3 Ways to Eliminate Vanishing ARR
December 12, 2016
What is vanishing ARR? All companies that rely on subscription-based services or annual contracts are subject to vanishing annual recurring revenue (ARR). For customer success leaders, one of the most important aspects of success is ensuring predictability and growth of current contract value, as well as anticipated contract value in the years to follow. So what happens when you and your CSMs (customer success managers) plan on a contract renewing, but it falls through at the last minute without warning? Or perhaps the contract was expected to grow, but instead the customer reduces the contract?
The above scenarios can be part of a concept we refer to as “Vanishing ARR”. But what exactly is it? In simple terms, vanishing ARR applies to customers that have multi-year subscription contracts. Because the renewal date is more than a year out, it can be easy for the CSM to take the contract revenue for granted and neglect to focus on the entire customer journey from start to finish, often resulting in a poor relationship come renewal time which causes the ARR you’ve been counting on to vanish.
3 Ways to Eliminate Vanishing ARR
Does vanishing ARR happen at your organization? Do you have a customer lifecycle strategy for multi-year contracts?
In order to ban vanishing ARR, it’s important for all CSMs and customer success leaders to treat every year as renewal year, even if the contract language states differently.
Below are 3 ways your team can ensure customer success, no matter what the contract may explicitly state. A strong multi-year contract strategy will pay big dividends.
1. Treat Every Year as a Renewal Year
Regardless of how long the contract of a new customer is, whether 2 or even 5 years, CSMs should treat every year with the same focus, attention, and strategy of a 1 year contract. Might be obvious, but vanishing ARR is real. Often times customer success teams focus much of their attention on the customers whose contracts are coming up for renewal to ensure that the deal is won. But without continual interactions through the entire customer journey, the multi-year customer may not be happy without the CSM even knowing.
When customers are silent, it’s virtually impossible for customer success leaders to know what problems they’re encountering, what frustrations they have, or even if the product they’re using is delivering value. While it may seem that silent customers are pleasant to have throughout the year, what about when the actual renewal time comes? Do your CSMs know how to address their concerns? Do they know which products or services might be suitable for an up-sell? Chances are, they don’t have any truly valuable information to go off of, so the approach is much more generic and may feel fake if they haven’t built up a strong relationship. In the end, when the CSM asks for the renewal at the end of the contract, the customer may already have decided to switch to another provider. Unless you have a strong proactive customer journey or strategy for multi-year contracts.
2. Be Proactive with the Customer Journey
All too often, CSMs are reactive to customer situations. This is especially true in scenarios where the contract length is multi-year. For example, a customer may call in about a product issue or may inform the CSM they aren’t happy with how their engagement is progressing. If a customer has to reach out to the CSM in order to engage, then the renewal is at risk potentially years before the contract is actually up for renewal.
Sometimes while your CSMs may schedule the occasional “touch base”, reactively addressing issues, they may be lacking the very important personal relationship aspect. Not only that, it’s important for CSMs to be in touch with role changes and additional responsibilities that the individuals across their customer account may have added to their plates. There could even be a shift of goals and priorities that impact your product.
Things change over the course of a year, just imagine the amount of things that would change in an organization over three years. Building out a proactive customer journey every year of a contract will help your CSMs understand the demands and pressures their customers have in front of them. It will help your customer success team manage contracts strategically and ensure their customers are set up for success well in advance of the actual renewal.
3. Go High and Wide with Relationships
What happens after a contract is signed and the customer is won, training is done, and the team is using the product? The initial excitement may not last long if relationships aren’t strong. Few relationships are typically developed outside of the day-to-day contacts and while sometimes that can work, it’s a risky bet – especially for multi-year contracts where turnover is probable. If that happens, the CSM is likely left with no advocate and no additional relationships within the account. Your organization risks losing that customer and you have to start from scratch building new relationships before the renewal – if even given the opportunity.
Our CEO, Dave Blake, discusses a concept called “High & Wide”. While the term is usually referenced as a sales strategy, it applies to customer success just as well. The concept references the goal to develop as many relationships as possible high and wide within your customer’s organization. Rather than having the entire relationship hinge on one or two lower-level contacts that have little to no influence or buying power, it’s critical to broaden the scope to develop as many relationships as possible throughout the entire organization. If you aren’t actively working with the customer, regardless of their contract length, then it’s likely your team is missing out on potential expansion opportunities.
Regardless of the length of customer contracts, it’s important that customer success leaders emphasize with their teams that the customer journey should never be neglected. This will help eliminate vanishing ARR. Make the phrase “every year is renewal year” a common saying in your customer success organization. Check out our resources below for more customer success best practices and insights for how your organization can approach customer success with the customer at the center:
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