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SaaS Renewal Rate

What is SaaS renewal rate?

SaaS renewal rate is a relevant part of the bigger and larger SaaS customer retention process. In the SaaS world, a renewed customer is the one who purposely chose your product over others. Engaged and passionate users should be a goal to whom every SaaS company aspires.

Different types of renewal rates

SaaS renewal rate can refer to any metric that a company prioritizes to see its business retention efforts. In other words, there are three different methods to calculate your renewal rate: Customer renewal rate, Revenue rate, and Monthly Recurring Revenue also known as- MRR renewal rate. So division is based on what renewal rate metric your company considers the most important.

How to calculate SaaS renewal rates

If your SaaS company prioritizes the customer method, then this is the right formula for you:

  • Customer renewal rate = number of renewed customers/ total number of customers x 100 

Similar to the first method you need to divide revenue from renewed users with total possible revenue and multiplied it with 100:

  • Revenue renewal rate = revenue from renewed customers/total possible amount to be renewed x 100

However, if you have different SaaS pricing models calculating the renewal rate for a sheer number then it is not a good idea at all. That number will not reflect on how good your business is doing compared to the previous period. This becomes more clear with a simple example:

Let’s say your customer Josh subscribed for your standard plan of $20.000, and Taylor who subscribed for a premium plan of $70.000. 

  • Josh – $ 20.000 annual subscription
  • Taylor – $ 70.000 annual subscription

So if Josh churns (cancels) his subscription your renewal rate would be 50%. But compared with a value that rate is just more than 20%. 

Due to the difference in pricing models, not all customers are equal. Therefore, the renewal rate calculation is helpful if various variables are taken into account. Therefore,  calculating the same pricing models is much more significant. 

  • You have 50 clients in standard subscription; 30 of them renewal while 20 churns. Your renewal rate, both by count and value, would be 60%., while the SaaS churn rate is 40%.

Lastly, the MRR rate. Formula is more complicated than ones for customer and revenue rate.  The first part of the equation is accomplished revenue from renewed monthly  customers. The second part is the highest possible revenue from all renewed customers. Two parts need to be divided and obtained number needs to be multiplied by 100:

  •  MRR renewal rate = (MRR per customer x number of renewed customers / MRR per customer x total number of potential renewed customers) x 100

Conclusion

Perhaps the most crucial thing to know is your customers’ expectations. Your company then needs to align those expectations with what your product can offer to them. Only that way can you hope to boost life cycle renewal rates. The best renewal rate for customers that you can expect is 100%, while revenue and MMR renewal rates need to be above 100%.