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SaaS Renewal Rate 101: Definitions, Calculations, and Risks

SaaS Renewal Rate is a measure of customer retention. This SaaS metric is typically expressed as a percentage and can mean different things to different people.

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Team Maxio

May 21, 2019

What is SaaS renewal rate?

SaaS Renewal Rate is a measure of customer retention. This SaaS metric is typically expressed as a percentage and can mean different things to different people. For instance:

  • Customer Renewal Rate is a rate of renewal of customers, typically using a count of customers that canceled and those that did not

  • Revenue Renewal Rate is a rate of renewal of revenue. Unspecified, “revenue” can mean GAAP revenue or a normalized revenue number such as MRR or ARR

  • MRR Renewal Rate is a rate of renewal of MRR, a normalized revenue number assigned to a recurring revenue transaction

Renewal rates can also be calculated using other methods. For instance, you can calculate a renewal rate using a booking number, which would be calculated by dividing the total of actual renewed contracts by the total potential renewing contracts in a subscription period. In this context, the renewal rate is based on the dollar value of renewal bookings divided by the dollar value of all renewing contracts. 

You will also see renewal rate based on a count of contract renewals and cancellations, which may be different from a customer renewal rate calculation for situations where there are or can be multiple contracts per customer.

Renewal rates are complicated

Like certain other SaaS metrics, the renewal rate may appear straightforward, but it can be complicated. A count-based renewal ratio is best used when your contract and customer base are homogeneous, with similar types of clients with similar contract terms, conditions, and prices. With multiple solutions or packages sold to more diverse markets, a renewal rate based on transaction values is more typical.

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%. 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 exactly should you calculate this percentage? Let’s walk through the basics.

The renewal rate formula is:

Renewal Rate = Number of Renewals / Number Eligible for Renewal

To break this down:

Number of Renewals: This is the 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.

For example:

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 = Number of Renewals / Number Eligible for Renewal  

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.

Renewal rate vs. retention rate 

Similar to your renewal rate, your customer retention rate is another key metric that’s linked to the health of your business. And while these metrics are similar, they tell very different stories about the current performance of a SaaS business. 

What do each of these metrics mean, and when should you use them?

Renewal rate definition

As explained previously, the renewal rate metric is the percentage of existing customers who renew their subscriptions out of all those eligible in a given period. It is calculated by dividing total renewals by the total pool of customers up for renewal.

Retention rate definition

Retention rate, on the other hand, takes a longer-term view. It looks at the number of customers lost over an extended cohort period, typically annually. For example, out of all customers gained in Year 1, what percentage are still paying in Year 2?

Similarities  

Both renewal and retention rates aim to quantify customer loyalty and provide recurring revenue visibility, and they both indicate how well a SaaS company achieves subscriber longevity.

Differences

In terms of their differences, the time horizons between these two metrics vary, with renewal rates tracking each billing cycle and retention rates evaluating annually. Additionally, renewal rates only count explicit customer renewals, while retention rates encompass all customers remaining, even those on monthly contracts.

When to use each of these metrics

You’ll want to use renewal rate to closely monitor your SaaS health during every billing period and check if your renewal quotas are being met. 

Then, you can also measure your customer retention rate to plan and forecast for long-term revenue and growth by customer cohort. Together, these metrics will give you a comprehensive view of your product stickiness and customer satisfaction over different time frames.

Renewal rate vs. churn rate

Another important metric related to renewal rate is churn rate. While most SaaS leaders are likely already familiar with what churn rate is, we’ll explain how it ties in with your renewal rate and how these two metrics impact one another.

Churn rate definition

Your churn rate represents the percentage of customers who discontinue their subscriptions or stop paying you during a given timeframe. Unlike renewal or retention SaaS metrics, churn rate focuses explicitly on the customers lost during a specific period.

The relationship between these metrics

Renewal rate and churn rate have an inverse correlation. If your renewal rate goes up, your churn rate tends to go down, and vice versa.

For example, a company with an 80% renewal rate for the year consequently has a 20% churn rate (100% minus the 80% that renewed). If the renewal rate drops next year to 75%, the churn would climb to 25%.

Using them in tandem

While renewal rates emphasize customer retention, churn rates highlight customer losses. Together, they construct a full view of the current health of your customer base. When examining historical cohorts with these metrics, you’ll begin to see visible correlations start to emerge between periods of lagging renewal rates and spikes in your user churn.

Additionally, tracking renewal and churn side-by-side will give you and your teams greater insight into what’s actually causing customers to cancel their subscriptions — whether it’s due to poor customer experience, a pricing issue, lack of new product features and incentives, leaving for a competitor in your space, or going out of business. 

We suggest calculating both churn and renewal rates for each period to give you a holistic understanding of when and why customers are canceling their subscriptions to your SaaS. 

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. Difficulty 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. In order to pinpoint your customers that are truly at risk of canceling their subscriptions, you would need to look beyond basic usage statistics and behavioral data. Instead, SaaS leaders could use predictive modeling to examine large amounts of detailed customer behavior data, and then analyze any traits or usage trends that are predictive of churn.

You could also use a platform like Maxio to study how revenue is trending across your customer cohorts. From here, you’ll be able to identify which customers 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.

While growth is typically the goal for SaaS companies, you should also do your due diligence to achieve balance between your growth targets and your ability to meet the needs of your current and future customers. Otherwise, you run the risk of creating a poor user experience, leading to low renewal rates, increased churn, and poor renewal revenue overall.

This is why setting future targets for support KPIs like response time and case closure is crucial to maintaining customer satisfaction as your company grows. You should also be proactively investing in support assets like a well-documented knowledge base or customer-led community. Then, you can use automated solutions like AI to resolve common support issues and reduce your support ticket volumes.

Incorporating these self-service strategies alongside automations 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.

Additionally, SaaS leaders should regularly assess their subscribers’ willingness-to-pay across different product lines and customer cohorts. Once you have a better idea of what customers are willing to pay for your SaaS, then you can consider raising your prices if needed.

But what should you do if raising your prices isn’t an option?

If you’re under pressure to increase your average revenue per user (ARPU) or contract value, you may consider incorporating upsells and cross-sells. This can be a great way to earn additional expansion revenue without raising prices across your entire customer base.

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 five 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 complex 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:

1. Set your customers’ default settings to auto-renew each term

2. Create visible alerts across accounts providing reminders on upcoming renewal deadlines

3. 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.

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