Definition: what is renewal rate?
There are a few possible interpretations of Renewal Rate. Often the term is interpreted as recurring revenue, customer renewals or retention rate. However, the renewal rate for subscription models is easy to explain. Unlike the retention rate, for example, this rate does not generally measure existing customers in comparison to new customers. Specifically, it is the percentage of customers who renew their contract after the subscription expires. Consequently, this means: The higher the renewal rate, the more likely the company is to achieve its long-term revenue targets.
For which offers is the Renewal Rate particularly suitable?
As mentioned above, it is a very important metric that should be relevant for all subscription models. Determining the optimal value for the Customer Renewal Rate is therefore highly dependent on the service offered and the market in which it operates. This metric is very sensitive to factors such as economic stability and the emergence of new competitors. Ideally, the renewal rate should be above 80% – this is the value usually achieved by SaaS companies.
No matter where the value lies, this metric should always be part of a company’s financial view. After all, it provides stability and predictability to Monthly Recurring Revenue (MRR). Knowing what the customer renewal rate is every week or every two weeks allows you to think of strategies that will deliver results in the same month.
Renewal Rate Calculation
How is the renewal rate calculated?
There are two ways to make the calculation, one with reference to the contract renewal and one according to the monetary value. To calculate the rate based on contracts, the equation should be as follows:
Formula for calculating renewal rate by contract.
If the customer renewal rate is to be calculated on a basis in terms of cash flow, the following equation applies:
Formula for calculating renewal rate based on cash flow:
*for the period
Tips for increasing customer loyalty in the subscription business.
In order to significantly increase the renewal rate, some strategies can be taken. The following measures should be considered:
- Target group-specific offer creation: Read the customer’s wish and plan actions that are targeted to each user profile. To do this, simply strategically use the data the company has from the user’s registrations and activity.
- Identify cancellations and unsubscribes: Low-interacting users tend to cancel more easily because they perceive the value of the service to be low. To encourage engagement, the company needs to be in frequent contact with users, use various forms of notification, and/or conduct frequent satisfaction surveys. This way, churn can be kept lower.
- Offer discounts: Plan targeted discounts, such as for an annual subscription. Also, the company must provide offers for a defined period of time, starting before the end of the contract.
- Discover brand or service ambassadors: Knowing who your most engaged and satisfied subscribers are, also called promoters, can help you understand what makes your subscription model stand out. Then, when you interact with a terminating customer, or detractor you can finally draw attention to the benefits perceived by satisfied customers. You could also use promoters as brand ambassadors, as some of them may have even built a social media reach to match.
Conclusion: renewal rate is an important metric used to predict future growth
The customer renewal rate is easy to calculate: Simply divide the number of customers/contracts renewing at the end of the specified period by the total number of customers/contracts scheduled for renewal, then multiply that number by 100. In a successful subscription business, the rate needs to be high enough that the entire business is on a growth path, either in total number of customers or measured by revenue. It is a metric that can measure the long-term relationship between the success of a subscription model.