What is SaaS Renewal Rate?
Renewal Rate is measure of retention. Renewal rate is expressed as a percentage. Renewal Rate can mean different things to different people. For instance:
- Customer Renewal Rate is a rate of renewal of customers, typically using a count of customers that cancelled and those that did not
- Revenue Renewal Rate is a rate of renewal of revenue. Unspecified, “revenue” can mean GAAP revenue or a normalized revenue number such as MRR or ARR
- MRR Renewal Rate is a rate of renewal of MRR, a normalized revenue number assigned to a recurring revenue transaction
Renewal rates can also be calculated using other methods. For instance, you can calculate a renewal rate using a bookings number, which would be calculated dividing the total of actual renewed contracts by the total potential renewing contracts in a period. Renewal rate is based on the dollar value of renewal bookings divided by the dollar value of all renewing contracts. You will also see renewal rate based on a count of contract renewals and cancellations, which may be different from a customer renewal rate calculation for situations where there are or can be multiple contracts per customer.
Renewal Rates are Complicated
Like certain other SaaS metrics, renewal rate appears straightforward, but it can be complicated. A count-based renewal ratio is best used when your contract and customer base is homogeneous, with similar types of clients with similar contract terms, conditions, and prices. With multiple solutions or packages sold to more diverse markets, a renewal rate based on transaction values is more typical.
A simple example illustrates the basic issues with disparate contracts:
- Customer A has a $10,000 annual subscription
- Customer B has a $100,000 annual subscription
- Customer A cancels and Customer B renews
By count, the renewal rate is 50%. By value, the renewal rate is 91%
Follow this interesting variation: Customer A cancels and Customer B renews with a 10% price increase. By value, the renewal rate is now 100%.
The more heterogeneous your contracts and customers, the more important it is to understand the renewal rate characteristics by segments. For discussions in the market, a single number might be adequate. As an input to decisions regarding contracts, services, pricing, packaging, marketing, etc., a thorough understanding of the renewal rate characteristics of segments is critical to being able to optimize your SaaS business.
Remember, you define the renewal rate metric and the method of calculation, and when doing so, keep in mind that you likely have not one, but a variety of renewal rates that should be examined, including life cycle renewal rates.
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Want to learn more about ARR, MRR, churn and other key metrics? We cover that and more.