Renewal Calculation with early renewals
I have a question about looking at churn and renewal data for a relatively unique purchasing model.
We sell a product that is both tied to an annual contract, but is also consumable. Our customers are purchasing not per "seat", but per assessment. A client will purchase a quantity of assessments that get used. The contract is typically for 12 months, meaning they have up to 12 months to use those assessments. The trouble comes with new clients. They will often purchase a small amount of tests to get started, albeit on an annual contract. When they run out just a few months into the contract, they purchase a larger amount though that is sometimes smaller than their true annual need. Here is a concrete example:
Customer A purchases 5,000 assessments Jan 1, 2020 on a 12 month contract expiring Dec 31, 2020.
Customer A uses those assessments over a 3 month period, and on April 1 purchases 10,000 assessments on a 12 month contract.
Customer A uses those 10,000 assessments over a 3 month period and on July 31 purchases 75,000 assessments on a 12 month contract. It is determined that 75,000 assessments is a strong estimation of their true annual need for assessments.
Since Customer A first purchased in January, they would typically be considered a January or 1Q cohort member. However, every indication is that they will not purchase again until next July. Furthermore, if you look at their first year of purchases, they purchased 90,000 assessments for the year. We do not expect them to need that volume again as 75k is their annual need.
These scenarios are very common for us. As we are a relatively early stage company, we do not have a lot of historical data yet. However, of the deals we are closing about 75% of them purchase an initial annual order that is below what their true annual need is.
My questions:
Are there similar scenarios out there you have seen and how do you calculate churn, renewal, etc?