Renewal Rate: 15 Tactical Ideas To Improve And A Calculator

Every business grows in just three ways:

1. New paid subscribers
2. ARPU (Average Revenue Per User)
3. Retention

What Is Renewal Rate?

Renewal rate is the rate at which existing customers renew their subscriptions or choose to transact with you again. It's also a good measure of customer loyalty and satisfaction. And falls into the third bucket.

A terrible renewal rate with users that crash and burn is going to make life much harder for your marketing engine.

Net Customer Renewal Rate

Net Customer Renewal Rate = (Number of customers at end of period - New customers acquired during the period) / Number of customers at start of period

This formula measures the proportion of customers you've retained, considering both churn and any new customers you've acquired.

Gross Customer Renewal Rate

Gross Customer Renewal Rate = (Number of customers at start of period - Number of customers lost during the period) / Number of customers at start of period

This formula focuses purely on retention, measuring the proportion of your original customers that you've managed to keep.

Both of these rates are typically expressed as percentages. A rate of 100% would indicate perfect retention, while anything below represents some level of churn.

Visualize All Your Retention Metrics in 1-Click for Free

Get a free, visual analysis of your churn metrics and understand how your retention compares to other companies.

• Gross and new churn rates by date.
• Involuntary and voluntary churn rates.
• Revenue vs logo churn.
• Retention cohort analysis.
• New vs. old churn.
• Churn cake charts.

Inherent Renewal Rates

Industries have an inherent renewal rate. Some have high renewals like liquor or life insurance companies where users don't easily churn.

While, impulse purchases or products with low switching costs have lower renewal rates.

The good news is that renewal rates can be improved over time for most industries.

Evaluating Renewal Rates

When evaluating renewal rates, you need to look at a few things:

• Is the rate healthy or unhealthy?
• When do people turn off the auto-renew?
  • For subscription businesses, this is easier to calculate. Is it the first month? Second year? Where's the drop off the highest?
  • For transactional businesses with one-time purchases, it's a bit tricker. You would need to identify the natural frequency of use of the product, and see if people come back within that time frame to use. For example, if it's a car wash service, you know people would need to get their car washes done twice a month. What % of people come back in that timeframe?

Look at this example from Moz, the SEO company. They measured churn rate in the 1st and 2nd months.

How To Increase Renewal Rates

Beyond the obvious recommendations like improve your product, offer more customer support, here's a list of lesser known ways to improve renewal rate.

Product Ideas

• Leverage network effects to solve retention and acquisition issues. As more people join, the product should become more valuable.
• Go multi-product earlier in your journey to make the product stickier and increase LTV. This is a risky move though.

Organizational Ideas

Make solving for renewal rates a priority. Keep it out of the backlog and assign at least one person to focus specifically on this issue. Mixpanel's Series B pitch deck that helped them raise $800M+ had churn as a focus.

Payment Ideas

• Set smart default renewal options: For example, banks typically set fixed deposits to auto-renew at maturity, with an option for users to disable this feature if desired.
• Incentivize card-linked trials: Offer extended trial periods to users who provide payment card information upfront.
• Encourage auto-renewal with incentives: Provide discounts or special offers to users who opt for auto-renewal. Display in-app reminders to encourage people who've opted out to opt back in.
• Encourage users to save a backup payment card. This reduces failed renewals due to expired or declined primary cards.
• Develop a one-click renewal system to minimize friction. Netflix, known for its industry-leading 93% renewal rate, has a simple renewal process. Amazon Prime Video and Hulu follow with 75% and 64% renewal rates, respectively.

Use A Plug-And-Play Software

The most impactful way to improve renewal rates is with Churnkey's Payment Recovery Suite.

We built Churnkey to solve a problem that we ourselves had: automating customer retention processes for subscription businesses.

We had two key requirements. The first requirement was a no-code tool that would allow us to test new retention strategies quickly. The second was a user-friendly experience for our customers.

None of the products on the market could meet these requirements, so we built our own.

Today, Churnkey offers support for both voluntary and involuntary churn prevention as well as deep analytics so you can understand the root causes of your customer churn.

Behavioral Psychology Ideas

• Make people feel good about their purchase. That's what Wikipedia does after the donation is made.
• You also want to convert one-time purchasers to subscribing customers, as long as the LTV is higher.

The recurring donations segment is growing fast for Wikipedia.

Outreach Ideas

• Reach out to users via email and SMS when natural frequency is nearing or is past due. Keep an eye out on how many people unsubscribe to monitor as a trade-off metric until you find the optimum messaging frequency.
• Let users set their own natural frequency of use. Do they want it every month or every 6 months? Amazon offers this and so do DTC brands like Olipop.
• Email from different senders. And email to different users (the admin and team members on an account) if relevant.
• Send an email if the card on file has expired prior to the renewal date, alerting users of an upcoming transaction.

How Important Are Renewal Rates?

Let's take a look at two companies: Company A and Company B.

Company A acquires 5X the number of users compared to Company B. But renewal rates are much lower.

Even after acquiring 5X more customers, Company B doesn't perform any better. They both end up with 500 customers at the end of Year 1.

Look what happens to the ARR when Company B improves its renewal rate. Doubling the renewal rates, doubles the ARR.

Even better if Company B can expand users and increase their net dollar retention!

Prosumer/Consumer Business Are More Difficult

B2C businesses that serve consumers or prosumers have a much harder time with renewal rates compared to B2B businesses. As Casey Winters writes,

1. Churn is higher. Consumers aren't rational.
2. It's much harder to build a habit loop around your product. Predicting who will churn is harder.
3. The amount made per customer is also lower. Offering personalized customer support eats away at the margin.
4. Net dollar revenue or expansion revenue is non-existent. Even when usage increases, the amount you can charge users doesn't quite increase linearly.
5. Customer acquisition is much harder, less scalable, and has fewer options.

Solving this is easier said than done.

Calculating Net and Gross Renewal Rate

You have two options: You can use our simple calculator to calculate net and gross renewal rates, or you can import a spreadsheet into Claude to create the graphs.

How To Use Claude To Create Renewal Charts And Graphs?

Remember to exclude any lifetime memberships sold.

Thanks for reading!