Renewal Rate Guide: What It Is And What It Means For Your Company (+63 Examples)

There is no perfect SaaS product.

Nobody can develop a piece of software that’s so good, people never switch away to another competitor. In effect, some churn (losing customers) is always unavoidable.

But how well are you keeping track of it? How much do you know about which customers are choosing to leave, and which are choosing to renew their contracts? That “renewal rate” is a gold mine for your analytics.

In this post, you’ll learn what to pay attention to for maintaining the best and most up-to-date analysis of your renewal rate that you can – and all about the benefits of doing so for your business and churn rate.

The Definition of Renewal Rate

The renewal rate is the amount of something that gets renewed divided by the number of things that had a chance to renew.

That’s pretty vague! But it’s vague for a reason. You can measure the renewal rate with many different data points.

Most often, renewal rate is measured in subscriptions. Suppose you are onboarding 100 customers whose subscriptions expire in May, and 90 of them end up renewing that same month. Therefore, you have a 90% subscription renewal rate!

Obviously, you’re not limited to subscriptions. You could also measure dollars, customers (sometimes an enterprise is buying two subscriptions at once) or really any other metric that you can think of.

If your product is divided into tiers, you can and should measure the renewal rates of each tier. Higher-priced tiers, for instance, might have better renewal rates because the customers have decided it’s a solid investment each month.

Be Granular… Analyzing Customer Success

Like so many other financial concepts, renewal rate is deceptively simple. To draw any real conclusions from it, you’ve got to run that same calculation multiple times across different demographics. Track where you get high renewal rates.

How many of the people on the lowest tier renew each month? How about the most expensive tier? Do many people tend to let their subscriptions lapse and then renew later on? In which time period do they usually make a contract renewal?

For instance, by looking at different tier renewal rates, you might find out that one tier ends up renewing more consistently than another tier. That could reflect that your more expensive tier might seem appealing at first, but after a couple of cycles people realize that it’s not really worth it. For better customer success, it might be time to readjust your product pricing!

How Much Difference Does it Make?

Simply looking at percentages might make it seem like there’s not a big difference between two months. Could that really be true?

Have a look at a hypothetical Group A and Group B – maybe they’re two different geographical regions or separated by some other demographic difference. Group A has a 90% renewal rate and Group B has a 95% renewal rate.  What does that mean for you?

Believe it or not, Group B apparently likes your product twice as much!

To get to this conclusion, we have to look at the other side of the equation. With Group A, ten percent of your customer base fail to renew every month, while just 5% of Group B’s customers don’t renew.

At scale, this has huge ramifications. You can spend half as much on Group B advertising as you can on Group A, and assuming people sign up with both groups at the same rate, it takes twice as long with Group A for you to get the same number of average customers per month.

SaaS Renewal Rate and Retention Rate

These two words may seem like the same thing up front, but there’s a subtle psychological difference that actually speaks volumes about how the customer perceives your product.

Customer retention is when your customer chooses not to cancel. Plenty of people are in automatic billing, as you know.

They want to “set it and forget it,” and not have to think about paying their bill again. They continue using your product and continue paying for it.

Customer renewal rate is when they make the conscious decision to pay for your product again once their lifecycle is over.

A customer who renews is thus in theory even more satisfied than a customer who just doesn’t cancel, because when they weren’t paying anymore, they decided not to go find another competitor but to start paying again.

This little distinction means that you need to be aware of the people who are “renewing” every month because they’re locked into a contract. That’s not really an accurate measure of who likes your product so much every billing cycle that they’ll sign up again.

Analyze and Conquer

By watching your renewal rate closely across many different tiers of service or groups of existing customers, you’ll be able to quickly spot unexpected changes.

Maybe a new competitor jumps onto the scene and offers a very tempting way to switch over to their product – that might only get on your radar when people leave your company in droves.

In general, you want an overall renewal rate of upwards of 80% for new customers – and it’s not uncommon for software companies to enjoy 90% or higher if they end up integrating well into the user’s ecosystem.

And whether your renewal rate is top-tier or still needing work, it can be a good indicator of the health of your revenue predictions. Pulling several months or years of renewal rate data can show you how accurate your previous revenue projections really were, because after all it’s the renewals that drive your ultimate earnings.

Since net revenue retention is closely related to renewal rate, here are 63 examples of net revenue retention from private B2B SaaS companies.

63 Examples of Net Revenue Retention and Annual Recurring Revenue (ARR) from Private B2B SaaS Businesses

Conclusion

As you might have guessed, it all really comes down to collecting data.

Many SaaS companies, especially those being bootstrapped by one or two founders, just don’t have this data available because it takes work to go through every renewal and projection, not to mention back-calculating whatever discounts and promos might have been offered.

Hopefully, though, this article has shown you how renewal rate is one of the core metrics in SaaS finance. It’s common sense, really – a high renewal rate means that your customers are satisfied with the product that you’re creating and therefore place a high value on your product.

The more data you collect about the value your customers place on your product, the better prepared you’ll be to make tweaks in the future – and enjoy consistent growth because of it!

Author:

Yassir Sahnoun is the founder of YassirSahnoun.com. He helps SaaS companies like Castbox and FluentU attract sales using content strategy, copywriting, blogging, email marketing, & more. If you want to up your content marketing game, you can schedule a free discovery call with Yassir by clicking here.