One of the great things about SaaS is that the new revenue layers on top of existing revenue such that the new year starts with a baseline of business even if nothing new is sold. As I talk to entrepreneurs and ask about 2017, they like to talk about revenue going from X to Y next year (e.g. $1M to $2M). Then, I ask about their annualized renewal rate, which is often in the 70% – 90% range (anything above 90% is amazing). Taking that annual renewal rate and multiplying it by the end-of-year run rate is a better way to think about the starting point for the new year.
Here are a few thoughts on the SaaS run rate for the new year in the context of the renewal rate:
- Most of the time, the renewal rate with existing customer expansion revenue layered on is well below 100% (meaning, if no new deals are sold in a calendar year, the company would shrink as opposed to some startups which are great at growing existing customers and continue to grow even if they didn’t sign new customers)
- Thinking about the run rate times the renewal rate as the starting point creates a more realistic baseline for the new year (e.g. $10M run rate and 80% renewal rate with a goal of hitting $15M by the end of 2017, it’s better to think of starting at $8M and needing to add $7M of new revenue to get to the 2017 goal even though it’s conservative since the 20% that cancel won’t do so on day one)
- Talking about the new year run rate with a renewal rate context drives home the importance of product development, customer success, support, etc. in delivering an amazing experience where customers will not only renew, but they’ll also want to expand
Entrepreneurs would do well to incorporate renewal rates into their high level thinking about going from revenue run rate A to B for the new year. Often, the delta between the two is higher that what’s already contemplated.
What else? What are some more thoughts on incorporating renewal rates into thinking about run rate goals and the new year?