The renewal rate is a vital parameter to measure the percentage of customers who choose to continue using a product or service at the end of the subscription period. When renewing the subscription, the customer decides whether to do it automatically or manually.
Why Is the Renewal Rate Significant?
The renewal rate measures a company’s ability to retain its existing customers and maintain recurring revenue. This inevitably reduces the cost of customer acquisition and leads to more profitability.
A Forbes survey reveals customer acquisition costs seven times more than retaining existing customers. For SaaS businesses, customer retention and renewal rates are strongly bound by customer relationships, user experience, product engagement, and customer service. The combined effort to rein in customer retention also boosts revenue and profitability.
What Are the Renewal Rate Types & How to Calculate Them?
To calculate your renewal rate, the initial step is to determine the period you want to measure. You can measure renewal rates across different time intervals, such as days, weeks, months, or even years. Each measurement has its significance and value.
Customer renewal rate
Customer renewal rate refers to the percentage of eligible customers who renew their membership or subscription at the end of the subscription period.
This renewal rate is determined using the following formula:
Number of customers that renew
_______________________________________ X 100
Number of customers due for renewal
For example, an organization’s customer renewal rate is 98 if it commenced the year with 100 customers and ended it with 98.
Revenue renewal rate
Revenue renewal is the percentage of renewed revenue from the total amount that could have been restored during the period. This metric evaluates the revenue generated from renewals instead of simply counting the number or percentage of customers who renew their contracts/subscriptions.
The revenue renewal rate is calculated by:
Value of all renewed contracts
—---------------------------------------------- X 100
Total value of contracts eligible for renewal
Here’s an easy example to demonstrate the revenue renewal rate:
Customer X pays $2,500 for an annual subscription, and Customer Y pays $1000 for the same. Suppose Customer Y cancels his $1000 subscription, but Customer A renews theirs, the Revenue renewal rate is calculated as:
($1000/$3,500) X 100% = 33.33%.
Monthly Recurring Revenue Renewal Rate
When we talk about Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) renewals, we measure revenue renewed every month.
The formula used to calculate the MRR revenue rate is:
Renewed MRR
__________________ X 100
Renewable MRR
SaaS businesses can use this formula to track the revenue coming from monthly subscriptions.
For instance, let’s assume the total monthly revenue coming from customers is $12,0000. Three customers whose MRR is $1,500 cancel their subscription. Using the formula, the MRR revenue rate is calculated as 87.5%.
How to Improve SaaS Renewable Rate?
A reasonable SaaS renewal rate indicates good revenue, reliable customer retention, and a profitable pricing strategy. Here are some strategies to maintain an affordable SaaS renewal rate or improve it if it is not up to the mark.
Improve product adoption
Make your platform as user-friendly as possible by plugging any inefficiency gaps and making it more customer-centric.
Identify & address churn
It is important to reach out to customers who lack adequate connection with a product, brand, or company. This helps track customer trends, improve customer retention rates, and identify areas for improvement before churn occurs.
Improve customers’ success
Efforts made to improve customer churn can help enhance every aspect of your SaaS, such as reducing churn, increasing renewals, and expanding revenue. You can achieve better results and grow your business by dedicating time and effort to your customers.
Promote your product
Leverage your social media presence and email communication to promote your products through discounts. You can also use these platforms to update customers about any interesting modifications to your product. This strategy will also help your upselling and cross-selling efforts.
Incentivize your renewal rates
Giving promotional discounts and special pricing can make customers feel like they are getting a great product at a reasonable price. You can increase your renewal rate by offering discounted rates before expiration dates or by giving promotional pricing to recently canceled customers.
Prioritize Renewal Rate Through Customer Retention
Renewal rate is a crucial SaaS metric. To ensure a successful SaaS renewal rate, you should:
- Have a standardized process
- Make renewals easy for customers
- Ensure better customer experience
These insights can improve customer satisfaction and loyalty and increase repeat business.
