SaaS Renewal Rate - Definition, Calculation, Best Practices
September 29, 2022
In 2022, SaaS is still a relatively new term, especially for those who have been in the business for a long time.
While some claim that SaaS is dead, some others agree to disagree. Yet there is no denying that we are yet to grasp the full idea of SaaS and reach its peak in terms of efficiency and profitability.
Likewise, the metrics and measurements of success associated with SaaS are also up for discussion and are often complicated.
The renewal rate is but one.
And today, we are talking about;
What SaaS renewal is,
Why SaaS renewals are important,
A comparison of renewal rate and retention rate and which one to use when,
How to calculate different types of renewal rates,
What a good renewal rate is for SaaS, and
How SaaS business can improve renewal rates
First, let's start with the definition and then move on to explore the concept deeper.
What Is a SaaS Renewal?
SaaS renewal rate or renewal rate is a metric widely used by SaaS businesses mainly to see a trend of renewal at the end of a subscription period and essentially to monitor and enhance customer and user retention. For different types of businesses, this metric might be measured in different ways; but in any case, it is one of the essential metrics for customer success in all types of SaaS companies.
Just as the definition and tracking of customer retention vary for all SaaS businesses, the way Saas renewal is used depends solely on the company and the operations of the customer success team.
There are different renewal types, from customer renewal rate to revenue renewal rate, all of which we'll look more into in detail below.
Why are SaaS renewals so important?
Though the specificities of customer success strategies of each SaaS company vary quite a lot, customer retention is a vital element of any business model. And renewal rate is one of the best ways of seeing the retention rates of a company's customer base in terms of retention in practice.
Thus, we can name three reasons why any SaaS business should be tracking its related renewal rates.
1- To better understand & enhance customer experience
An informed tracking of renewal rates in Saas businesses can help reveal problems in the customer experience, especially if customers are asked for feedback.
In any case, SaaS renewal rates are known for creating a newfound understanding of and appreciation for UX and CX for customer success managers and other executives alike.
It is a good practice to look for a correlation between drops and rises in renewals and customer experience updates.
2- To develop a detailed understanding of retention
Even without considering the metric's obvious benefits, looking into renewal rates might lead customer success teams as well as founders to find valuable insights and see a better connection between customer retention and other crucial elements of a thriving business.
For example, when used in tandem with other metrics like customer acquisition cost and churn rates, renewal rates might reveal just how beneficial it is to first focus on retaining current customers other than chasing after new ones to acquire.
3- To foresee customer churn rates & upcoming renewals
One of the primary reasons that make the SaaS renewal rate a powerful tool is its capacity to contribute to foreseeing customer behavior and just how long the business can keep happy customers happy.
While customer health scores and customer retention rates are much more reliable metrics in determining the future behavior of users and the percentage of customers likely to churn or upgrade, the renewal rate is one of the best metrics for supporting such calculations and making them more grounded.
Though there are many other reasons that make SaaS renewal a worthwhile factor to factor in, these three are possibly the most common and universal ones.
However, they also call for a correction of mixed terminology.
Let's take a look at the difference between renewal and retention rates.
Renewal Rate vs. Retention Rate - what to use when
In theory, retention and renewal aren't necessarily very different.
However, in practice is when things start to look a little more different and case-specific.
What we know for sure, though, is that the main difference between the two metrics is a matter of user behavior.
A retained customer choosesnot to cancel at a given period of time, usually the duration of the subscription period, while a renewing customer choosesto keep doing business with a company after they are done with the contract term.
Similarly, a decreasing retention rate points directly to a leaky bucket situation, while a decreasing renewal rate might have to do with other factors like customer satisfaction, contract lengths, or the cons of an annual contract.
The real question, however, is when we get to use which.
It is best to look at retention rate when:
✅ Considering the behavior of all customers/users,
✅ Looking into a given period of time,
✅ Tracking more general data (customer satisfaction, customer lifetime value, customer loyalty, etc.)
It is best to look at the renewal rate when:
✅ Considering more specific cases, though also entire customer bases at times,
✅ Looking into the end of a renewal period,
✅ Tracking more specific data (customer renewal rate, net renewal rate, monthly recurring revenue renewal rate, etc.)
Knowing all this in theory, we can now move on to the practice part of the SaaS renewal rate. Let's talk about how we can calculate each type of renewal.
How Is SaaS Renewal Calculated?
As mentioned above, there is not just one formula for a fixed way of measuring renewal.
There are several cases in which renewal rate calculation might be necessary, all of which fitting a specific use case and/or business strategy.
Here are some common renewal types and how they are calculated.
How to calculate customer renewal rate
Customer renewal rate is quite the simple calculation and perhaps the most similar to retention rate; all there is to do is divide the number of customers who renewed at the end of a time period (almost always subscription period) by the number of customers who were up for renewal. Then, by multiplying the outcome by 100, we get our customer renewal rate.
So, let's give this a try ourselves.
Let's say we have 100 customers up for renewal, and we end up with 80 that actually renew. This means our customer renewal rate is 80%, which is right on the border of what we generally consider okay in SaaS.
It is also important to keep in mind that not all customers have the exact same lifetime value; losing a customer with an annual subscription value of $150,000 might be more devastating than losing three customers with $50,000 each.
And yet, with the customer renewal rate, you might never know.
Here's a better option for times like that.
How to calculate revenue renewal rate
Contract renewals are tough, especially on your sales team. But some accounts bring in so much that you just need to keep up customer relationships and get that renewal.
Revenue renewal rate is the metric that shows you if you've been good at keeping up with the big ballers.
Simply by adapting the customer renewal rate to revenue growth, dividing the total renewed dollar value by the total renewable dollar value and multiplying that by 100 will give you how much was brought in through the renewal process.
Let's take the same four customers; for example, the total dollar expected at 100% renewal being $300,000, if everyone decides to renew, you get a 100% revenue renewal rate.
But there is more.
You can actually go above 100% in revenue renewal rate, for instance, if a customer wants to upgrade their plan. In fact, it is great for the financial health of a company to go over 100% with this one metric.
How to calculate MRR renewal rate
MRR renewal rate is also directly related to the cash flow of renewals; however, it works to oversee the renewal revenue on a monthly basis which contributes to a more sophisticated tracking of customer journeys and gives actionable insight constantly.
To calculate the MRR renewal rate, all there is to do is divide the renewed MRR by the total renewable MRR and multiply the outcome by 100.
Once again, drawing upon the prior example, let's say that the annual $150,000 customer, along with the two $50,000 customers renewed while one of the latter decided to churn at the end of the subscription period. This means that we were getting $12,500 from the big account and around 4,200 from the smaller accounts.
Which makes our MRR renewal rate for the month the $50,000 customer decided to cancel something around 83%.
Considering that MRR renewal rates can also go above 100%, this result means barely hanging on. No disaster, but a push is required for sure.
And how do we know what is good and what is not when it comes to renewal rates? Let's take a look.
What is a good renewal rate for SaaS?
While the measurement of a 'good' renewal rate also depends on the type of calculation we use and the criteria we take into account based on the specific SaaS company, we can say that, generally, there is a redline and a safe zone in renewal rates.
When the rate goes up to 100% at max, 80% is considered a good renewal rate. However, when it can go up and beyond, like in revenue-related calculations, anything below 80% might be a dangerous place to be.
On the bright side, if your MRR or revenue renewal rate is above 100%, you can consider your business financially healthy.
And what must a business do to make sure they stay above the mark? Here are some tips.
6 Effective Ways to Improve SaaS Renewals
Let's just remember first that there is no set and fixed way of ensuring success, especially when it is SaaS.
Every business is unique and has equally unique customers who have unique needs.
Still, some universally working tricks that anyone can try can work out fine for you too. Let's give them a quick look.
Improve user experience
The number one rule of getting users to stick around and keep renewing is, of course, to keep the product interesting.
If the user experience is not on par, no customer can be obliged to stay.
So, if you are encountering serious decreases or looking for a leap, the best first reaction is to go ahead and take a look at the product itself. There might just be some problems that need checking.
Fixed everything about your product's UX? You think it's good to go and get everyone to renew?
What about the onboarding UX?
86% of customers will pay more for a better customer onboarding experience. And that includes renewing their subscriptions as well. Moreover, better onboarding has a great effect on long-term retention and customer acquisition as well.
SaaS Renewal Rate - Definition, Calculation, Best Practices
Offer perfect customer support/service
One thing that is almost as important as the product itself is definitely the customer service and support.
Because however simple or easy to navigate a product might be, there will always be some sort of issue. And when a business is not eligible to solve the issue quickly and effectively enough, the trust of the customer is as good as gone.
Considering the length of a contract period for contracting businesses, a customer stuck in an annual contract might be the biggest detractor you'll ever see.
The most dangerous thing to assume about a customer base is that they will stick around forever. Taking renewals for granted might become the main reason why a SaaS business gets low renewal rates.
To avoid such a mistake, it is important to continuously remind customers that renewing has its perks. Even in the event that you can't offer much, an email to ask the users to renew that points out the benefits can work just as fine.
For example, Glassdoor does this pretty well.
Glassdoor lets users get unlimited access by contributing to the Glassdoor community, which makes their authority higher while also getting users actively using the platform.
Smooth out the renewal process
When working on the customer journey for renewals, the last thing any business would want to do is make things harder for the customers. The easier it is to pay, the better.
So, many different products and brands have been coming up with different ways to smooth out the renewal process. One of these is Netflix.
If you've ever had any problems with Netflix payment, you are likely to have received a message similar to this:
Because there are buttons directing users to the payment page directly inside the email itself, the renewal process is fairly smooth.
Go back to square one
Renewal rates are quite similar to retention rates when it comes down to planning a strategy and reevaluating the strategy. If one solution doesn't work, it is best to go back to square one.
Since renewals might be as complexly intertwined with other factors as retention, they can be treated the same in this manner.
So, if your attempts to increase your SaaS renewal rate aren't fruitful, the best strategy is to regroup and refocus. There are likely many other solutions you can try out.
To Wrap Up
Renewal of customers is hardly a new topic in business.
However, for SaaS businesses, SaaS renewal rates have become more and more critical with the constant rise of subscription-based products and services.
In the midst of such a shift in business, it is best to know what the SaaS renewal rate is, how to measure it, and how to enhance it. Hopefully, this article will be all you need.