Retaining existing customers is much easier (and cheaper) than finding new ones. There’s a 60-70% chance of selling to an existing customer. On the contrary, the chance of closing a sale is just 5-20% with new customers. That’s why monitoring and improving your SaaS renewal rates is essential.
In this article, we’ll explore what SaaS renewal rates are and how to calculate them. We’ll also provide renewal rate benchmarks and steps to improve your renewal results.
SaaS renewal rate is the percentage of customer accounts and percentage of customer revenue that you maintain over a period of time (typically one year). The metric provides insights into whether your customers value your software and have a positive customer experience. It can also be affected by factors outside your control—like economic downturns.
A high renewal rate indicates a solid product-market fit. It proves your product is sticky, solving a real problem and adding value to your customers.
Conversely, low renewal rates could mean your company is losing customers fasten than you can replace them. You might have to pivot your customer service strategy, expand product features or lower pricing to retain at-risk customers.
The renewal rate is often considered the other side of the churn rate, which refers to the percentage of customers who don’t renew their subscriptions at the end of their contract.
1. Customer Renewal Rate: It’s the percentage of customer logos that renew. Understanding customer renewal rates is important because they tell you if you satisfy your customer base enough to keep them coming back for more. Even a slight jump in renewals can have a massive impact on your bottom line.
2. Revenue Renewal Rate: It's the percentage of revenue that is renewed relative to customer revenue that is up for renewal. Measuring renewal rate by revenue can give you a more accurate measure of your company’s financial health since not every customer is worth the same amount.
3. Net Revenue Retention: It's the percentage of renewal revenue + expansion revenue relative to customer revenue that is up for renewal. Expansions are the reason why most successful SaaS companies have renewal rates over 100%.
How do you know what a healthy renewal rate is for your SaaS company? Understanding that a “good” renewal rate for one company might be terrible for another is imperative. Worse, comparing renewal rates across different markets and sectors will leave you tangled in confusing statistics and contradicting studies.
Renewal rates depend on product quality, your SaaS pricing model, and customer service. Economic conditions and contract terms also play a role. You must consider all these factors before analyzing and comparing renewal rates.
A healthy customer renewal rate is considered above 90% for successful SaaS companies. Although the exact number might vary depending on your industry, pricing, and product. Your Net Revenue Retention rate (NRR) should be higher than 100% if you aim to be a successful SaaS company. 100%+ NRR happens due to negative churn from expansion revenue and upselling. Additionally, higher renewal rates correlate with higher net retention. The average industry benchmark for SaaS NRR is 102%.
While all these are a good rule of thumb, context matters. For instance, it's obvious to see a downfall in renewal rates during a market downturn. Grasp how different elements affecting renewals interact for a nuanced view of your business's renewal dynamics.
This leads to our next question: how do you measure renewal rates?
These are the most widely used renewal rate formulas.
The first formula is a simple division.
Customer renewal rate = Number of customers who renewed subscription / Number of customers up for renewal * 100
Let’s say you have 100 accounts up for renewal, and 10 of them decide to cancel—that means 90 customers would continue their subscriptions, giving you a customer renewal rate of 90% (90/100*100).
It’s also worth noting that the customer renewal rate can’t ever go above 100%. The most customers you’ll ever see renew subscriptions are all of them.
The second method is the percentage of revenue renewed divided by the entire amount of renewable revenue during a set time period.
Revenue renewal rate = [Dollar value of renewal revenue / Dollar value of renewable revenue] x 100
Let’s say you’re bringing in $200,000 in revenue from your 100 customers yearly. The same ten customers decide not to renew, losing $50,000 of renewable revenue. That makes your revenue renewal rate only 75% (150,000/200,000*100), significantly lower than the customer renewal rate of 90%.
The third method is similar to the one above, but factors in expansion revenue from existing customers that renewed.
NRRl rate = [Dollar value of renewal revenue + expansion revenue / Dollar value of renewable revenue] x 100
Let’s say 10 customers churn to bring your renewable revenue from $200,000 to $150,000. But the existing 90 customers add $75,000 in expansion revenue. This makes your NRR 112.5% (150,000 + 75,000/200,000*100).
A count-based (customer) renewal ratio is best when your contract and customer base are similar. This means that you have similar types of clients with similar contract terms, conditions, and prices.
On the contrary, renewal rates based on transaction values are more typical when your contracts and customers are heterogeneous. All types and sizes can use the renewal rate formula based on churn.
Remember always to define the renewal rate metric and the calculation method. And when doing so, bear in mind that a variety of renewal rates should be examined.
Monitoring renewals is essential for all SaaS companies. Additionally, when you have multiple solutions or packages sold to diverse markets, it is more important to understand the renewal rate. Understanding different segments' renewal rate characteristics enables you to make crucial decisions regarding contracts, services, pricing, packaging, marketing, etc.
Here are some more reasons to track renewal rates:
Renewal rates help give you clear visibility of your company’s financial health. Regularly tracking them enables you to spot anomalies ahead of time.
You can forecast how much revenue you can expect to produce during future weeks, months, and years when you have clear visibility into renewals. Accurate projections mean less wasted spend on marketing operations. And hence, decreased costs.
Renewals have a direct relationship with retention. An excellent renewal rate means your customers are happy, thus improving overall retention.
Continuously decreasing renewals and increasing churn can become a silent business killer. You need effective renewal strategies to win more renewal and expansion deals. Some common strategies for improving the SaaS renewal rate include:
A standardized SaaS renewal playbook ensures an efficient renewal process across customers and situations. The playbook helps you mitigate risks by spotting issues early on. It also enables you to scale effectively without sacrificing quality or customer satisfaction.
You can also offer your customers discounts or rewards to renew their contracts. Incentives are powerful motivators. They encourage customers to continue their contracts. An incentive should not necessarily be a monetary discount. It can be longer contract terms, better payment terms, access to more features, etc.
Customers are more likely to churn when you have an unclear renewal process. They don't renew their contracts when they have less clarity about their deals, what they’re getting, and how things are changing.
A smooth and easy renewal process minimizes friction and delays. Ideally, you should set up automatic renewals from the start. This can involve providing a seamless renewal platform. You can also automate customer information input to save the time and effort required for renewal.
Customers will look for a cheaper alternative if you price your product is too high. They might view your product as a commodity if you're priced too low. Find a balance that works best for your business. And don't forget to watch what the competition is doing.
To boost your renewal rates, customers should repeatedly return to your product. It should be incorporated into their daily lives and routines. Sticky products are more likely to generate and maintain customer loyalty, translating into more renewals.
In the SaaS world, churn is an unpleasant reality. And very often, non-renewals are shaped by frustrating buying experiences, poor communication, and an overwhelming number of options to consider. About 95% of technology buyers prefer a fully digital experience for their expansion purchase.
Renewal automation might not be a silver bullet to improve renewal rates, but they’re the closest thing to it. Cacheflow helps your Finance and RevOps teams by automating renewal work. Clearly see which accounts are up for renewal and which products, prices and changes they’re making to their contral. Enable Cacheflows auto-renewal feature to go full auto-pilot mode.
Book a personalized demo with our team and see for yourself.
