What is the Renewal Rate?
The Renewal Rate measures the proportion of customers who opt to renew and extend their contracts at the end of a subscription period.
SaaS and subscription-oriented companies that possess higher renewal rates with minimal churn generate more predictable, recurring revenue, all else being equal.
How to Calculate Renewal Rate (Step-by-Step)
The renewal rate tracks the rate at which a company’s customers actively renew their subscriptions, rather than cancel.
A SaaS or subscription-based company’s renewal rate represents the percentage of customers that chose to renew their subscriptions at the end of each membership cycle.
The term “cycle” refers to the date when a customer can either extend their subscription or end it.
The renewal rate matters because it is a practical indicator of the potential for a company to retain its paid customers and therefore generate long-term recurring revenue.
- High Renewal Rate → More Recurring Revenue
- Low Renewal Rate → Less Recurring Revenue
Companies seeking financial stability strive to improve their renewal rate — in fact, many make it one of their top priorities.
The longer a customer continues to renew their subscription, the more incremental revenue and the more profitable the company becomes because there is less spending required on new customer acquisitions.
In practice, it is important to set up customer cohorts based on the end date of each customer’s contract, i.e. the date at which the subscription can either be renewed or canceled.
The concept of customer renewals is the inverse of customer churn, i.e. churned customers are those that decided not to renew their subscriptions.
If a customer were to churn, not only does the company lose the revenue from the churned customer, but it must also incur more costs to acquire a new subscriber to maintain its current revenue level.