When it comes to understanding your customers, renewal and retention rates are two of the most important metrics. But what’s the difference between retention rates vs renewal rates?
I remember when I first started my business. I was so focused on acquiring new customers that I didn’t even think about retaining or renewing them. A few months in, my sales began to plateau. I realized I needed to start thinking about customer retention. Since then, I’ve learned that there is a big difference between retention and renewal rates.
The renewal rate is simply how many of your customers come back and purchase from you again after their initial purchase has ended. The retention rate is a bit more complex. It takes into account how long they stay engaged with your product or service before making another purchase.
This blog post will explain the real difference between retention vs renewal rates.
Retention vs Renewal Rates
Retention typically refers to the keeping of customers while renewal generally connotes the restoration or continuation of something.
In business, customer retention is often cited as a key metric because it costs five times as much to attract a new customer than it does to retain an existing one.
What is Customer Retention?
Retaining your customers is a continuous process. By focusing on your customers’ needs and satisfaction, you can ensure that they remain loyal to your brand.
Businesses should focus on retaining their customers by keeping them engaged. There are steps a business can take to ensure this, such as focusing on keeping the customer interested in the product.
To maximize your company’s profits, all stages of the customer lifecycle need to be carefully managed.
Three stages affect customer retention: onboarding, adoption, and renewal. Each stage requires a different strategy, and this guide outlines best practices for each.
These stages are designed to help you integrate best practices for your customers’ onboarding, grow their adoption of the product, and renew their relationships with your company.
By following the best practices for each stage, you can ensure that your customers have a positive experience with your product from start to finish. From onboarding to renewal, we’ll help you keep your customers happy and coming back for more. Let’s get started!
Why You Should Focus on Customer Retention
Retaining customers is important for a number of reasons. First, it’s more cost-effective to retain a customer than to acquire a new one. Second, retaining your customers allows you to generate recurring revenue and referrals from them.
It costs five times as much to acquire new customers as it does to retain existing ones. So, it’s smart to focus your efforts on keeping customers happy.
Since existing customers already know the value that your product or service provides, they trust your company and are more willing to purchase from you. This saves you money as you don’t need to convince them of the value of your business.
As a business, it is important to focus on customer retention to create long-term loyalty. This is because new customers require more effort to persuade them that your brand and product are trustworthy and offer value. By improving customer retention rates, you will also be making your marketing investment more efficient.
Compared to marketing methods such as advertising, referral strategies such as word of mouth and online reviews cost you nothing more than the time and energy it takes to treat your customers well.
Happy customers lead to more business. When your customers are happy, they come back for more and tell their friends. This is better than traditional forms of marketing and search engine optimization because it comes from a more trusted, personal place.
Customer loyalty can complement acquisition. By focusing on retaining customers, you can generate referrals.
It’s important to focus on customer retention because if your customers are satisfied with your brand, they’re more likely to generate referrals. On the other hand, if they’re not satisfied, they may spread negative word of mouth, which can hurt your business.
This also means that if you aren’t keeping current clients happy, you’ll lose potential ones as well.
Not adopting a retention strategy is like shooting yourself in the foot.
What is Customer Renewal Rate?
The customer renewal rate is the percentage of customers who renew their contract with the company in the form of a subscription or membership.
It is an indicator of how successful a business will be in the future.
This metric is a critical measure of a company’s ability to generate long-term value. A strong value proposition is essential for any company looking to create lasting relationships with its customers.
An 80%+ retention rate is considered very good and means that the company is doing well at keeping customers.
All companies aim to increase their retention rates or the percentage of customers that stay with them.
How to Calculate Customer Renewal Rate
Calculating a customer’s retention rate is flexible. A company can calculate the number based on whatever factors it deems important.
However, there are two common ways of calculating this metric: customer count and revenue.
1. Customer Count
A simple method for estimating the retention rate of customers is to count the number of customers who renew their contracts.
It is the ratio of the number of customers who renewed their contracts to the total number of customers who could potentially have renewed their contracts.
The customer count method is best suited for companies that have a homogenous client base. These are companies that sell the same product to all of their clients, or where the variation in price between their different clientele is relatively low.
This method of measuring retention can be inaccurate if a company’s customers come from a wide range of backgrounds.
2. Revenue
The customer retention rate is the ratio of actual customer renewals to potential client renewals.
This approach is better suited to companies with a diverse customer base.
By understanding the differences between types of customers and their needs, a business can be better positioned to serve them.
Some customers may have a small contract while others have an extremely long one. In such cases, the monetary value of the customer is more relevant than how many years they’ve been a customer.
How to Calculate Renewal Rate?
The renewal rate is the percentage of customers that stay with your company over a given period. It can be calculated over weeks, months, or years.
By measuring retention rates over different periods, businesses can gain valuable insights into when customers are most likely to churn and why. For example, by measuring renewal rates during the first few weeks after customers subscribe, businesses can identify issues with their onboarding process.
Calculating renewal rates can be done in different ways, such as by several clients, total revenue, no of seats and or license, etc.
Each measure compares the total amount of renewals against the maximum amount of subscriptions that the business could have had. The type of subscription renewability to be calculated depends on a business’s current stage, operational model, and business goals.
To calculate the customer renewal rate, divide the number of customers that renewed at the end of their subscription period against the number of customers that could potentially have renewed.
A 100% customer retention rate is when every customer who could have renewed did so. A retention rate of 100% means that no customers were lost.
This calculation method is appropriate for startups with a homogeneous client base where customers have very similar needs and contracts. As the clientele becomes more diverse, the calculation for customer retention rates can become inaccurate.
Not all clients are equal. The amount of money they renew is relative to how much they’re worth. The ratio between the amount of money they renew and the total amount they paid is called the revenue renewal rate.
Revenue Renewal Rate = dollar amount of renewed contracts divided by the total dollar amount of contracts that are up for renewal * 100.
The total revenue generated from existing customers can be greater than the total new customers added during the same period. The revenue growth rate is an indicator of the company’s financial strength and its ability to grow its customer base.
The revenue renewal rate is an important metric for SaaS businesses to track. This is because it provides insight into the company’s ability to generate and grow revenue in the future. It is especially useful for businesses that deliver multiple solutions to diverse customers with different contract values, as it can help identify which customers are most important to the financial health of the business.
This is because some customers have larger contracts with the company than others, which affects their importance to the business.
The MRR renewal rate is a metric that measures the percentage of monthly recurring revenue that is renewed each month.
To calculate your MRR renewal rate, simply take your total monthly recurring revenue and divide it by the number of customers you have at the beginning of the month.
For example, if you have 100 customers and your total monthly recurring revenue is $10,000, then your MRR renewal rate would be 10%.
The MRR is a metric that normalizes the revenue from monthly recurring subscriptions to a monthly period. This allows for consistent tracking of trends and monitoring of growth.
The Net Renewal Rate (NRR) is a metric used to measure customer retention.
This is the formula for calculating the NRR:
The Gross Renewal Rate is the percentage of your existing customers that renew their contracts or subscriptions during a specific period without including benefits from expansion revenue or price increases.
Here is the formula for calculating GRR:
Renewal Rate vs Retention Rate
Customer retention and renewal rate are two terms that are very often confused. While they are similar, they are not the same.
The retention rate is the percentage of customers who stayed with you over a certain period.
It determines how many customers were successfully kept by a company, whether by automatic renewals or active subscriptions.
The calculation of the retention rate only takes into account customers who were actually up for renewing their subscription. It does not take into account any customer who chose not to.
Conclusion
Overall, retention vs renewal rates are both important metrics to track when it comes to understanding your customers. However, the key difference between them is that retention rate takes into account not only whether someone purchases from you again, but also how long they stay engaged with your product or service before making another purchase. So if you want to get a complete picture of your customer base, be sure to keep an eye on both retention and renewal rates.
