Customer Renewal Rate – Critical Metric for Decision-Making

Source:  Tien Anh Nguyen

Using the customer renewal rates data to unveil sub-optimal customer service, neglected account management, indifferent product marketing and faulty market strategy:

I would not be adding much value by simply stating that customer renewal rate is an important performance measurement for any technology business. It has long made its way into almost every technology company’s stable of operating metrics. Additionally, it has been an important factor in deciding the profitability and feasibility of those companies’ business models, especially those with high customer acquisition costs and extended payback periods such as software-as-a-service companies. Of course, customer renewal can be considered a direct measurement of the company’s ability to retain its customers by offering them excellent post sales support and services, and thus its improvement often appears as the key performance goal for the customer service or account management organization.

I would like to argue that other executives across the whole organization, including marketers, product developers, managers and operations managers, should be constantly monitoring the evolution of their customer renewal rate (and some other variations such as the customer usage growth, customer count growth, etc.) to identify areas for improvement and growth. Needless to say, it also goes the other way around: customer renewal rate can be improved by optimization in any of those business lines. It is really a pulse on the whole business, one that is arguably even more powerful and comprehensive than the revenue or profits.

Basically, the Customer Renewal Rate, in its simplest form, is calculated as a percentage of customers that renew in a given year, or the amount of renewed revenue as a percentage of the previous years’ license revenue. It is a good indicator of customer satisfaction with the customer service and the efficacy of account management function.

A more particular metric, the First Year (or other applicable Billing Period) Customer Renewal Rate, which is calculated for customers going from the first year to the second year of service (or appropriate billing period), is, on the other hand, an indication of whether the newly acquired customers are actually the right type of customers. The first year is a critical period where the customer is really trying to realize their expected benefits, and if they do not, it is very likely that they will not be renewing, regardless of whether customer service or account management is doing its job.

A low or declining First Year Customer Renewal rate is an indication that either the sales team is overly aggressive in selling to customers who are not a fit, or the marketing team is attracting the customers who are not ideal, in that their pain points are not being addressed effectively by the product or services being sold.

Another level of analysis can be done by segmenting the renewal rates using another set of criteria. For example, comparing renewal rates between customers in different brackets of monthly/annual license revenue will help the market strategy team decide on which particular group to focus their efforts. It might show that while overall customer renewal is acceptable, there are particular segments that are not renewed as well, and this can be caused by either overly aggressive sales or non-targeted marketing messaging.

It is also very important for the product management team to analyze license growth rate per customer since customer groups with high license growth over time are good targets for further customer research on expanding the product line and adding new revenue streams to the existing license.

Another angle to analyze customer renewal is to calculate the Rate of Customer Loss by Competitor over time. This is extremely important to both marketing and product management, as it provides early warnings of surging competitors. A decreasing rate of customer loss by a competitor, on the other hand, signals a ripe opportunity for the go-to-market team to replace that competitor in the market given its competitive advantage and momentum.

There are of course many more ways to analyze the customer renewal rates, but I hope these examples give you a taste of how powerful its variations can be in strategic business decision making.