SaaS Customer Life cycle - Contract Renewal

This is part of a series of posts focused on the life cycle of a SaaS customer. The first post is here, and the previous post about new releases here. This is the final installment in this series.

This final step in this series is crucial for all SaaS organizations. That is not to say that installed software companies aren't interested in renewing contracts, but the financial implications are slightly different. I have written about monthly recurring revenue (or more importantly contracted monthly recurring revenue) in previous posts. This is one of the key measurements of a SaaS organization's health and worth. If there are investors this is one of the key numbers they will likely focus on. If your organization is looking to take on investors this is a key number they will likely focus on. Did I mention this is an important number?

Hopefully contract renewal was an issue that was addressed during the sales process. The initial contract certainly included terms like price and length of contract, but hopefully also included language around how the renewal process will work. There is a balancing act to walk here in that obviously the longer the contract the better for the organization providing the software, however enterprise clients may resist lengthy contracts, especially if they are still new to the SaaS concept.

The flip side of a lengthy contract is that it will likely also lock in pricing to some degree during the term and subsequent renewals. It doesn't really matter what your pricing model is: a per seat basis, a feature basis, or some other model the contract price will likely be allowed to increase some set amount with each subsequent contract renewal or calendar year. This means that a client who is an early adopter of your services may end up with a very modest increase in their fees if they continue to renew for a long period, say an additional two, three or four contract terms. This may or may not be a big deal, however it is one that should be entered into with eyes open.

Since this blog is focused on SaaS for the enterprise I would be remiss if I didn't mention procurement. It is likely that at renewal time there will be a formal procurement process that is invoked. It is important to understand this process as much as possible and rely on your internal champions within the client to help guide this process. Many enterprise organizations have a procurement process that runs in cycles, say every 2 or 3 years, so if you have a one year contract with the option to renew at annual intervals it is important to understand how that will work. If you are lucky it might mean no formal procurement process until the next cycle or until the contract dollar amount hits a certain threshold.

One way that you can help your internal champions make the case for contract renewal is to ensure that there are tangible numbers that can be referenced when speaking to budget holders. This falls into the best practices / relationship management category but helping the internal units who are using your software build a case with metrics that are legitimate and easy to understand should help make the renewal process smoother and more likely.

There shouldn't be any surprises about whether a client is or isn't going to renew their contract. Speaking with clients about contract renewal well in advance is to everyone's benefit. The more transparent the process the better it will be for all involved. If there are issue with the product offering, or issues with service levels, etc the sooner they can be addressed the easier it will be to ensure contracts get renewed.

I would also strongly encourage internal teams to be transparent and honest when looking at contract renewals. This should also follow into the revenue projection and budget process. If a large client is unlikely to renew then having a revenue plan and budget impact if they choose to renew as well as if they choose not to renew is a worth while exercise. This also helps set internal expectations and a better informed internal leadership team. If your organization has investors or board oversight transparency around contract renewals is crucial for honest communication about the financial well being of the organization, as well as for where budgets might need to be adjusted to fit new goals (say increased client retention or ability to increase billing by rolling out new features on a more frequent basis for example).

Clearly this series of posts is far from exhaustive in relation to SaaS customer life cycle. I will follow up on some of the concepts presented in this series of posts over the upcoming months.