Renewal Rate: How to Calculate & Boost It (2023)

Keeping existing customers has a better ROI than acquiring new ones.
That’s why any business should keep a close eye on their renewal rates.

Your what?

Your renewal rate is a crucial metric for any SaaS business that offers subscriptions or recurring services. This powerful metric can help you predict revenue and understand customer behavior for better customer retention.

In this article, we’ll discuss what the renewal rate is, why it’s crucial, and how to calculate it. 

We’ll also explore renewal rate benchmarks, how to boost your renewal rate, and other relevant metrics to look out for. Finally, we’ll get into some burning questions about the metric.

Further Reading

  • Explore 4 actionable tips to improve your number of Monthly Active Users and outperform your competitors. 
  • Want to acquire more happy customers? Check out 5 powerful tips to improve your First Call Resolution Rate
  • Confused how CARR differs from ARR? Read our comprehensive CARR vs. ARR guide in 2023.

This Article Contains:

Let’s get started!

What is Renewal Rate?

Renewal rate is the percentage of customers who renew their subscription to a service or product after their initial purchase. 

It’s a critical metric for determining any subscription-based business model’s sustainability and growth potential. 

What does it signify?
High renewal rates indicate customer loyalty, trust, and satisfaction, while low renewal rates suggest an inability to meet customer needs or deliver value to those churned.

A SaaS business with high renewal rates can more efficiently generate a regular, predictable recurring revenue stream. It also allows them to focus on other income-generating processes like expansion or acquiring a new customer.

What Type of Company Measures Renewal Rate?

Companies in various industries may track renewal rates, including software-as-a-service (SaaS) providers, telecommunications companies, media streaming services, gym memberships, and magazine subscriptions. 

By monitoring renewal rates, these companies can evaluate their customer churn rate, forecast revenue, and identify areas for improvement in their products, services, or customer experience to increase customer satisfaction and retention.

Now that we have a clear idea of the nature of the renewal rate, let’s explore how to measure it.

How to Measure Renewal Rate

Renewal rate is a measure of retention over a specific period. It can be measured weekly, monthly, or annually.

Here’s the average renewal rate formula:

Customer Renewal Rate (%) = ( Number of customers who renew / Total number of customers up for renewal ) * 100

Renewal Rate Example

Here’s a practical example to further illustrate the renewal rate formula:

Let’s say you’re running a streaming service, and you want to calculate your customer renewal rate for March.

In March, you had 1,000 customers who were up for membership renewal, meaning their monthly subscription period was set to expire.

Of those 1,000 customers, 800 chose to renew their membership and continue using your service.

Plugging in the numbers from our example, we get:

  • Customer Renewal Rate (%) = (800 ÷ 1,000) x 100 = 80%

After calculating the renewal rate, you can assess your retention strategies’ effectiveness and identify improvement areas. 

An 80% renewal rate is pretty great, so it means your retention strategies are working. 

But what other information can you glean from this data?
Remember, you can even examine the renewal rate by region, demographic, or any other metric.

For example, if you find that your renewal rate is particularly high among people aged 25-35, you can fine-tune your marketing strategy to appeal to that demographic in particular.

How Often Should You Measure Renewal Rate?

The frequency at which you should measure renewal rates depends on your specific business and industry. 

However, in most cases, it is recommended to measure renewal rates regularly, typically monthly or quarterly.

By monitoring renewal rates, you can identify patterns, understand customer behavior, and take proactive steps to improve customer retention.

Additionally, measuring renewal rates consistently allows you to compare performance over time and track the impact of any changes you make to your products, services, or customer engagement strategies.

With the calculation of the renewal rate in tow, let’s explore why keeping track of this Saas metric is beneficial.

Why is Renewal Rate Important to Your Business

The key to any lasting relationship is knowing your partner’s needs.

Similarly, the subscription renewal rate is crucial in helping you understand your customer base. It enables you to provide stellar customer service and increase customer retention. 

By tracking this metric, you can:

  • Accurately Predict Trends: Renewal rates can help you predict patterns in your business. You can use the data to improve your customer service and prevent customer churn. For example, if you find that your renewal rates are falling month-on-month, you need to step in and make some serious changes by improving things.
  • Forecast Future Revenue: By knowing your subscription renewal rate, you can estimate how much renewal revenue you will generate from your existing customers. It can help you make informed decisions about future investments and expansion plans. 
  • Monitor Customer Satisfaction: Renewal rates can help you monitor customer satisfaction. Afterall, nobody’s going to renew if they’re not satisfied!

Acceptable Ranges For Renewal Rates

According to industry standards, a good renewal rate is at least 80%, while anything lower than 50% is concerning.

Wondering how to reach your renewal rate goals? 
Let’s explore various methods to improve your SaaS renewal rate.

6 Smart Ways to Boost Your Renewal Rate

There are several strategies businesses can use to boost their renewal rates.

Here are a few ways to increase your renewal rate: 

1. Increase Adoption

Product adoption (also called product stickiness) is when an existing customer regularly uses and engages with your app. Increased adoption is an indicator of solid customer satisfaction and loyalty.

To increase the stickiness of your product:

  • Provide a comprehensive onboarding process
  • Add new features regularly
  • Prioritize a seamless customer experience

2. Build on Customer Success

Keeping an eye on customer success can make a big difference. To positively impact your membership retention, you must identify what customer success means for your clients and provide the tools and resources they need to achieve it.

You can provide training, support, or additional features that help your customer base achieve their goals. 

3. Focus on Customer Needs

A customer can only find value in your product if it solves their needs and makes their life easier. Hence, you need to know what they need and how you can provide it.

Analyzing customer feedback and creating a customer success team can help you do so. You can adopt analytics and CRM tools to collect the feedback and data you need to improve and increase your subscription renewal rate.

4. Decrease Payment Failures

To avoid payment failures, ensure your renewal process is reliable and user-friendly. Adopt a subscription billing software that can help you streamline your payment collection. 

Additionally, consider offering multiple payment methods, a more straightforward renewal form, and a sturdy renewal notice to ensure customers know about upcoming renewals.

5. Establish a Customer Renewal Plan

Create a standardized plan for renewals in your SaaS company to ensure every existing customer chooses to continue using your service. 

Your plan should include:

  • How to address the needs and challenges of customers during billing for improved customer experience.
  • Incentives for early customer renewal.
  • Means of communicating with customers throughout the renewal process.

6. Focus On At-risk Customers

By monitoring customer behavior and engagement, you can identify customers at risk of churning and take action to avoid it. Use product usage data to identify these at-risk customers.

This plan could involve providing additional support, incentives, or personalized outreach.

On top of implementing these strategies; you’ll also need to keep track of some pertinent metrics to gain a better perspective.

What Are Other Relevant Metrics to Track Alongside Renewal Rates?

It’s crucial to track additional metrics to gain a comprehensive understanding of your business’s health and growth potential. 

Here are two relevant metrics to track alongside the renewal rate:

  • Customer Lifetime Value (CLV): Measures the total revenue a customer is expected to generate over their lifetime with your business. 

Customer lifetime value and renewal rate are closely related, as a higher renewal rate typically results in a higher CLV, indicating a longer and more profitable relationship with the customer.

CLV = Customer value X Average customer lifespan

  • Expected Customer Lifetime (ECL): Refers to the time a customer is expected to remain a customer with your business. 

Expected customer lifetime and average renewal rate are positively correlated, as a customer who is expected to stay with a company for a more extended period of time is more likely to renew their subscription or contract.

Now, let’s dive deeper and explore some common queries about the renewal rate. 

3 FAQs about Renewal Rate

Here are some valuable answers to common questions about the renewal rate.

1. What are the Differences Between Renewal Rate & Retention Rate?

While these two metrics might seem interchangeable, they’re not.

The difference between the two is that the renewal rate only takes into account customers up for renewal, whereas the retention rate measures the total customer base.

Let’s say the existing customer base at the start period is 1,000.

In May, you had 200 customers up for subscription renewal, and of them, 150 customers renewed.

This means you lost 50 customers and retained a total of 950 customers.

The renewal rate would be: (150/200)*100 = 75%

The retention rate would be: (950/1000)*100 = 95%

2. What are the Different Types of Renewal Rates?

Different renewal rates are used to measure various aspects of customer behavior.

Here are a few renewal rates to keep an eye on:

  • Revenue Renewal Rate: The revenue renewal rate is the ratio of revenue renewed measured against the total amount of potential renewal revenue during a given period.
  • MRR Renewal Rate: MRR renewal rate is the revenue renewal rate normalized to one month. It focuses on recurring revenue due in one month to allow for consistent tracking and trend monitoring.
  • Net Renewal Rate (NRR): The net renewal rate is the percentage of renewable revenue that has been renewed while taking expansion revenue into account. 

3. What Are Some Things to Avoid While Boosting Renewal Rates?

Here are a few practices to avoid:

  • Failing to notify users when their free trial converts to a paid plan.
  • Auto-renewing a monthly subscription without a customer’s consent.
  • Making it difficult to cancel a monthly subscription on purpose.

If customers feel deceived or taken advantage of, they may be less likely to continue using the product or service, leading to a decrease in revenue over time.

Furthermore, negative word-of-mouth can spread quickly in the age of social media, leading to a tarnished reputation and further loss of customers.

Improve Customer Retention With Renewal Rate

The customer renewal rate is a vital metric as it can give you a clear picture of your SaaS company’s ability to retain customers and provide quality. 

Use this guide to ensure that you calculate the renewal rate correctly and leverage the tips we’ve covered to boost your membership renewal. 

But before you can tackle renewal and retention, you’ll need to attract customers to your product.

Need some help getting the word out?
Startup Voyager is a growth agency that can help you gain increased visibility in the crowded world of subscription businesses. At Startup Voyager, we utilize cutting-edge techniques to drive organic traffic to your website, putting you on the path to 10x growth.

About the author

Startup Voyager is a content and SEO agency helping startups in North America and Europe acquire customers with organic traffic. Our founders have appeared in top publications like Entrepreneur, Fast Company, Inc, Huffpost, Lifehacker, etc.