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?
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.
What is the Difference Between Renewal Rate vs. Retention Rate?
Often the terms “renewal rate” and “retention rate” are mistakenly used interchangeably.
The difference between the two concepts is “customer intent”.
The renewal rate measures the customers that actively chose to renew their contract, whereas the retention rate is more related to customers that did not cancel their subscription.
Renewal Rate Formula
The formula for calculating the customer renewal rate is as follows.
As an illustrative example, imagine a SaaS company has 100 customers coming up for renewal at the end of the month, and 90 of those customers decided to extend their subscriptions.
Upon plugging those figures into our formula, we calculate our company’s rate of customer renewals as 90%.
- Customer Renewal Rate = 90 ÷ 100 = .90, or 90%
The renewal rate fluctuates far more widely in the B2C market, as most contracts are priced on a monthly payment structure, such as Spotify and Netflix.
In contrast, the renewal rate can also be calculated by replacing the customer count with the value of each contract.
Renewal Rate Calculator — Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
SaaS Renewal Rate Calculation Example
Suppose a B2C SaaS company offers its customers a monthly subscription plan, where customers have the option to either renew or cancel at the end of each month.
At the start of Month 1, the company has 400,000 customers.
From Month 1 to Month 4, the following new customer and churn rate assumptions will be used.
| Customer Assumptions | Month 1 | Month 2 | Month 3 | Month 4 |
|---|---|---|---|---|
| New Customers (% of Beginning) | 4.5% | 5.0% | 5.5% | 6.0% |
| Churn Rate (% of Beginning) | 3.0% | 2.8% | 2.6% | 2.4% |
In order to complete our customer count schedule, we must multiply the new customer assumption by the beginning customer count to calculate the total number of new customers, i.e. new subscribers.
On the other hand, the churned customers are those that canceled their subscriptions, which is calculated by multiplying our churn rate assumption by the beginning customer count (with a negative sign in front).
With our customer schedule set up, the formula for calculating the number of customer renewals is the beginning customers less the churned customers.
- Number of Customer Renewals = Beginning Customers – Churned Customers
The new customer additions impact our ending customer count but are excluded from the customer renewal metric since their time spent as a subscriber is still insufficient.
The total number of customers up for renewal is straightforward in comparison, as we can just link to the beginning customers, i.e. these customers will have the option to renew or cancel at the end of the month.
Upon inserting our figures into the formula from earlier for each month, we arrive at the following rates.
- Month 1 = 97.0%
- Month 2 = 97.2%
- Month 3 = 97.4%
- Month 4 = 97.6%
From Month 1 to Month 4, our hypothetical company’s renewal rate has increased from 97.0% to 97.6%, reflecting incremental improvements in convincing their customer base to renew their contracts each month.
Everything You Need To Master Financial Modeling
Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks.
Enroll Today
