I was fortunate to catch Red Hat's Todd Barr today while at visiting the company, and during our conversation, we discussed the ruminations of IBM's Savio Rodrigues on the "paltry" open-source renewal rates. Savio asks:
What happens when 15 percent of your current paying customers decide they can use your (open-source software) product without paying you a dollar. Worse still, these are users you convinced to buy support/license from the mass of nonpaying users. Customers surely realize that their support/license payments enable the OSS vendor to continue developing the product in question. Sure, you get some free development from the community, but 95 percent-plus is still done by the vendor's employees. What happens when more and more customers pass the "pay for continued development" buck and simply become users???
It's a good question, but Barr suggested that it's not the best one. For one thing, it's hard to determine if a given customer doesn't renew or simply buys through a different channel. Customers of smaller companies like MuleSource or JasperSoft are arguably going to know to connect those dots. But at larger companies like Red Hat or MySQL, it's very possible (perhaps even likely) that a customer ends up "renewing" without renewing.
Barr took it a step further, however, and suggested that the real metric shouldn't be renewals (at least, not vanilla renewals) but rather value of the customer over time (maybe three years). While a 100 percent renewal rate is great, a 100 percent renewal rate at last year's contract size is not nearly as interesting as a 50 percent of those 85 percent (or whatever the renewal rate happens to be) bumping up their subscription dollar sizes by 250 percent.
In other words, it's too simplistic to simply measure customer renewals. Open-source companies who want to succeed need to be looking at how to improve sales penetration within their accounts and, in particular, "lighthouse" accounts.