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Renewal Rate

What is a Renewal Rate?

Renewal rate, also known as retention rate, is used to measure the percentage of customers or subscribers who continue using a product or service, typically after the initial subscription or contract term has expired. Renewal rate is particularly important for subscription-based businesses and SaaS companies, where retaining existing customers can significantly impact revenue and growth.

Why is Renewal Rate Important?

The renewal rate provides insights into customer loyalty, satisfaction, and inclination to remain a customer. A high renewal rate indicates that a significant portion of customers are satisfied with the product or service and are willing to continue their subscriptions. Conversely, a low renewal rate may suggest issues with the product, service quality, or customer experience.

Businesses use renewal rate data to assess the effectiveness of customer retention strategies, identify areas for improvement, and make informed decisions about pricing, customer support, and product enhancements. It is also a crucial metric for forecasting revenue.

What is the Formula for the Renewal Rate?

The renewal rate is expressed as a percentage and is calculated using the following formula:

Renewal Rate = (Total Number of Eligible Customers / Number of Customers Renewing) × 100%

  • Total Number of Eligible Customers are the total customers whose subscriptions or contracts are up for renewal during the same period. These customers are eligible to make a decision regarding renewal.
  • Number of Customers Renewing represents the customers who choose to renew their subscriptions, contracts, or memberships for a specified period. 

Renewal Rate Calculation: Example

To calculate the renewal rate, you need to know the number of customers who renewed their subscriptions or continued using the offering, as well as the total number of eligible customers whose subscriptions were up for renewal during the same period. Here is an example:

A SaaS company provides a subscription-based project management tool, and the typical subscription lasts a quarter. The company wants to calculate the renewal rate for the last quarter of the year. 750 customers renewed their subscriptions, while 900 customers whose subscriptions were set to expire during the last quarter.

Customers Renewing
Eligible Customers
750
900

Using the formula from the section above, we find:

Renewal Rate = (750 / 900) × 100%

Renewal Rate = (5 / 6) × 100% = 83.33%

So, the renewal rate for this company during the last quarter of the year is 83.33%. This means that 83.33% of the eligible customers chose to renew their subscriptions for another year.

A high renewal rate is generally a positive sign, indicating that a significant portion of customers are satisfied with the offering.

Renewal Rate vs Retention Rate

Renewal rate and retention rate are related but distinct metrics used to assess customer loyalty and the ability of a business to keep its customers.

Renewal rate primarily focuses on subscription-based or contract-based businesses, where customers decide  to renew their subscriptions or contracts for a specific period.

The renewal rate formula is typically expressed as a percentage: (Number of Customers Renewing / Total Number of Eligible Customers) × 100%

Renewal rates are often calculated over specific periods (e.g., monthly, quarterly, or annually) to measure the rate at which customers renew their commitments, and It is commonly used in industries with subscription-based pricing models, such as SaaS, streaming services, and membership programs.

Retention Rate has a broader focus and can apply to various businesses and industries, not just subscription-based ones. It measures the ability of a business to keep customers over a given period.

The retention rate formula calculates the percentage of customers who continue using a product or service over a specified time frame, regardless of whether they renew a subscription or contract. The formula for retention rate is (Number of Customers at the End of a Period / Number of Customers at the Beginning of the Period) × 100%

Retention rates can be calculated over various periods and are not limited to subscription or contract renewal cycles. It can be measured monthly, quarterly, annually, or for any relevant period. Retention rate is used to assess customer loyalty in a broader context and is applicable to industries with various pricing models.

What is a Good Renewal Rate?

A good renewal rate depends on the industry, the type of business, the company’s stage of growth, and the other company circumstances. What constitutes a good renewal rate for one business might be considered average or subpar for another. However, some general considerations when examining a renewal rate are:

  • Industry standards show whether the renewal rate of a company is standard for the industry. Some industries, such as SaaS, have higher renewal rates. Industries with more discretionary spending might have lower renewal rates.

  • Historical data in which a company regularly looks at the history of its renewal rates is key. If the company’s current renewal rate is on par with or higher than its past performance, it could be a positive sign.

  • Customer feedback and satisfaction is often correlated with renewal rates, with high renewal rates reflecting high levels of customer satisfaction and positive feedback.

  • Market Competition can influence renewal rates, and businesses in highly competitive markets may need to work harder to retain customers.

  • Churn Rate should remain low with a good renewal rate.

  • Customer Lifetime Value (CLV) should be high with a good renewal rate.

How Can You Improve Renewal Rate?

Improving the renewal rate involves time, a commitment to success, and a variety of strategies, including:

  • Customer Engagement and Communication that informs customers about the product and establishes a channel for all customer feedback is a good start to a higher renewal rate. 
  • Exceptional Customer Support should be the cornerstone to any business, but especially one looking to improve its renewal rate.  A positive support experience can improve customer satisfaction and increase the likelihood of renewal.
  • Customized Offerings that meet the evolving needs of customers are more likely to engage the customer and result in renewal.
  • Discounts and Incentives to encourage customers to renew can be a good short-term strategy for higher renewal rates.
  • Regular Product Updates to improve products or services keeps an offering appealing to customers.
  • Customer Success Teams can proactively engage customers to understand their goals and help them achieve success with a product or service.
  • Renewal Reminders and Alerts ensure customers are aware of their upcoming renewal dates and can help to increase renewals. reduces the likelihood of missed renewals.
  • Customer Retention Analytics identify trends and patterns in customer behavior that can uncover factors that impact renewal rates.
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