DEFINITION of Advance Renewal

Advance renewal is an agreement to continue utilization for another term of a time-based service prior to its contracted expiry. The agreement may refer to any business arrangement between two entities, from magazine subscriptions and mining claims, to internet domains and software product licenses. Advance renewal generally involves some inducement to the customer to commit to another term.

BREAKING DOWN Advance Renewal

Advance renewal benefits both the buyer and the seller of the product or service. The buyer benefits from uninterrupted supply without any disruption, and may be able to wring some concessions from the vendor by agreeing to renew a service in advance. The seller may experience a slight erosion in profit margins if it has to offer better terms on a renewed service, but not necessarily because the seller could also see a reduction in new customer acquisition costs (i.e., marketing expenses) if it is able to hold onto a core base of customers. The net benefit will be a more predictable income stream and possibly stable margins. It will depend on the competitive landscape and how efficiently the company operates.

Advance renewal rates tend to be high for services where switching costs are an issue. A large manufacturing company with multifunctional enterprise software installed at sites around the world will likely keep renewing the vendor's service in advance. Switching to another supplier would entail interruption of business processes, which for some companies would be undesirable even for a day. A company that leases office space in a downtown building where it has been headquartered for years will likely renew before the next lease term expiry because it would be too costly to relocate. Psychologically, it could also be considered too much of a hassle. These are reasons that landlords have high lease renewal rates. Another example of robust advance renewal rates of contracts is in the pharmacy benefit manager (PBM) business. Companies like CVS Health boast elevated client retention rates, which make them attractive to investors who seek businesses with stable cash flows.