Renewal rate

What is the renewal rate?

The Renewal Rate calculates the percentage of consumers who decide to prolong their membership and renew their subscriptions. Everything else being constant, SaaS and subscription-based businesses with greater renewal rates and lower churn provide more dependable recurring income.

Even though it’s more of a historical indicator, the renewal rate may be able to detect a beginning decline in renewals. When churn and retention are simply tracked on an overall basis, the negative trend could be hidden. In contrast to five customers quitting out of 1,000 total customers, it is far simpler to see a trend when five customers depart out of 100 during a certain time period.

Both account management and customer success teams gain from structuring the renewals of a business on monthly or quarterly basis. These teams may acquire advance knowledge about impending renewals by month and past patterns in renewals. The team can get ready for forthcoming talks about renewals and/or prospective client growth prospects.

One may counter that the renewal rate is overly general and outdated since a single month’s worth of renewed clients is a composite of several consumers. Use additional SaaS indicators like upsell rate and propensity to renew to increase the renewal rate’s potency and predictability.

Renewal rate formula

The following equation may be used to determine the customer renewal rate.

Let’s understand it further in detail.

How to measure the renewal rate

The renewal rate of a SaaS or subscription-based business is the proportion of users who choose to continue using the service at the conclusion of each membership cycle. The “cycle” is the time frame after which a user may renew or cancel their membership.

The end date of each user’s contract, or the time when the subscription may be renewed or terminated, should be used in practice to group customers into cohorts.

Businesses looking to stabilize their financial situation work to increase their renewal rate. Many consider it to be among their primary objectives. The renewal rate is important because it is a useful measure of a business’s ability to keep its paying members and hence provide long-term recurring income. More recurring revenue results from a high renewal rate, while less recurring revenue results from a low renewal rate.

Because less money has to be spent on acquiring new customers, the longer a client keeps renewing their membership, the more additional income is generated and the more lucrative the business becomes.

User renewals are the opposite of customer churn, which refers to consumers who choose not to renew their memberships. In addition to losing the money from a churned client, a firm that experiences customer churn must also spend additional expenses to get a new subscriber in order to retain its existing level of revenue.

Let’s understand calculating the renewal rate using the formula with an example.

Renewal rate example

Consider XYZ, a SaaS provider, has 100 clients whose subscriptions are available for renewal at the end of the cycle. Ninety of these clients choose to renew their memberships.

Let’s enter those numbers in the formula:

Renewal Rate (in percentage) = Number of Customer who already renewed ÷ Total Number of Customers who are required to renew x 100

Here,
Number of Customer who already renewed = 90
Total Number of Customers who are required to renew = 100
Therefore, the customer renewal rate = 90 / 100 x 100 = 90%

In the B2C industry, where most contracts have a monthly payment structure like Netflix or Apple music, the renewal rate varies much more considerably. Instead than using the number of customers, use the value of each contract to compute the renewal rate.

Let’s take another example:

Consider a scenario where UVW, a B2C SaaS firm, provides its clients a monthly subscription plan with the choice to renew or terminate at the end of each month. The business has 400,000 clients as of the beginning of a month. Customers have increased by 4.5%, and the churn rate is 3%. Let’s figure out the renewal rate.

Renewal Rate (in percentage) = Number of Customer who already renewed ÷ Total Number of Customers who are required to renew x 100

Here,
the number of customer who already renewer = Customers at the beginning of the month – Churned customers

Customers at the beginning of the month = Total Number of Customers who are required to renew =400,000
Churned customers = 3% of 400,000 = 12,000

Therefore, Renewal rate = 388,000 / 400,000 x 100 = 97%