Often expressed as a percentage, Renewal Rate is simply a measure of retention and can mean different things to different individuals. In SaaS, for instance, this could mean the rate of renewal of customers based on customers that cancelled and those retained. It could also mean renewal of revenue, which includes GAAP revenue and MRR or ARR (a normalized revenue number).
These rates can be calculated using various methods, for instance, a bookings number can be used to calculate the rate of renewal by dividing the total/ actual renewed contracts by all the potential renewing contracts in a particular period. Additionally, we can calculate the rate of renewal based on the actual dollar value or amount of renewal bookings by the total dollar value/ amount of all renewing contracts. This rate can also be viewed based on an actual count of total contract renewals and cancellations, which may differ from a calculation for a rate of renewal for a customer (for cases where there are multiple contracts per single customer).
How to Increase Your Renewal Rate
The Complication with Renewal Rates
Like many other SaaS metrics, the rate of renewal appears straightforward and yet can prove stubborn and complicated. The best use of a count-based renewal ratio is on a homogeneous contract and customer base – with a group of clients with much similar contract terms, prices, and conditions. And with multiple packages or solutions sold to more diverse markets, a rate of renewal based on transaction value is very much typical.
For instance, some fundamental problems with disparate contracts include:
- Customer X has a $15,000 annual subscription
- Customer Y has a $150,000 annual subscription
- Customer X cancels and Customer Y renews
As you may have noticed, by count the rate of renewal is 50%, but by value, the rate of renewal is 91%.
To continue with this example, check out this interesting variation:
Customer X cancels and Customer Y renews but with a price increase of 10%. By value, the rate of renewal will typically be 100%. So the more heterogeneous the customers and contacts, the more critical it is to understand the segment characteristics of renewal rates. While a single number must be sufficient for discussions in the market, an in-depth understanding of the rate of renewal and characteristics of segments is key to optimizing your SaaS business.
Note that you define the rate of renewal metric, including the calculation method, but keep in mind that you are dealing with multiple rates of renewal that need to be examined, including those of life cycle.
Studies have shown that companies that neglect their renewal processes leave massive revenue on the table. Moreover, many companies out these overestimate the actual performance of renewals and subscriptions, and this shortfall is often discovered during quarterly earnings. This is because salespeople care more about bagging new clients than retaining the existing ones. Therefore, whether your main business comes from SaaS offering subscription renewals or renewing software/ hardware maintenance agreements, working around recurring revenue can seem like an easy administrative task, and yet cause you too much headache.
Typically, it takes more than a specialized skill set, multiple metrics, and different tools to close recurring renewal sales. And yet in a majority of businesses, the task of managing renewals is not only a neglected, but also a thankless task. So while it may require distinct practices, a motivated sales team that is fully dedicated to renewals has the capability to elevate your business to the next level.
Why does your business need these skills?
1. By exclusively using a SaaS-based model, 30-40% (or more) of your total revenue may come from recurring revenue.
2. As the industry you operate in migrates to the cloud, your ability to manage recurring revenues becomes a critical/ key differentiator in your business performance.
3. Failure to optimize these process today means you could be leaving a huge amount of money on the table. This comprises revenues that compound over time as long as your loyal customers remain with your business.
What it takes to make it work
A company can employ multiple strategies to optimize recurring revenues. For instance, a simple strategy such as applying best practices has enabled a good number of companies to impact their renewal rates by up to 15% or more. Some of world’s latest technology firms and even some of the industry’s growing and more agile movers have profited from applying best practices.
Measuring SaaS Rates of Renewal
In cloud computing, SaaS metrics are used to measure renewals.
The Four Factors
When you dig into the nitty-gritty of renewals, you’ll find the following four dependent factors at work, influencing the rate of renewals measurement:
1. Timing: Concerns contract renewal. A common challenge involves knowing how to handle a contract when it is renewed – either early or late.
2. Duration: This is the period the renewed contract is supposed to last. For instance, how do you handle a situation whereby a 1-year customer decides to renew for 3 years and in the process receives a multi-year discount for either pre-paying or for the actual contractual commitment?
3. Expansion or shrinkage: How to handle the expansion/ shrinkage of the value of the contract in relation to the initial or original contract? Or how do you handle customers adding more or dropping some products, including increases and decreases in price.
4. The count metric: Note what you would like to count (such as seats, bookings, customers, or ARR) and what it means to count one item versus another.
In a business world where SaaS companies are increasingly trying to market “negative churn” rates as well as renewal rates exceeding 100%, it is worth digging deeper into how you can increase your rates of renewal, gain some insight into the topic, and increase the profitability of your business. The rate of renewal of customers that were retained can be determined as a percentage of the total customers (including those that cancelled.) While this calculation may be simple and straightforward, it can also be frustrating and complicated. By neglecting their renewal processes, companies cal leave huge amounts of revenue on the table. A specialized skill set, multiple metrics, and different tools are required to close renewals sales and increase renewal rates; and yet many businesses view the task of managing renewals as a thankless task worth neglecting.