Customer renewal rate (sometimes called retention rate) and churn rate are some of the most important metrics for SaaS teams to track. This article will compare and contrast the two metrics, renewal rate vs churn, giving their significance in the business and how to Calculate them.
Your renewal rate is the percentage of customers who renew their subscription with your company after their initial contract expires. Churn, on the other hand, is the percentage of customers who cancel their subscription within a given period of time.
Renewal Rate vs Churn Rate
Customer retention/renewal and customer churn rates are Two of the most important metrics for any SaaS team. By tracking these numbers, you can gauge whether your customers are happy with your product, if it is delivering a high-quality experience, and if the features you have implemented are the right ones.
Let’s take a closer look at these key metrics, renewal rate vs churn.
The Difference between Churn Rates and Retention/Renewal Rates
Churn rate refers to the percentage of customers who sign up but then leave within a certain time. customer retention rate is the percentage that customers stay with you after signing up.
Simply put, churn rates are bad because they mean you’re losing customers. The renewal rates are good because you’re keeping customers.
A high customer renewal rate and low customer churn rate have three main benefits.
First, you are likely to inqur new customer acquisition costs.
You need to spend $100 on advertising to get one customer who will pay you $50 per month. This customer must stay with you for at most 2 months to break even, and 3 months to make profit. You’ve just lost $50 If the customer leaves after one month.
Low churn and high renewal rates are two other signs that your customers are satisfied with your product.
This means that you have identified a market need and are successfully filling it. It’s up to you now to innovate so that you don’t lose the edge over potential competitors who enter the market.
High customer renewal rate can help you predict your future revenues. This is crucial when you are looking to expand your team, increase your ad budget, or enhance your product or feature suite.
A high renewal rate will allow you to feel confident that money will continue flowing in while you invest in the future of your business.
All of these reasons are why you should be keeping track of your churn and renewal rates.
Although it may seem obvious, your retention rate is the most important metric for customer retention.
To Determine Churn and Retention Rate, you should track the following metrics:
These metrics are important to know when you prepare a retention rate and churn report.
- Number of new customers who joined the company in the last month.
- Number of new customers that were added in the past year.
- Number of customers who cancel after the first 30 days.
- Number of customers who cancel after the first one year.
- Average number of months a customer is a customer before they cancel.
If you lock customers into annual contracts, which is common in enterprise SaaS, don’t worry if customers cancel before the end.
To determine your SaaS churn rate, however, you should offer a free trial of your SaaS business for a month before you lock a customer into an annually contract.
How to Calculate the retention rate Formula
It is simple to calculate your customer retention rate (also known as renewal rate).
First, determine the time period that you are interested in.
If you offer your services on an ongoing basis, it makes sense to consider both your monthly retention rate and your overall annual retention rate.
If you offer services only on an annual basis, you can just calculate your annual retention rate.
To calculate your customer retention rates, you will need to simply determine the percentage who have kept their account for the time period you are looking at.
Let’s say, for example, that you brought in 1000 customers in May and 50 of them cancelled their accounts before the month ended. This would mean you retained 950 customers.
95% of 1000 is 950, which means that your monthly customer retention rate for May is 95%.
What is a Good retention rate?
You can look at industry averages to find out what a good customer retention ratio is.
The average monthly churn rate of SaaS companies is between 3-8% and 92%, which would indicate that the average retention rate should be between 92-97%.
We also know that the average annual churn rate is between 32-50% and 50-68%.
Nevertheless, it is best to not compare yourself with the industry average.
Calculating Churn Rates
You should look at two types of customer-churn rates: voluntary churn or involuntary.
Voluntary churn refers to the number of people who unsubscribe from a product or service for their own reasons, such as because they are unhappy with it or don’t need it anymore.
Involuntary churn refers to people who are not subscribed due to payment failure. A churned customer can be a lost customer. You want to prevent this from happening.
It all starts with understanding your churn rate and how many customers are being lost.
The easiest way to Calculate your customer’s churn rate using the basic churn calculation is:
Number of customers who have left / total number of customers x 100.
If you had 1000 customers over a period of time and 50 of them quit without renewing their subscriptions, your churn rate would be 5%. 50 divided by 1000 equals 0.05. Multiply that number by 100 to get 5%.
You can calculate your churn rates on a monthly basis, quarterly and/or annually, depending on how long you have subscription agreements.
You’ll want to consider not only the customer churn percentage but also the monthly recurring revenues (MRR) and annual recurring revenues (ARR\) lost due churn. This is your revenue churn.
This will allow you to get a better understanding about how net revenue churn impacts your bottom line and why even a low percentage like 5% could result in losing thousands of dollars per month.
Let’s suppose you sell a monthly subscription for $100 per month.
You can make $100,000 a month If you sign up 1,000 new customers every month.
your revenue churn rate will be 5% if 50 of those new customers don’t sign up at the end of each month, as we discussed previously. This is a great percentage. Five percent is great. This means that you are retaining 95% your customers!
If you lose 50 customers who each generate $100 in revenue, then you are losing $5,000 per month in MRR.
You might be thinking, “$5,000 isn’t so bad if you have $95,000 going into the second month.”
It is worth working hard to improve even a 5% rate of churn. You could potentially save thousands of dollars If you can move the needle by 1-2%
It is important to not get complacent, even If your churn rates are high.
What is a Good Churn Rate?
SaaS businesses have an average monthly churn of 3-8% and an average annual churn of 32-50%.
It’s important to make sure your product is as good as possible in order to avoid losing revenue.
Ask for feedback from customers consistently. after a month of usage, survey them to gauge their feelings. then send another survey after a few more months to see if they have any further feedback.
If you are aware that you have a lot of churn at a particular point in your customer journey. If you notice a lot of churn during month 2, you will want to find out why. You can Use feedback surveys and reach out directly to customers to find out what’s happening so you can fix it.
Remember to keep innovating. One day you might have a high retention rate, and the next day a competitor disrupts your market and suddenly everyone leaves your company to join the new company.
Although you cannot always predict a disruptive competitor, you can set up customer loyalty programs to retain loyal customers in the unlikely event that they do enter the market.
A strong customer loyalty program can reduce churn and improve retention. This could be as simple as having a personal account team or sending quarterly gifts to customers.
It is equally important to invest in maintaining your existing customers as it is in signing new customers.
How do you stack up?
Now that you are able to Calculate your retention rate vs churn rate at the most basic levels, how do you compare?
Are you currently within or above industry averages?
What plan can you and the product analytics manager devise to increase data-drivenness, reduce churn and increase retention?
Here’s a tip: You can do both by focusing on customer satisfaction.
Conclusion: Renewal Rate vs Churn
Your customer renewal rate is the percentage of customers who renew their subscription with your company after their initial contract expires. Churn, on the other hand, is the percentage of customers who cancel their subscription within a given period of time. Both renewal rate vs churn metrics are important to track, but your customer renewal rate is more important.