One way of valuing a SaaS business is by measuring its recurring revenue. A healthy annual recurring revenue (ARR) depends on new customers and contract renewals. A high renewal rate provides a stable base for growth, making it an important SaaS metric to track.
Renewal rate is the percentage of customers who opt to continue their subscriptions at the end of a subscription period. It is distinct from the customer retention rate, which tells you how many customers are continuing to use your product from the date of signing up for your product. Retention formulas measure more accounts as the contract renewal dates differ for different customers.
Renewal rate calculation allows you to make important sales analyses and predictions, as explained below:
The renewal rate metric is straightforward to calculate. You can calculate it for your customers, revenue, or monthly recurring revenue (MRR).
Customer renewal rate formula (best used for a homogeneous customer base):
Number of customers who renewed their contracts/Number of accounts (customers) up for renewal
The customer renewal rate can never be more than 100%.
Revenue renewal rate formula (best used for a heterogeneous customer base):
Revenue renewed during a time period/Total revenue up for renewal over that time period
MRR renewal rate formula (best used for a heterogeneous customer base):
Renewed MRR/Total renewable MRR each month
You can also include expansion revenue to calculate the net MRR renewal rate.
The revenue renewal rate can be more than 100%.
If you have 200 accounts up for renewal and 10 of them decide to cancel, then you’d have 90 customers continuing their subscriptions.
Customer renewal rate = 190/200 x 100 = 95%
Say make a total of $200,000 from 200 customers annually. But when you lose 10 existing customers, and they accounted for $30,000, your renewal rate would now be:
($200,000-$30,000)/$200,000 x 100 = 85%
Generally, a renewal rate of more than 80% is considered favorable. Some of the most successful SaaS companies have revenue renewal rates of more than 100% when expansion revenue is included.