Customer renewal rate – an introduction
Customer renewal rate is a metric used to measure the percentage of customers who renew their subscription or purchase again from a company. It's a key indicator of customer satisfaction and loyalty and its used by businesses to track the success of retaining customers.
What is customer renewal rate?
Customer renewal rate is the percentage of customers who renew their subscription or purchase from a company within a given period of time. It’s calculated by dividing the number of renewals by the total number of customers and expressing the result as a percentage.
Why is customer renewal rate important?
Why is customer renewal rate valuable and where can you best see that value best applied?
Health of business
Customer renewal rate is important because it can provide insight into the overall health of a business. A high customer renewal rate indicates that customers are satisfied with the products or services offered, and as a result, likely to continue doing business with the company. On the other hand, a low renewal rate may indicate that customers are not satisfied.
Predictive power
Customer renewal rate can serve as a leading indicator of future revenue and growth. A high renewal rate suggests that a significant portion of a company's revenue is recurring and predictable, which can help inform budgeting and forecasting decisions.
Cost savings
Acquiring new customers is often more costly than retaining existing ones. A high customer renewal rate can help a business save money on marketing and sales efforts that would be required to bring in new customers. Additionally, retaining existing customers is more profitable than acquiring new ones because the cost of serving an existing customer is lower than acquiring a new one. So, a high customer renewal rate can lead to greater profitability for the company.
What’s a good customer renewal rate?
A good customer renewal rate varies depending on the industry and the type of product or service offered. Generally, a renewal rate of 80% or higher is considered to be good. However, it's important to benchmark and compare your renewal rate against industry standards and also against your competitors.
You should consider other metrics which are linked to customer renewal rate, for example lifetime value (LTV) is a measure of the total value that a customer will bring you over the course of their lifetime. A high customer renewal rate can contribute to a higher LTV, as it indicates that customers will continue to do business with the company over a longer period of time. Also, a high customer renewal rate could be linked to a good net promoter score (NPS) which measures customer satisfaction and loyalty, meaning satisfied and loyal customers are more likely to renew their subscriptions or purchases.
What does customer renewal rate look like?
How do you calculate customer renewal rate?
The formula to calculate customer renewal rate is:
Customer renewal rate = Renewals / Total customers x 100
The answer is expressed as a percentage. This can be calculated over a period of time as you wish, be it a month or a year.
Customer renewal rate worked example
If 100 customers renew their subscription out of a total of 500 customers, the customer renewal rate would be 20%, calculated like this:
Customer renewal rate = 100 / 500 x 100 = 20%
Conclusion
Customer renewal rate is a key metric for businesses to track, as it provides insight into the satisfaction and loyalty of customers. A high renewal rate indicates that customers are happy with the products or services offered and are likely to continue doing business with the company. Businesses can use this metric to evaluate the effectiveness of their retention efforts and make necessary changes to improve customer satisfaction and loyalty.
