As a business owner, it’s important to know how to calculate renewal rate. This number can give you valuable insights into the health of your business and help you make decisions about where to allocate resources.

So how to calculate renewal rate? It’s actually pretty simple.

 

What is a renewal rate?

In business, the term “renewal rate” refers to the percentage of customers who renew their subscriptions and extend their relationships with the company. It is calculated at the end of each subscription period when customers are eligible for renewal.

the renewal rate is a measure of a company’s ability to generate revenue and provide long-term value for its customers.

Customers can churn for many reasons due to the low switching costs. Customers expect more from their service providers than ever before. A high renewal rate indicates that customers are receiving consistent service. A low renewal rate indicates an inability to satisfy customer needs and deliver value to those who churn.

How to calculate renewal rate

the renewal rate can be measured over a period of time, such as weekly, monthly, or over a long period of time. It is possible to measure retention over different periods and get valuable information about how customers churn.

To identify problems with onboarding, it is possible to measure the renewal rate in the first weeks after customers sign up.

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You can calculate renewal rate in many contexts and for different variables such as number of customers, revenue, number of seats, licenses, etc.

Each metric measures the amount of the variable that was renewed versus the maximum amount that could be renewed. The maturity, operations, and goals of a SaaS company will determine the type of renewal rate or variable to be measured. renewal rates are usually expressed in percentages.

The purpose of the renewal rate metric

the renewal rate is a historical metric that may be used to identify a downward trend in renewals. If you only track aggregate churn or retention, the downward trend could be obscured. It is easier to spot a pattern if you only track the five customers that churn out one hundred customers versus the five customers that churn out one thousand customers.

Your account management and customer support teams will also benefit from organizing your renewals by month. These teams can have a better understanding of the upcoming renewals and historical renewal trends. Each team can prepare for future renewal discussions and/or potential customer growth opportunities.

How to calculate a dollar-based renewal rate

The dollar-based renewal rate shows the percentage of renewal revenue compared to the total revenue up for renewal during a given period. To calculate the dollar-based renewal rate, take the total revenue in a given period and divide it by the revenue that has expired.

For example, if you had $140,000 in Renewal Bookings in Q2 and $150,000 in revenue, your dollar-based renewal rate is $140,000 / $150,000 = 93%.

 

How to calculate the SaaS renewal rate?

The SaaS renewal rate measures retention over a certain time period. This can be a yearly, monthly, weekly, or annual period. Different reasons for churn can be revealed by retention measurement.

If the renewal rate is measured in the first weeks, you will notice problems with onboarding. Each metric of SaaS renewal compares the variable that was renewed to the maximum revenue that could be renewed.

renewal rates can be expressed as a percentage. The following factors will affect how renewal rates are measured:

• Operation
• Maturity
• Goals

To calculate the renewal rate, consider the following questions:

• How many customers are renewing their contracts for your lowest-priced product or plan?
• What about the higher-priced product?
• How many people renew their subscriptions after it expires?
• Is the contract’s value increasing or decreasing?
• What was the length of the renewed contract?
• Is the renewal valid for the current period? Or was it prepaid for a longer period? If so, was there a discount?

It looks something like this after you have factored in these questions:

Customer Y purchases 100 seats of product B at $1300 per year. This transaction takes place on the 2nd January 2020. The contract stipulates that the price can’t rise by more than 5% per year. the same customer renews his contract on January 1, 2021. He now buys 120 seats for $1300 per year. He signs a prepaid contract for five years, which gives him a 16% discount.

It’s not so simple anymore.

This is how real-world renewal rates look in SaaS companies. Different customer success teams may have different ways to process the same data. These questions can make the analysis more complicated but the results can be rewarding.

The importance of renewal rate in a SaaS Business

It costs five times as much to acquire new customers as it does to retain an existing client. Click To Tweet

Customer retention should be a primary focus area for a customer success manager (CSM).

We also know that renewal rates are useful in revealing purchase patterns. It helps to predict revenue growth and retention by capturing trends.

You might notice that one group of your customers renews more than the other. You might try to optimize their response by cross-selling or upselling.

You might also consider revising your product pricing, packaging, or value proposition for customers who aren’t renewing as often.

You can make the most of what you find and take steps to improve customer satisfaction for your company.

The customer turnover is closely tied to the renewal rate. You can improve customer retention by focusing on renewal rates and churn rates. Click To Tweet

Conclusion

It is important to keep customers happy, regardless of what business you are in. Customers need to have high levels in product adoption and a better experience with the company. the renewal rate reflects the effectiveness of customer service teams and customer value.

It is also a reflection of the company’s financial health and growth prospects. Customer success managers must improve the customer experience, and knowing how to calculate renewal rate can make that happen. You can retain your customers by having personalized renewal conversations.