How Customer Success teams can nail their renewal forecast

Customer renewals are the lifeblood of a subscription business. Responsibility for renewals often falls to the Customer Success (CS) team. For example, survey research shows about half (50.2%) of all CS teams surveyed are directly responsible for customer renewals.

It doesn’t end there either. While renewals are a central aspect of CS work, many Customer Success Managers (CSMs) have a mandate for upsells. In the same survey, another 42% of respondents said CS is also responsible for customer expansions.

Even if CS doesn’t “own” renewals or expansions in your organization, having a command of the numbers is still important: just because you aren’t held directly responsible for collecting a signed contract does not mean you are not held indirectly accountable for customer retention.

Better forecasts improve Customer Success’ standing

There’s something in it for CS too. Forecasts help business leaders identify the risk of churn or opportunity of growth in terms of business impact. They rely on forecasts to secure funding and allocated resources.

By the very nature of their work, CS teams have insight that is useful for developing forecasts. So, regardless of who owns renewals and expansions, the CS team needs to participate in developing forecasts.

Doing so will help CS and the overall business do the following:

• Proactively address at-risk customers;
• Avoid being blind-sided by a non-renewal; and
• Align Customer Success with revenue goals.

Most important of all, this will improve CS’ standing in the business. Instead of being viewed as a cost-center associated merely with “customer happiness”—it will be increasingly recognized for its contribution to revenue and growth.

Two accepted approaches to renewal forecasts

There are two common approaches to forecasting. The first method is a basic approach commonly called “in or out.”

The second is more advanced. It is based on the likelihood or probability of renewal.

• In or out. In this approach, a renewal, upsell, or downsell is either completely in or completely out. Being “in” means 100% of the renewal amount is counted in the forecast, while “out” means 0% of the renewal amount is in the forecast. Example: Active, Inc. has a $12,000 software subscription with Awesomesauce Software. If the CS team believes Active, Inc. will renew, then $12,000 is in the forecast. Conversely, if the CS team believes Active, Inc. will not renew, they are considered out and $0 is counted in the forecast.
• Degrees of confidence. In this approach, a renewal, upsell, or downsell is partially included in a forecast. The amount is calculated based on the CS team’s confidence in the customer renewal. That confidence is articulated as an estimated percentage of probability. Example: The CS team puts the probability that Active, Inc. will renew with Awesomesauce Software at 90%. Their forecast will count $10,800, which is 90% of the $12,000 renewal amount in their forecast. Similarly, if the probability is lower, say 50%, then just $6,000 is included in the forecast, and so on.

Metrics for forecasting renewals, upsells and downsells

While customer renewals are typically measured with a distinct set of metrics—it’s important for CS leaders and CSMs to also have a grasp of a broader set of revenue metrics. Below are recommended metrics to consider.

1. Customer renewal forecast metrics

Customer renewals are tied to timelines delineated in contractual terms with starting and ending periods. Common metrics CS teams should track for forecasting renewals include:

• Up for renewal. This is the total amount CS is responsible for renewing in terms of both the number of customers and the sum value of the associated renewal revenue. This metric focuses on renewal and excludes upsells and downsells.
• Renewal forecast. This represents the total amount CS believes it will renew including any upsells or downsells that occur as part of the renewal. The tally should include the total number of opportunities and the sum value of associated revenue.

2. Customer upsell forecast metrics

Upsell metrics estimate what the business will gain over and above the existing renewal amount. Segmenting these metrics is important to highlight growth as a result of upselling, cross-selling, and customer expansion efforts.

• Upsell forecast. The amount CS believes it will see grow beyond just the customer renewal. This usually includes both the number of upsell opportunities and the value in terms of revenue.
• Total expansion forecast. The total amount CS believes it will add to the company’s recurring revenue (usually articulated in terms of ARR or MRR). Mathematically the metric is equal to the expression: renewal forecast + upsell forecast.
• Upsell at renewal forecast. The number and value of revenue CS thinks it will gain as part of the renewal process – compared to what it is responsible for renewing (directly or indirectly).

3. Customer downsell and churn forecast metrics

Customer downsell metrics are a fact of life. It’s better to keep a customer, even with a reduced footprint, than it is to lose the customer entirely. Both of these events are tracked through the downsell forecast metrics.

• Downsell forecast. This reflects the amount CS believes it will lose outside of a renewal event. For example, a customer with 10 software seats opts to reduce that to just five seats—three months into an annual subscription. This number is expressed in terms of the number of downsells expected and the associated revenue value.
• Churn forecast. This describes the number and revenue value of customers CS is responsible for renewing but expects they will not renew when the contract expires.
• Downsell at renewal forecast. This is the number of customers and revenue value CS expects to lose during the renewal period compared to what CS is accountable for renewing (directly or indirectly).

4. Customer Success forecasting metrics

Metrics for renewals, upsells and downsells are component parts that are tied to overall business metrics used to manage a company’s performance. Two common metrics include the net revenue retention (NRR) and gross revenue retention (GRR) rates.

• GRR forecast. This is the CS team’s overall predicted success at retaining existing customers. GRR forecast = (renewal forecast – the upsell at renewal forecast) / up for renewal.
• NRR forecast. This is the CS team’s predicted success at retaining and expanding their existing customers. NRR forecast = (renewal forecast + upsell forecast – downsell forecast) / up for renewal.

As you determine these forecasts, it’s worth keeping in mind that GRR addresses one of the key challenges with NRR: NRR can mask churn with expansion. By contrast, GRR excludes expansion revenue.

Forecasting drives focus

Whether CS owns renewals or not in your organization, you have a lot to offer in forecasting renewals, upsells and downsells. Creating forecasts of your own, or collaborating on those created by another team, will help align CS with the larger business. It will focus the business on those areas you think need the most work. As Peter Drucker is reported to have said, what gets measured gets managed.

If this seems overwhelming, ChurnZero can help.

Our Renewal and Forecast Hub takes the legwork out of forecasts, eliminates those spreadsheets that are painful to sort through, and provides CS teams with an automated dashboard that’s always up to date.

See the power of Renewal and Forecast Hub firsthand in this quick, 15-minute webinar.