How to Calculate Your Customer Renewal Rate
Renewal is about a consistent revenue basis. The rate at which your customers extend their relationship with you determines how fast and how far your enterprise can grow. As such, being able to accurately calculate your renewal rate gives you insight into your customer success team’s performance. Customer expectations are higher than ever, and if you can’t deliver lifetime customer value, then a relationship you’ve worked hard to build may just end in churn.
Your customer renewal rate is a measurement of your enterprise’s ability to maintain a customer’s interest and generate long-term revenue. It is vital that you know how to calculate renewal rates and employ strategies that encourage your customers to renew time and time again.
A Guide to Calculating Customer Renewal Rate
Customer renewal rates only make sense within defined periods of time. You can take measurements over weeks, months, quarters, or years. When taken regularly, these measurements help identify trends. You can tell, for instance, how renewals have performed year-over-year or how they track across the breadth of a single year.
To determine your customer renewal rate, use this equation:
Customer Renewal Rate = Number of Accounts that Renewed ÷ Number of Accounts Due for Renewal X 100
So, if you had 44 accounts renew out of an expected 52 accounts, then the result would be 0.84. Multiply that by 100 to get the percentage of customers renewals—in this case, a healthy 84%.
Not all accounts are equal, however, so there will be discrepancies in the dollar value of each. To account for that, you can insert potential and actual dollar values in place of the headcount:
Customer Renewal Rate = Actual Renewal Value ÷ Potential Renewal Value X 100
So, if you got $11,000 from a customer with a potential of $14,000, you would be left with a 79% renewal rate.
An inverse reading of these renewal stats will give you a glimpse of your churn rate. Obviously, if you retained 84% of expected value over a specific time period, you also lost 16%. It’s not a totally accurate reflection of churn since it doesn’t consider accounts that canceled before they were expected to renew, but it does show the close relationship between these metrics.
Understanding Renewal and Churn
There are two possible outcomes once a subscription draws to a close: renewal or churn. In either case, a customer often decides to maintain or end their relationship with you long before the subscription deadline.
Generally speaking, customers will renew if:
- The product has provided ongoing value during the subscription period.
- The customer depends on the product for one or more business use cases.
- The effort or cost of switching services is higher than the value of replacement.
On the other hand, customers will churn if:
- The product has not returned value.
- They need to cut costs.
- The product is no longer needed.
- The product was not fully adopted.
- Better or cheaper alternatives became available.
How to Improve Your Customer Renewal Rate
Improving your renewal rates depends on improving the customer experience, from onboarding through product adoption. Don’t wait until 30 days before the subscription end to start thinking about renewal; rather, keep renewal in mind from the very beginning.
To keep a finger on the pulse of each of your accounts, use a comprehensive customer success platform. Such a platform will help you better capture, organize, and analyze customer data, helping you to optimize every customer engagement.
Then, follow these best practices to encourage customers to renew:
Share Customer Knowledge
Every time your customer engages with your enterprise, they offer insight into the product experience. A customer success platform will allow you to record all these interactions in a central hub, providing a detailed view of the customer journey. This information should be accessible to every member of your team and used to inform every customer engagement.
Prioritize At-Risk Renewals
As your customer success platform gathers data from customer engagements, it can provide an up-to-the-minute snapshot of your customer’s status, called a customer health score. Use this information to proactively target accounts with the lowest customer health scores. The most productive way to boost your renewal rate is to proactively address issues before they lead to churn.
Personalize the Renewal Process
Providing a personalized service inspires customer loyalty. Your messaging during the renewal phase should reflect the unique insight you’ve gained through your customer success platform. Instead of pushing a standard renewal message, mention the number of individuals a customer has managed to onboard, the features they have yet to use, and whether they need any assistance with that new element of the workflow.
Don’t talk to your customer about renewal as the end of a contract. Rather, demonstrate how much there’s still to achieve in the future. Set goals for the coming year and demonstrate how much growth both of you have to look forward to down the road.
The Importance of Customer Renewal Rate
Accurately calculating your customer renewal rate is a forecast for future growth. If your renewal rate is increasing across your accounts, then your customer success engagement is working and the future looks bright. If it is decreasing, then there is likely trouble ahead. In such cases, it’s time to deploy some of the proactive practices listed above. Start using your customer success platform to better share information about your customer so every contact point becomes a rewarding, personalized customer experience.
In the digital age, renewal is your new bottom line. That’s why it is critical to understand how to properly assess your renewal rate and leverage it to improve your customer success efforts.
Totango is here to help you accurately monitor every aspect of the customer journey so you are ready to act when renewal approaches. Request a demo or explore Spark today and start gaining real-time insights into the health of your customer accounts.