Last updated on February 3rd, 2020 at 04:45 am
Renewability: it’s a top priority for your business, especially if you’re highly focused on bringing in customers who will stay with your business long-term and increase their lifetime value. Are you paying attention to the right KPIs, or key performance indicators, that focus on your contracts’ renewability? It’s important to shape your contract records around the principles that are best for your business. This article can help you start to identify strong KPIs. Make sure these KPIs are at the top of your list, too:
1. What percentage of your customers are already renewing?
Take a look at your contracts over their lifecycle. What percentage of your customers are renewing their contracts — and what percentage of your customers are falling away, either choosing not to renew their services at all or looking to your competitors for their needs in your industry? This metric can help you gauge the strength of your business as a whole.
It’s just as important to take a look at what percentage of your income comes from annual or renewed contracts. Are you constantly having to look for new business, or noting that your business is currently in a state of growth? While it’s important to have new customers coming in on a regular basis, having a lot of your business’s income is generated by repeat customers gives you stable growth.
2. What is the cost-effectiveness of each contract?
You carefully choose the terms of your contract, including what you will charge your customers, to ensure that it offers the maximum benefit to your business without overcharging your customers. If you want to check on your contracts’ renewability, however, make sure you’re focusing on the cost-effectiveness of that contract. A relatively low-risk contract with fairly high profitability is a contract you may want to set to auto-renew or renew for a longer contract term. Because it’s highly effective for your business, you want to maintain this customer and work with them in the future.
On the other hand, if a contract is not particularly cost-effective — it uses materials that are more costly than anticipated, or it has cost more in manpower than originally assumed — you may want to set that one in the “renegotiate” stack. In some cases, you may choose not to renew with your client at all. In other cases, you may prefer to take a second look at the terms.
3. How much of the contract’s value has been paid?
When you work for a client, you do it with the expectation of payment. As you focus on renewability, you don’t just want to renew contracts. You want to renew effective contracts that are actually working for your business (and allowing you to pay your own bills on time). Before renewing a contract with an existing client, take a look at how much value remains in that contract. Check with your AR department to see if they have outstanding invoices or a history of late payments. A client who has failed to pay off the contract in a timely manner might not be one you want to renew a relationship with in the future.
4. How long is your contracting cycle length?
In order to effectively focus on the renewability of your contracts, keep an eye both on your average contract cycle length and the average length of contracts with specific customers. It’s one of the eight top KPIs that measure contract performance. This allows you to accomplish a couple of different goals:
By knowing your average contract cycle length, you can determine whether there are barriers in your contract approval process. Does it take you too long to move contracts through the approval process? Are there specific spots where your efforts tend to bog down? Take a look at your average contract cycle length and where it tends to stall, then make alterations accordingly.
By knowing specific contract cycle length, you can get a better idea of when you need to start working to renew a contract. If you have a client who often bogs down the negotiation process or who goes silent for a while rather than approving the contract immediately, start earlier than usual. You may need to allow more time to get that contract renewed than you do when working with a client who rarely needs to make serious alterations to the contract and who signs it quickly.
The contract cycle length can tell you where there are unexpected costs in dealing with the client. Many times, when you work with clients who are finicky or who take a long time to sign your contracts, you’re losing money while you’re waiting on them. Each time you have to create a new draft or move your contract back through the approval process, your team has to spend valuable time and effort on that client. That’s not an expense that is written into your contracts, but it’s an expense you have to pay.
As you work to make your contracts more renewable, you’ll find that automating as much of the process as possible can streamline contract renewing processes. It also makes it easier to identify potential problems along the way. Setting auto-renew clauses, lengthening subscription-based contract terms, and monitoring payment history strengthens your customers’ renewability as a whole. The right contract management software also makes a big difference — both in identifying risks in your existing contracts and in making it easier to measure the achievement of KPIs that determine the effectiveness of your contract renewability efforts.