In the subscription economy, a high customer renewal rate is a key indicator that your business has a stable base for future growth. Find out how to calculate renewal rates, how to improve subscription renewal rates, and more.
What is a renewal rate?
Put simply, the term ‘renewal rate’ refers to the percentage of your customers who choose to renew their subscriptions at the end of the subscription period. In a sense, it’s the flip-side of customer churn, the rate by which your customers cancel their subscriptions. If you have a high renewal rate, it indicates that your business is more likely to retain your customers’ interest over a long-term period and generate lasting revenue.
How to calculate renewal rates
For businesses in the subscription space, it’s crucial to measure customer renewal rates. Learning how to calculate renewal rates will provide your business with the data you need to spot trends and see potential pitfalls before it’s too late. This will enable you to more accurately predict revenue, retain customers, and gain a more detailed understanding of the health of your business.
So, how do you work out your customer renewal rate? It’s a relatively straightforward process. Here’s a simple renewal rate formula you can use:
(# of customers who renew / # of customers up for renewal) x 100 = Customer renewal rate (%)
For example, if there are 105 customers up for renewal, but 12 decide to cancel, the renewal rate formula would read as follows:
(93 / 105) x 100 = 88.57%
5 tips to improve subscription renewal rates
Once you’ve identified a problem with your customer renewal rate, you should act fast to implement a solution. Here are five best practices for improving renewal rates:
Understand your customers – Gaining a deeper understanding of your customers is an important factor in your ability to retain them. Ask for feedback to find out more about how they use your service, which features they rely on, and what drives their engagement with the service. This can help you create a pricing model that works for your customers and convinces them to renew their subscription.
Identify and target customers who are likely to churn – Gathering data is a necessity for subscription-based businesses. Make use of that data by using it to identify customers who could be about to churn and provide them with targeted offers and deals to convince them to stay. Look at your engagement metrics and focus on customers who haven’t used your service over the past 60-90 days. In addition, it may be a good idea to target customers with a high number of replies to support tickets, as this may indicate that they’re having difficulty with the service and may be about to churn.
Create a ‘sticky’ product experience – Ensuring that your service does what it says and helps customers achieve their goals is a surefire way of boosting customer renewal rates. By building ‘stickiness’ – critical features that customers can’t do without – into your product, you’ll decrease churn and boost renewal rates. So, how do you do this? Consistently improve your product’s main features and add new features that tie your customers to the product.
Make a customer renewal playbook – Implementing a standardised process for improving subscription renewals rates can ensure your users enjoy a consistent customer experience. Make sure that there’s an easy process for reaching out if your customers encounter payment issues and create a mechanism that rewards members who renew early.
Switch to Direct Debit – Finally, it’s important to remember that payment failures are responsible for a high percentage of involuntary churn. Because bank accounts don't expire (unlike debit or credit cards), Direct Debit could help to solve this issue. Failure rates with Direct Debit can be as low as 0.5%, and because it’s a bank-to-bank payment system, you don’t need to worry about lost or expired cards.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.