What is and How to Calculate the Renewal Rate: Short Guide

SaaS companies rely heavily on recurring revenue. With recurring revenue, you can predict revenue flows, and work on customer retention. 

To understand annual recurring revenue (ARR) at its core, you must take all its metrics and factors into account. One of its most essential ones is certainly the renewal rate. If you wish to learn how to calculate a renewal rate, how to improve it, and what a good renewal rate is, stay with us. 

What is a Renewal Rate?

The renewal rate shows the percentage at which customers renew their subscriptions to a service or a product within a certain time frame. If it’s high, it indicates a good valuation, and if it’s not, it signals potential problems with the customer support, product, or customer experience in general. Renewal rates are especially important for SaaS companies, as they provide insight into customer satisfaction and loyalty. 

Renewal Rate vs Retention Rate

There is usually confusion about how renewal and retention rates differ, so let’s make things clearer. In the customer success and SaaS fields, both of the given metrics are essential for assessing customer loyalty and business health. 

While the renewal rate measures the percentage of customers who renew their subscriptions within a certain time frame, the retention rate shows the percentage of customers who continue using the product or service over the given time frame.

Therefore, retention rate is a more general metric that helps you understand trends in customer engagement, and satisfaction, while renewal rate is more specific and demonstrates your company’s ability to retain its customers at the point of customer renewals. 

What is a Good Renewal Rate?

A good renewal rate varies depending on the business model and industry. When it comes to SaaS renewal rates, a rate of 85% or higher is considered to be a good one.

Numerous factors affect a customer renewal rate. Besides the most obvious ones, like product value and the quality of customer support, it is noticed that the proactivity and engagement of customer success management also contribute to a better subscription renewal rate. In a competitive industry like SaaS, it is quite difficult to maintain high renewal rates due to greater competition, pressure, and high customer demands. 

If you perform customer segmentation properly, you can better understand and address the unique needs of each segment, as different customer segments often have different renewal rates. With customer segmentation software like Akita, you can perform customer segmentation easily and learn all about each segment so that you can target them at the right time with the right messaging. 

As we provided you with the general SaaS renewal rate benchmark, it is crucial to perceive monitoring and improving renewal rates based on the data as an ongoing process where each unique trait of your business and customer base is taken into account. 

What Has an Influence on Renewal Rates?

Product quality and value are two of the most crucial factors that can affect the number of customer renewals. If your product meets the needs of your new or long-term customers, there is a great chance for a higher SaaS renewal rate. 

As we mentioned, an average SaaS renewal rate is around 85%, but if you climb to 90 and higher, this truly means you have an exceptional product that most of your customers perceive as highly valuable. Another factor that can influence renewal rates is the customer experience. Make sure that every customer has a smooth onboarding process where they can easily understand how to use the product effectively. Also, a user-friendly and easy-to-navigate interface surely helps. 

Most of the customers will simply move on if your customer support is poor. Effective and prompt customer support that resolves customer issues quickly can save customers a lot of time and frustration, which all contribute to a better customer experience. 

Customer success has become one of the essential departments in SaaS lately, as personalized communication and assistance are highly valued by customers. If your customer success team is proactive, competent and customer-centric, that can positively affect renewal rates.

Lastly, one of the most effective practices in SaaS renewal management is pricing. As pricing strategy is a factor that surely influences customer renewal decisions, by having fair prices and flexible contract terms, you are maximizing the chances for renewals. 

How to Calculate a Renewal Rate?

As we already provided you with the renewal rate definition, and the factors that can influence it, the next step is to show you how to calculate the renewal rate. 

Calculating the renewal rate is crucial if you wish to understand your customer retention rates and overall business health.

The first step is to determine the exact time period – monthly, quarterly, or annually. Then, you should count the total number of customers who renewed their subscriptions during the given period and also count the number of up-for-renewal customers. Then, you can use the following renewal rate formula to get the percentage:

Renewal Rate = number of renewals/number of up-for-renewals x 100.

There are two types of renewal rate calculation – customer renewal rate and revenue renewal rate. 

The revenue renewal rate or net renewal rate, takes into account all the revenue retained from existing customers, including cross-sells and upsells, but excludes churned customers. 

Also, there is another term that you’ll encounter when calculating the renewal rate – gross renewal rate, which measures the percentage of revenue you retained from existing customers over a certain time frame without accounting for revenue acquired from upsells or cross-sells. 

Besides the three given metrics, there are a few more crucial SaaS renewal metrics to mention. 

• Expansion revenue
  • The additional revenue is obtained from customers through upsells, cross-sells and upgrades. 
• Churn rate
  • The percentage of customers who stopped using your services. 
• Customer Lifetime Value
  • The expected revenue from a customer over their entire customer journey 

By monitoring and tracking renewal rate metrics and collaborating across teams, you can prepare yourself better for renewal forecasting, which involves predicting the likelihood of customers renewing their subscriptions. This process can help you plan your resources smarter, identify potential churn risks, and set realistic revenue targets. 

Tips to Improve Renewal Rates

So, you calculated your renewal rate, and you are not satisfied with the results. What can you do next? Let us show you how to improve subscription renewal rates by implementing a few effective tips. 

• Invest in customer success
  • Provide all your customers with personalized support, training and resources (like valuable content and help center) to ensure they achieve their goal with the product. 
• Collect feedback
  • Gather customer feedback regularly to understand their satisfaction levels and challenges. Use the given feedback for product and service improvement. 
• Provide outstanding customer support
  • Customer support is one of the crucial factors that influence the customer experience. Therefore, investing in customer support is one of the SaaS renewal best practices. 
• Create a successful SaaS renewal playbook 
  • This playbook should involve understanding your customers’ needs, aligning your product and customer success strategies to those needs, and implementing best practices for improving customer retention. 
• Offer incentives
  • Provide discounts, additional features, or upgrades for those who renew their subscriptions. 
• Facilitate renewal process
  • By simplifying the SaaS renewal process, you are ensuring your customers the stress-free and quick renewal that they are seeking.
• Stay engaged with customers
  • Stay engaged with customers before renewal to check their satisfaction levels and offer additional help if needed. 
• Track and monitor renewal metrics
  • Monitor and assess renewal metrics regularly to identify trends and make better decisions about your renewal strategies. 

Importance of Tracking Renewal Rates

Let’s see why tracking renewal rates is crucial for SaaS companies:

First and foremost, It allows you to better forecast revenue. 

If you create a customer success renewal playbook that comprises all the crucial renewal strategies and goals, you can get a comprehensive plan for improving renewal rates. 

Based on data, you can identify churn patterns quicker and get the information on service and product improvements you can work on.

Conclusion

Understanding how to calculate a renewal rate is crucial for SaaS companies to further measure customer retention. If you calculate a renewal rate properly, you’ll get valuable data that can help you improve your services, products, and, in the end, the customer experience.

Identify areas where there is a need for improvement and, of course, forecast revenue. 

Invest in customer success, strive for perfection, and engage with customers effectively, and you are on a safe path toward ensuring your business’s sustained growth!