What Is SaaS Renewal Rate?
Renewal rate is a metric to measure the percentage of customers renewing subscriptions when their contracts end. A high renewal rate means existing customers value the products and repose their faith in their SaaS providers.
How Renewal, Retention & Churn Are Interlinked
Retention, on the other hand, is a broader topic, going beyond simple renewals. It indicates the number of customers who have stayed with a SaaS company for a considerable period. Customer retention is continuous, culminating in a positive customer experience, contract renewals and long-term customer loyalty. However, customers can leave during onboarding or adoption if the ease of operations and customer experience are less than satisfactory.
If a five-year-old SaaS company has managed to onboard 500 customers over the years and all of them are still with the company, the retention rate will be 100%. Therefore, retention rate means the percentage of customers who have stayed for a certain period and renewed their subscription throughout.
Both retention and renewal rates are critical for SaaS companies as they generate revenues with minimum CAC. In contrast, a company’s churn rate means the loss of customers/revenue at any point before the subscription period ends. An increase in churn rate indicates gaps in customer retention and a drop in the renewal rate.
All About A Good Customer Renewal Rate & How To Calculate It
Calculating customer renewal rate is easy when one determines the percentage of customers staying with a SaaS company for a period – say, a month, a quarter, or a year. Divide the number of customers opting for renewal by the total number of customers eligible for renewal and then multiply it by 100 to get the percentage.
For example, if a SaaS company has 50 accounts, out of which three have cancelled subscriptions, 47 customers are willing to continue with the company. Therefore, the customer renewal rate will be 47/50 x 100 = 94%
Understandably, this cannot exceed 100%, implying that all eligible customers have renewed their subscriptions.
One can also calculate the renewal rate by revenue, number of licences, or other parameters. For revenue-based calculation, one should compare the total amount derived from renewals with the maximum amount obtainable from all contracts. Therefore,
Revenue renewal rate = Value of all renewed contracts/Value of total contracts eligible for renewal x 100
A customer renewal rate of more than 80% is generally considered good, although the definition varies depending on the industry, pricing and operational model. To assess the quality of the renewal rate, it is crucial to benchmark all parameters against industry standards and competitors.
How SaaS Companies Can Boost Customer Renewal Rate
- Develop a user-friendly onboarding process for a fulfilling experience.
- Use CRM tools to identify user trends and provide targeted assistance.
- Identify and re-engage with customers who seldom connect personally to help them realise a product’s full value.
- Get feedback to cement relationships and inform customers about product improvements.
- Offer discounts and special pricing as customers near the subscription end.
- Encourage recently cancelled subscriptions to opt for renewal.
- Share customer success stories to show how similar users have benefited from the product to increase its perceived value.