What is Customer Renewal Rate?
Customer renewal rate, also known as customer retention rate or renewal rate, is the percentage rate at which a company’s customers extend their relationships with the company (such as a subscription or membership). It is an important indicator of a company’s growth prospects. This metric is a critical measure of a company’s ability to generate long-term value for its customers.
Generally, a renewal rate above 80% is considered to be very favorable and indicates that a company is effective with its customer retention efforts. Every company aims to maximize its customer retention rate (bring it closer to 100%).
How to Calculate Customer Renewal Rate?
There are many ways to calculate customer renewal rate. Depending on its operations and goals, a company enjoys flexibility in calculating the metric. Nevertheless, there are two commonly used methods of calculation: count of customers and revenue methods.
1. Count of Customer Method
A straightforward and easy method of estimating customer renewal rate is the count of customer method. It is the ratio of the number of customers who renewed their contracts in a given time period to the total number of customers who could potentially have renewed their contracts during the period.
Mathematically, the count of customer method can be expressed using the following formula:
The count of customer method is most suitable for companies with a homogeneous customer base. These are companies whose customers all pay an equal amount of money for its product or service, or the variation is relatively small. However, if the customer base of a company is more varied, this method can provide misleading results about customer retention.
2. Revenue Method
Alternatively, customer renewal rate can be calculated as the ratio between the actual renewal value in revenues and the potential renewal value. In other words, the revenue method calculates the value of contracts rather than the number of customers.
The revenue method uses the following formula:
Unlike the first method, the second approach is more suitable for companies with a diverse customer base. This means that some of the company’s customers have small contracts while other customers have extremely large contracts. In such a case, the actual renewal value is a more meaningful figure than the number of contracts renewed.
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