What is Renewal Rate? | Chargebee Glossaries
Based on the definition, you might think that the renewal rate is a simple concept. analytically, however, he can travel to depths.
Before delving deeper into the topic, it should be noted that the terms “renewal rate” and “retention rate” are often used interchangeably, and incorrectly; let’s see why.
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renewal rate vs. retention rate
The difference between the renewal rate and the retention rate lies mainly in the intention of the client. the renewal rate is the measure of customers who actively choose to renew the contract, while the retention rate refers to customers who chose not to cancel their subscription even when they had the opportunity to do so. this could be an automatic decision or an active decision on your part to renew the contract.
In addition, the renewal rate tells you how many customers choose to renew their contract at a time. On the other hand, the retention rate tells you how many customers you have been able to retain over a period of time. this is true when the contracts are longer.
how to calculate renewal rates
There are two methods to calculate the renewal rate.
customer renewal count/rate
Number of Renewed Items vs. Number of Renewable Items provides the customer’s renewal count or rate. the formula is as follows:
not. of clients who renewed their contract / no. of customers who had the opportunity to renew their contracts
here are some examples:
example 1: 100 customers have subscribed to your product earlier this month. at the end of the month, 90 renew their subscription. your product renewal rate (this month) is 90%.
customer renewal rate can be a maximum of 100% and is best used when your customer base is consistent: similar types of customers, contract terms and conditions, price range and the like.
revenue/dollar renewal rate
Unlike the counting formula, the dollar/revenue renewal rate considers the dollar value of renewed contracts. the formula is as follows:
value of the contracts that are renewed / value of the contracts that have the possibility of renewal
customer x has a subscription of $100.
the client and has a subscription of $1000.
client x cancels and client y renews.
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the renewal rate is 91%.
Also, let’s say customer y renewed with a 10% price upgrade. now, the revenue renewal rate is 100%.
here is another example to understand monthly recurring revenue (mrr) renewal rate and annual recurring revenue (arr):
total number of clients: 100
offer value: $12,000 for a 12-month contract ($1,000 mrr)
number of contracts to renew – 10
contracts lost in churn – 2
the renewal rate is 80% ($8,000 mrr / $10,000 mrr).
Also, suppose you managed to upsell one of them from $1,000 to $5,000.
mrr renewal rate is now 120% ($12,000/$10,000).
To summarize, mrr takes into account mrr at the beginning of the month, mrr gained from new customers, expansion revenue (mrr change gained by upgrading customers), reduced revenue (mrr change lost due to downgrading of clients), and the mrr churn. once you know mrr, arr = mrr * 12.
Revenue renewal rate can be greater than 100% and is best used when your customer base is heterogeneous and you have to process data from multiple demographics. therefore, high renewal rates are something businesses should aim for.
why refresh rate can be a complex metric
As mentioned above, the renewal rate may seem like a somewhat vague or straightforward concept. well, not unless you want it to be.
That’s because you can calculate it with many different data points based on different customer segments.
For example, you might consider these questions to calculate your renewal rate: How many customers are renewing for your lowest priced product or plan? what about the higher price level? how many renew after their subscription has expired? Has the value of the renewed contract been increased or reduced? What is the duration of the renewed contract? Was the renewal for the given period or prepaid for a longer duration? – if so, is there any discount?
once these questions are factored into the calculation, it looks something like this:
customer and purchases 100 seats of the product at $1,300 per seat per year on January 2, 2020. The terms of the agreement state that the price cannot increase by more than 5% per year. The same customer then renews his contract on January 1, 2021. This time he buys 120 seats at $1,300 per seat per year. makes a prepayment commitment for 5 years that allows a 16% discount.
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It’s not that simple anymore, is it?
this is what real world renewal rate calculations look like in saas companies. furthermore, different customer success teams have different ways of processing the same data. Although these questions complicate the analysis a bit, the results are gratifying. let’s understand how.
why renewal rate is an important factor for customer success
It costs five times more to acquire new customers (cac – customer acquisition cost) than it does to retain an existing customer. As a csm (customer success manager), customer retention should be one of your main areas of focus.
In addition, we know that renewal rates are useful for revealing purchasing patterns. since renewal rates capture trends, it helps improve retention, leads to better customer success results, and helps predict revenue growth.
For example, you may notice that one segment of your customers is renewing more than another. In reaction, you can optimize your response by upselling or cross-selling. Similarly, you may choose to review your product’s price, packaging, and value proposition for customers you think are not renewing as much.
Given what you discover, you can take steps to make the most of the situation, which will lead to better customer success outcomes for your company.
renewal rate is also closely related to customer churn, since renewal rate = 1 – churn rate. Focusing closely on churn and renewal rates allows you to improve your customer retention. To learn more about churn, visit our blog on calculating churn rate.
steps to improve your renewal rate
High renewal rates don’t happen overnight. the journey must start from day one, and the obvious secret is to have satisfied customers. Fortunately, there are many ways to accomplish this:
focus on product adhesion
uncover gaps and increase efficiencies to deliver the best customer-centric platform you can to improve product adoption.
Know when and to whom to offer
You don’t want to offer deep discounts to a customer who is likely to pay the full amount for the renewal.
identify customers who are most likely to churn
By engaging them with enticing offers, you can help increase renewal or even increase new revenue.
promote your product
Just because you have a set of loyal customers doesn’t mean you shouldn’t talk to them about your product anymore. You can use social media and email campaigns to offer discounts and convey important information about your product. this will not only help with renewal (and retention), but also with upselling and cross-selling.
engage and nurture your customers
Understand your needs and work toward a mutually beneficial partnership. remember: your success is the success of your customers.