It’s not uncommon for companies to confuse renewal rates with retention rates—after all, they seem very similar. However, they tell very different stories, and which one is more important will depend greatly on your business.
What is the retention rate?
As you might guess from the name, “retention” is about retaining or keeping your customers. It measures how many of your customers remain as customers throughout their lifecycle. It is a particularly useful measure for subscription products, especially those with short termination periods.
Calculating your retention rate
This is a straightforward calculation to introduce to your business:
Retention Rate = (Total number of customers at the end of the period – New customers added during the period) / Total number of customers at the beginning of the period
As you can see, the period needs to be defined. For subscription businesses, a month is typically the norm for key performance indicators (KPIs), but it’s not uncommon to see quarterly or yearly numbers in financial statements.
What is a renewal rate?
A renewal rate is the rate at which subscribers renew their contracts when they reach the end of the current agreement. The calculation for this is simple too:
Renewal Rate = Number of subscribers who renewed their contracts during the period / Number of subscribers that were due to renew their contracts during the period
Again, the period can vary depending on what you are reporting, but a monthly period often works well for subscription businesses.
So, what’s the difference?
Let’s start by reflecting on the difference between churn and retention. Churn reflects the customers you’ve lost; it’s a passive activity when the customer has already decided to leave your business. It’s very challenging to win customers back from this point. Use your customer success executives to re-engage with churned customers to understand their decision and discover whether we can help them re-achieve value, but it’s not a place we want our customers to be.
On the flip side, retention is all about keeping your customers—proactively nurturing relationships, addressing issues, and ensuring customer adoption is successful. Retention should start from the moment the deal is signed and continue all the way through to the renewal of the contract. For businesses the traditional customer support efforts are complemented by the proactive technical project management skills of the customer success team.
For me, traditional businesses that focus primarily on their churn numbers are missing a trick. A lack of focus on customers before they decide to churn means the business loses customers unnecessarily and often with little insight into why the customer churned.
Furthermore, this drives businesses to focus on expensive acquisition initiatives, deep discounting, and aggressive competitive marketing. Examples of this can be seen in the mobile phone and cable/satellite TV markets, where new customers receive better pricing and service than long-standing customers. Hopefully, you’ll agree that a retention focus is a much better way to grow a profitable business than a churn focus!
A number of businesses I’ve spoken to see the words “retention” and “renewal” as interchangeable. However, the action of getting a customer to sign up for another fixed term—including the steps the customer goes through and the outputs the customer receives—does not reflect retention. This is the action of renewal. A renewals function should focus on the specific administrative process of contacting a customer due for renewal, introducing changes (such as price increases or contract term changes), processing the renewal, and updating systems. Renewal is just one small part of retention.
All too often, the renewals function is held accountable solely for getting the money in, without the necessary skills and support. Unhappy customers may not be willing to renew or accept a price increase, which drives a culture of discounting and giveaways. This is exacerbated by the practice of setting sales-style targets and commissions based on achieving numbers, which drives the renewals function to get customers renewed at any cost.
Contrast this with a healthy retention approach, which starts with a supportive deployment and adoption strategy (driven by customer success), continues with ongoing structured health checks during the life of the contract (both human and automated), includes a solid high-availability support function, and concludes with an effective administrative renewal process, and you’ve got a retention strategy. This involves sales (commercial relationship), customer success (operational relationship), customer support (technical relationship), and renewals (finance/procurement relationship). In high-value/complex customer accounts, a virtual team plans a retention strategy, while for smaller accounts, automation supports the retention goals.
SaaS and technology businesses tend to see the value in this approach, understanding that retained customers are more likely to become advocates and drive viral growth. But even if your established business is currently churn-obsessed, it’s not that difficult to start focusing on retention. There’s plenty of guidance and advice available online to create a groundswell in your business to make the shift (a great start is Jean Bliss’s Reality Audit). This could be your first major step towards putting the customer back at the heart of your business!
