewal rate from 50 percent to 85+ percent Enterprise Networking OEM Business managed out of Excel Little information on end users Sold premium support; recaptured expired contracts; improved renewal rate by 20 percent Leading Telco/Service Provider Automated renewal system Poor data management Increased renewal rate from 60 percent to 85 percent Security Software OEM Auto-invoicing through finance department Multiple disparate data systems Poor entitlement management 20 percent improvement in service revenue performance
  • 5. 5ServiceSource Challenges with Auto-Renewals Q3| 2011 Summary While auto-renewal was used for collecting on ongoing renewal contracts in the past, evidence accumulated over time has proven that the fundamental assumptions for this approach are no longer applicable given changes in customer behavior, market conditions and third-party competitive threats. Companies that had been using an auto- renewal approach realized that this approach sacrificed (1) significant bookings and revenues in this segment and (2) a critical success factor in business—building an informed and intimate relationship with customers. In the service revenue segment where the customer relationship is a key driving factor, an auto-renewals process does not reinforce the value proposition, ignores the possibility of up selling, and precludes the opportunity to hear crucial customer feedback. Instead, it delivers an invoice in a presumptuous way, which is a potential affront to valuable customers that companies can no longer afford to lose. For More Information: To learn more about this topic and how we have helped companies drive improved financial performance and increased visibility and insight within their renewals business, contact ServiceSource at sales@servicesource.com or call 800-211-5868 to speak with a sales professional.
  • 6. The Service Revenue Performance Company ServiceSource focuses on driving increased recurring service revenue, profitability and customer satisfaction for the world’s leading technology-based companies. The ServiceSource solution consists of a suite of cloud applications, dedicated service sales teams working under its customers’ brands and a proprietary Service Revenue Intelligence Platform™ with over a decade of renewals data, KPI’s, benchmarks, and best practices. ServiceSource addresses the critical steps of the renewals process, including: data management, quoting, selling, and renewal business intelligence. Its business is built on a pay-for-performance model that ensures a results-driven, shared risk partnership with customers. Corporate Headquarters 634 2nd Street San Francisco, CA 94107 Toll free: 800-211-5868 www.servicesource.com North America San Francisco Denver Nashville Asia Pacific Singapore Kuala Lumpur EMEA Dublin Liverpool ServiceSource and any ServiceSource product or service names or logos above are trademarks of ServiceSource International, Inc. All other trademarks used herein belong to their respective owners. All contents are © 2011 ServiceSource International, Inc. All rights reserved. 1109-WP-Challenges