SaaS Renewal Rate: A Guide for Subscription Businesses - SmartKarrot

SaaS Renewal Rate: A Guide for Subscription Businesses

The best guide to SaaS renewal rate – top metrics, how to improve renewal rates, how to keep your customers, improve customer experience, and more.

SaaS Renewal Rate

Retention is important for any SaaS company. The base for retention is renewals. For any SaaS company, the value is calculated based on the recurring stream of revenue. Renewal in SaaS companies may be hard. SaaS renewal process starts with the very first customer interaction. Every single conversation or customer interaction plays a vital role in customer decision to renew or not. A mere 5% increase in customer retention can lead to 25% increase in company profits. This is the margin of customer retention. This blog deals with everything about SaaS renewal rates. SaaS companies look to generate high revenue from new customers. However, they need to look at renewals primarily. SaaS companies who place importance on high renewals can deliver highest value to customers.

What is SaaS Renewal Rate?

SaaS Renewal Rate is the percentage at which customers renew their subscriptions and extend their relationship with a SaaS company. SaaS renewal rates are measured at the end of the subscription period. Renewal rates show the ability to deliver long-term value to customers. This will help generate revenue.

Customers churn for multiple reasons- it can be poor onboarding, bad fit, wrong pricing, bad support, and other problems. This can create a leaky revenue bucket that reduces and hampers increase in revenue growth. A high renewal rate in SaaS means that customer’s needs are met consistently. Low renewal rates indicate that customers do not get value or feel invested in the product.

Why Should You Measure SaaS Renewal Rate?

There is a need to measure SaaS renewal rates. This is because of the following-

  • Increase Retention
  • Predict Growth
  • Measure Customer Success

How to Calculate SaaS Renewal Rates?

The SaaS renewal rate measures retention over a specific period of time. This time period can be yearly, monthly, or weekly. Retention measurement can expose different reasons why churn happens and when. For example: if renewal rates are measured in the early weeks, you can notice the problems in onboarding. Each metric of SaaS renewal compares the variable renewed against the maximum amount of revenue that could have been renewed. Renewal rates are expressed as a percentage. Renewal rates need to be measured depending on the following-

  • Operations
  • Maturity
  • Goals

Customer Renewal Rate

Customer renewal rate measures the rate of renewal of customers by dividing customers renewed at the end of the subscription against the number of customers that may have renewed. This is expressed as a percentage. 100% customer renewal rate means each and every customer who could renew actually renewed. It cannot be greater than 100%.

Customer Renewal Rate Formula

Who is this method best suited for?

  • Startup SaaS companies
  • Companies with a homogenous customer base
  • Customers with similar contract value, market, and contract terms

Revenue Renewal Rate

Revenue renewal rates or dollar renewal rates is the ratio of revenue renewed measured against total revenue that can be renewed in that period. This bases on the principle that all customers are valuable, but the value is not the same. It is expressed as a percentage. A 100% revenue renewal rate means all renewable amount was renewed.

Revenue Renewal Rate Formula

Revenue renewal rate can be higher than 100% if customers expand their accounts during renewal. This indicates the financial health of the company and shows the ability to grow.

Who is this method best suited for?

  • SaaS businesses who have diverse customers
  • Businesses with different contract values

MRR Renewal Rate

MRR Renewal rate is the revenue renewal rate that is adjusted to a period of one month. It focuses on renewals in a month that helps with consistent tracking and trend monitoring.

MRR Renewal Rate Formula

Who is this method best suited for?

  • For SaaS businesses who depend on monthly subscriptions
  • For startups with monthly revenue targets

Net Renewal Rate (NRR)

Net renewal rate is the percentage of renewable revenue taking expansion revenue into account. It is a result of upsells, cross-sells, and other upgrades against overall revenue. Successful SaaS businesses have renewal rates over 100%.

Net Renewal Rate (NRR) Formula

Who is this method best suited for?

  • For startups where expansion revenue is frequent
  • For SaaS business in a similar function

How to Increase SaaS Renewal Rates

  • To ensure high renewal rates, you can follow some best practices.
  • Allocate responsibility to the right CSMs at the right time
  • Product adoption is key in improving SaaS renewal rates
  • Understand customers by talking to them and learning their features and nurture them
  • Monitor customer health regularly and track their problems
  • Customer Experience needs to become a priority
  • Find out the sticky features- those that are integrated deep that its tough to remove them

Why is SaaS Renewal Rate a Complex Metric

Renewal rate is a vague concept depending on the customer segments. There are multiple data points that can affect how renewal rates are calculated. The questions also vary depending on the industry. For example- how many customers are renewing their contract? What is the rate of renewal after the subscription has lapsed? Length of the contract? Is there any discount? Was the renewal prepaid or credit basis? These questions when taken into calculation make it complex for companies to understand renewal rates properly. All SaaS companies process customer success teams in different ways. Either case, following these best practices will help improve customer stickiness and retention.

What is Considered a Good Renewal Rate

There is no specific number that can be called a good renewal rate. A customer renewal rate of 80 % is considered good, however. It depends on the type of business, customer acquisition costs, customer lifetime value, customer growth rate and such factors. Customer success teams need to work on their strategies to improve retention rates.

Bottom Line

Keeping customers is important- regardless of the business. So customers need to have high levels of product adoption and an improved experience to be with the company. SaaS renewal rate reflects the effectiveness of the customer success team and customer value. It is a mirror of the financial health and growth prospects of the company. Customer success managers need to productively improve customer experience. SaaS renewal rates will give an account of customer health as well. Through personalized renewal conversations, you can keep your customers as much as possible.

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