Service Renewal Metrics: Definitions and Benchmarks
Service renewal metrics indicate the level of performance for retaining the number of service contracts and the rate that recurring revenue is retained and grown.
Service Renewal Metrics
Tracking service contract renewal performance and recurring revenue retention is essential to help identify the factors that lead to customer and revenue retention and attrition. Measuring both the number of contracts and revenue retained is an important indicator of customer relationship health.
Two important service renewal metrics are Contract Renewal Rate and Recurring Revenue Rate both are defined and described below.
Contract Renewal Rate
Contract Renewal Rate indicates the percent of contracts due to expire in a specified period that are successfully renewed.
Contract Renewal Rate provides a good indication about the number of relationships your able to sustain and can help identify attrition and retention trends and underlying causes. When possible, examine Contract Renewal Rates by key customer segments to identify relationship trends by customer type, geography, product family, length of relationship, etc.
For Period = Q1
Contract Renewal Rate = Contracts Successfully Renewed / Contracts Due to Renew
Contracts Due to Renew Q1 = 100
Contracts Successfully Renewed Q1 = 90
Contract Renewal Rate = 90%
Recurring Revenue Rate
Recurring Revenue Rate provides an indication of how much recurring relationship value has been retained, grown or been lost.
Unlike Contract Renewal Rate, where 100% is the maximum performance level, Recurring Revenue Rate can exceed 100% indicating that the value of an existing relationship has increase from the previous period.
Recurring Revenue Rate can be applied to a specific timeframe (e.g. quarterly, annually, etc.) or applied to tracking Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). This is critical for tracking the financial health of recurring revenue relationships.
For Period = Q1
Recurring Revenue Rate = Recurring Revenue at End of Term / Recurring Revenue at Beginning of Term
Recurring Revenue Beginning Q1 = $100
+ Recurring Revenue Added in Q1 = $50
$45 from new customers
$5 from expansion of existing relationships
– Recurring Revenue Lost in Q1 = $30
$25 due to customer churn
$5 due to downgrade of existing relationships
= Recurring Revenue End Q1 = $120
Recurring Revenue Rate = 120% (20% growth)
- Establish both contract renewal and recurring revenue metrics.
- Monitor contract renewal rates to identify trends in relationship retention or attrition.
- Examine contract renewal rates by key customer segments to determine variations in retention or attrition performance by customer type.
- Compare contract and recurring revenue rates to indicate changes in buying behaviors.
- Measure the rate of growth or reduction in revenue month-to-month or year-to-year.
- Investigate the root cause for loss of contracts and revenue.
Service renewal performance is fundamental to overall corporate financial health. Existing service relationships represent a predictable recurring revenue stream and provide the foundation from which to grow revenue. Before you can grow relationship value however, you must be able to retain what you have.
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