Key takeaways
- Renewal rate measures customer retention in a subscription-business model, expressed as a percentage.
- There are multiple ways to calculate renewal rate and can produce very different results, so consistency and clarity in your calculation method are essential.
- Count-based renewal rate works for similar contract sizes, while value-based renewal rate is better when contract sizes vary.
What is SaaS renewal rate?
SaaS renewal rate is a measure of how effectively a company retains customers, expressed as a percentage. Because “renewal rate” can refer to different underlying metrics, it’s important to clarify which type you’re using. Common types include:
- Customer Renewal Rate: Measures how many customers renew versus cancel, based on a simple customer count.
- Revenue Renewal Rate: Measures how much revenue renews. Depending on the company, revenue can refer to GAAP revenue or a normalized revenue number such as MRR or ARR
- MRR Renewal Rate: Specifically measures the rate of renewal of MRR, a normalized revenue number assigned to a recurring revenue transaction.
- Booking Renewal Rate: Calculates based on the dollar value of renewal bookings divided by the dollar value of all renewing contracts.
- Contract Renewal Rate: Measures renewals and cancellations at the contract level, which can differ from customer renewal rate when customers hold multiple contracts.
Understanding which renewal rate calculation you’re using and why, ensures that you’re measuring retention consistently and interpreting the results correctly. This helps teams make better decisions about growth, churn, and customer success.
Why are renewal rates so complicated?
Renewal rate may seem straightforward, but the way you calculate it can lead to very different interpretations. Here’s how the two main approaches differ:
- Count-based renewal rate: Best used when your contract and customer base are homogeneous, with similar types of clients with similar contract terms, conditions, and prices.
- Value-based renewal rate: Uses the transaction values of renewing contracts. Works best for multiple solutions or packages sold to more diverse markets.
Example of count-based vs value-based renewal rate
A simple example illustrates the basic issues with these disparate contracts:
- Customer A has a $10,000 annual subscription
- Customer B has a $100,000 annual subscription
- Customer A cancels, and Customer B renews
By count, the renewal rate is 50% but by value, the renewal rate is 91%.
Following this interesting variation: Customer A cancels and Customer B renews with a 10% price increase. By value, the renewal rate is now 100%.
The more heterogeneous your contracts and customers, the more important it is to understand the renewal rate characteristics by segment. For discussions in the market, a single number might be adequate. As an input to decisions regarding contracts, services, pricing, packaging, marketing, etc. A thorough understanding of the renewal rate characteristics of these segments is critical to being able to optimize your SaaS business.
How to calculate renewal rate
When assessing the financial health of your SaaS business, one of the most important metrics to understand is your renewal rate. But how do you calculate it correctly? Here’s a breakdown.
Formula: Number of Renewals / Number Eligible for Renewal
How the variables work:
- Number of Renewals: Total number of customers from a cohort that renewed their subscriptions during a given time period. This is limited to customers who were actually up for renewal.
- Number Eligible for Renewal: This represents the total pool of customers that were eligible to renew in the period. It does not include new customers added over that time.
Example of renewal rate calculation
Acme SaaS Company has 100 customers up for renewal in Q1. Of that 100, let’s say that only 80 customers renew their contracts during that quarter.
Renewal Rate = 80 / 100
Renewal Rate = 80%
Therefore, Acme SaaS Company has an 80% quarterly renewal rate. The higher the percentage, the better a company is at retaining and generating recurring revenue from its existing client base.
To track renewal rates over time, you would calculate this metric each billing cycle for longer-term trends. However, some companies also examine their renewal rate by different customer cohorts or subscription tiers.
3 common renewal rate challenges
Even SaaS companies with the best customer retention strategies face renewal rate challenges as they scale. Here are some of the most prevalent obstacles across the SaaS space and how you can tackle them head on.
1. Targeting at-risk customers
As SaaS companies scale, it becomes exponentially more difficult to identify customers that are clearly at risk of churn. This is because most surface-level engagement metrics can overlook accounts that actively rely on one niche capability of your product or service.
How to identify churn risk more accurately:
- Look beyond basic usage statistics and surface-level engagement.
- Use predictive modeling to examine detailed customer behavior data.
- Analyze any traits or usage trends that are predictive of churn. You could also use a SaaS reporting platform like Maxio to study how revenue is trending across your customer cohorts.
- Identify customers and cohorts who are canceling their subscriptions or failing to upgrade their subscriptions, indicating a potential risk of churn.
Once you’ve identified which customer cohorts are likely to churn, you can then trigger automated nurture campaigns for these users. This could include offering a special discount, upselling an exclusive feature or module, granting special account credits, or assigning a member of your customer success team to meet with the customer 1:1 and identify their pain points.
2. Sustaining high service levels
As your SaaS company grows, providing excellent customer service only gets harder. More customers mean more customer support tickets, technical bugs, and complaints. And your Customer Success Managers will only get overwhelmed as they try to meet these rising demands.
To avoid poor user experiences, lower renewal rates, and increased churn, SaaS companies should:
- Balance growth targets with support capacity to ensure existing customers continue to receive high-quality service.
- Set support KPIs, such as response time and case resolution goals, to maintain customer satisfaction as your company grows.
- Invest in self-service resources like a well-documented knowledge base or customer-led community.
- Leverage automated solutions like AI to resolve common support issues and reduce your support ticket volumes.
Incorporating these strategies will prevent your large accounts from feeling ignored while freeing up your live support agents to assist your high-value customers that require more time and attention.
3. Price increases backfire
At some point in every SaaS company’s growth journey, there will come a time when pricing needs to be increased. However, these changes aren’t always received well by customers.
While leadership may assume that long-time customers won’t leave due to high switching costs or lack of alternatives, in reality, many customers will try to find a viable alternative solution if they feel that this pricing hike isn’t justified.
To avoid these spikes in customer churn, SaaS providers must align their pricing to value — whether that’s by incorporating a usage-based pricing model or a more complex pricing model that justifies any additional charges users may incur while using your SaaS.
How to improve your SaaS renewal rate
Once you’ve calculated your renewal rate and identified any challenges or shortfalls, you can start taking steps to improve it. But getting more customers to sign up and stick around for your SaaS is easier said than done.
Here are four strategies you can use to achieve a high renewal rate at your company.
1. Strengthen your user onboarding
Developing a seamless user onboarding process sets the tone for strong renewal rates later on. Welcoming your new users helps develop trust between them and your team. Plus, these introductory calls allow your customer success managers to connect one-on-one with your users while educating them on your product’s capabilities which can then be customized to your clients’ individual use cases.
If you don’t have the resources to assign a CSM to each of your new users, you can also consider developing an interactive product tutorial that guides new users through the onboarding process and shows them how to get started using your SaaS. And if video is still too much, your support team can develop help documentation that enables new users to self-serve answers to common support and onboarding questions.
2. Provide ongoing value
One of the pros of SaaS is that you get somewhat predictable cash flow from your users in the form of monthly recurring revenue. The tricky thing is that those same customers expect you to deliver additional value over time — whether that’s through new product offerings, add-ons, integrations, etc. In other words, it’s unlikely that you’ll be able to just set and forget your core offering and expect your users to stick around.
This is why sending out regular product updates, bug fixes, and feature roadmaps to customers on a regular basis is important for preventing risks of churn. But this only works if you are intimately familiar with your customers’ needs and pain points.
Fortunately for you and your team, no one knows what you should be building and improving better than customers themselves. You can frequently solicit user input from your customer base to align your product roadmap to their needs and ensure you’re building a product they’ll want to keep paying for.
3. Create flexible pricing plans
When it comes to pricing, no two customers will feel the same way about it. Some may prefer a flat monthly rate, others may want to be charged based on their product usage, and larger accounts may demand sales-negotiated contracts to meet their specific needs.
The best way to meet your customers’ pricing needs as you scale? You should offer flexible pricing plans. This could mean:
- Offering both annual and monthly subscriptions
- Giving customers discounts for long-term 3-5 year commitments
- Setting up usage-based billing and volume-based pricing for customers with higher usage rates
The good news is that setting up these flexible pricing plans doesn’t have to be difficult. You can use a tool like Maxio to quickly set up and launch automated recurring billing models across your business.
4. Automate renewals
Finally, automating and easing the renewal process itself reduces churn that’s unrelated to product or customer satisfaction. Plus, it’s one of the easiest ways to ensure customers don’t churn by mistake
There’s a couple of quick ways to set this up in your company:
- Set your customers’ default settings to auto-renew each term
- Create visible alerts across accounts providing reminders on upcoming renewal deadlines
- Send helpful email reminders before the renewal date to prompt users to review their subscriptions
Setting up these automatic reminders will give your users one less thing to worry about and increases the odds that they’ll renew their subscriptions.
Track and measure your renewal rate with Maxio
When it comes to identifying a “good renewal rate,” it’s important to keep in mind that these benchmarks vary significantly across software segments based on pricing norms, competitive landscapes, and product criticality in driving intrinsic customer lifetime value. But regardless of these niche dynamics, maintaining higher renewal rates will always bolster your company’s revenues.
Want to keep tabs on how renewals are trending across your customer cohorts? Schedule a demo with Maxio to get started.