This is no secret to you. It costs up to seven times more to attract a new customer than to keep an existing one. Upselling an existing customer is also easier than upselling to a new one. So, keeping customers will increase your revenue and profitability.
Not to mention, current customers are likely to buy more goods and services than new ones.
But that’s not all. The longer you keep a customer, the higher their Customer Lifetime Value (CLV) grows, thus maximizing your return on investment. Even a small increase in your customer retention rate can increase your profits substantially.
Increasing customer retention by 5% can lead to profits increasing by 25%-95%, according to Bain & Company. But this finding is from 2001.
Josh Chapman, an investment banker turned VC who writes for Toptal, found that focusing on keeping customers can increase revenue by 80% over 18 to 24 months, slash customer acquisition costs by 30%, and gain 1.5X more customers.
So, while generating new revenue is essential for growth, keeping current customers is equally or more important.
In SaaS, this means keeping more customers than you need to onboard to meet your earnings targets. But how?
Enter the SaaS renewal process.
Table Of Contents
What Is SaaS Renewal?
In SaaS, renewal refers to a customer’s choice to maintain their subscription with you even though they are free to leave at any point. When a customer renews, he or she chooses to automatically or manually continue getting more value from you for the next subscription period.
The SaaS renewal rate is the percentage of subscribers who renew their subscriptions after a specific subscription term has ended.
Most SaaS companies today offer monthly subscription plans that customers can cancel at any time. If they cancel during the subscription period, the service remains active until the last day of the subscription period, when it automatically expires.
A high renewal rate is a sign of a product’s value to customers. So your business is more likely to sustain long-term revenue and customer interest.
What Is The Renewal Process In SaaS?
Renewals follow a process, at least when you are trying to improve renewals. The SaaS renewal process involves a series of actions prior to, during, and following the subscription renewal. These renewal efforts include proactive communication and identifying any service gaps to fill.
What is the difference between the renewal rate and retention rate?
The renewal rate shows the proportion of customers who renewed their subscriptions during a subscription period, whereas the retention rate measures how well you are keeping customers who signed up during the same period.
So, customer renewal is a part of any customer retention strategy.
What is the difference between renewal strategy and SaaS renewal strategy?
In other sectors, a renewal strategy refers to a company’s effort to address declining performance. It refers to a plan to stabilize operations, re-energize organizational resources, and regain its competitive edge.
However, SaaS renewal strategies are often about measuring the proportion of customers who choose to continue to using a service by paying a subscription fee.
Calculating Renewal: What Are The Different Types Of SaaS Renewals?
Different tech brands and SaaS companies measure renewal rate differently, and they follow different SaaS renewal processes as well. Renewal metrics include recurring revenue, client base, subscriptions, and more.
The following are five of the most popular in a nutshell.
Customer renewal is the proportion of customers who renew their membership or subscription at the end of the subscription period compared to the total number of customers who were eligible to renew.
This method is also known as the Count of Customers Method and is most effective for businesses with a homogeneous customer base — businesses with similar or only slightly varying contract terms with customers. This method is less accurate if a company has a more varied customer base.
Example: If you have 50 customers coming up for renewal and five of them leave (churn), your customer renewal rate is 48/50, which is (48/50 X 100%) = 96%.
Monthly Recurring revenue (MRR) or annual recurring revenue (ARR) renewal
Monthly recurring revenue (MRR) or annual recurring revenue (ARR) renewal measures renewals revenue each month. This formula is particularly useful for SaaS companies that offer monthly subscriptions or track monthly revenue goals.
Revenue renewal is the ratio of revenue renewed against the entire amount you could have renewed during the period.
Instead of calculating the number or percentage of customers that renew their contracts/subscriptions, this metric compares actual and potential revenue from renewals. So, this method considers contract value instead of customer numbers. It is ideal for SaaS companies that provide a variety of services to different customers.
Example: Customer A has a $2,500 annual subscription and Customer B has a $1,000 per year contract. If Customer B cancels and Customer A renews, the revenue renewal rate will be ($1000/$3,500) X 100% = 33.33%.
The customer renewal rate, in this case, is 50%, which doesn’t convey the seriousness of the revenue loss.
Gross renewal rate (GRR)
Gross renewal rate (GRR) measures the amount of revenue you collect from renewable sources during the subscription period. It excludes expansion revenue (plan upgrades, cross-sells, upsells, etc). GRR represents the ratio of renewed revenue to potential revenue. It cannot exceed 100%.
Net renewal rate (NRR)
Net renewal rate (NRR) refers to the total amount of renewable revenue you bring in, including expansion revenue. The NRR measures the ratio of total revenue received versus revenue up for renewal. It can exceed 100%
So, what is a healthy SaaS renewal rate?
What Is A Good Renewal Rate In SaaS?
Renewal rates above 80% are considered healthy. However, the best-performing SaaS companies have a revenue renewal rate above 100%. This means more customers are purchasing upgrades, taking part in upsells and cross-sells, and accepting more offers than the revenue lost to customers leaving (churn).
Yet, it’s still possible to have a good B2B renewal rate of 90%, so this is not a rigid rule.
But, what if your renewal process yields well below 80%?
12 SaaS Renewal Process Best Practices To Ensure Profitability
Can’t seem to increase your renewal rate? You may have tried all the basics to help your subscribers renew their SaaS contracts, including:
- Show all your customers that they can achieve their goals with your product or service by sharing customer success stories.
- Personalize user experiences to make customers feel valued.
- Create strong customer relations from the moment of onboarding.
- Seek feedback from your customers to determine where you might be losing their interest so you can fix it.
- Offer subscription renewal incentives to encourage subscribers to renew, such as a one-time discount.
- Refund them when they ask. No questions asked.
- Automate your software renewal process using billing automation tools like:
- Sage Intact
If these renewal methods haven’t worked as well as you’d hoped, then your SaaS renewal process may be the problem.
Here’s the deal. Although another SaaS might swear by it, if a strategy does not work for you, there’s no point trying to replicate it. Instead, test out different SaaS renewal process best practices, some of which may be unconventional.
Here are some actionable, working SaaS renewal process best practices to help you along. Afterward, we’ll share a solution to help you provide value to your customers while protecting your margins.
1. Standardize your SaaS subscription renewal process
You cannot improve what you don’t measure consistently. But using non-standardized measurements makes it difficult to compare results. So, ensure that you have a systematic approach to measuring renewal rates, whether it is on a revenue or count of customer basis.
Not sure how to do it? We’ll cover that below.
2. Prepare your customers to succeed
Sharing customer success stories helps others see that your product or service can help them reach their goals.
However, they may not know how to use your solutions in certain use cases. So, educating them continuously can be very effective, and can also bring you closer together from all the interaction.
You want customers to be able to apply your product or service in their everyday work. Until then, your product may be the easiest to use, but won’t be included in their software renewal budget, especially if they need to cut costs.
Tip: Here’s what we do at CloudZero. CloudZero provides you with the people, process, and technology to fully allocate your spend, decentralize cloud cost, and create a shared language between finance, engineering, and every stakeholder.
Yet, as a new or veteran CloudZero customer, we’ll still set you up with one of our Cost Intelligence Analysts to help your engineering, finance, and FinOps teams to shift cost optimization left and harness unit economics to achieve their business goals.
3. Detect churn before it happens
Knowing where to look can help you spot signs of churn. For example, customers can show signs of leaving when they:
- Open significantly more help desk tickets than before, but your support team can’t seem to close several of them.
- Reduce logins dramatically. This may mean they are exploring other solutions or are not sure if your product is right for them.
- Reduce referral activity, possibly showing they no longer have confidence you will satisfy their referrals either.
- It has been a long time since you updated your product or service.
- Their behavior has changed after you raised your prices recently.
- Have significantly less utilization than your contract terms or is significantly less than other customers with similar usage patterns.
- Disputed a bill recently. Support requests could mean adoption issues, but it also shows they are using your services. But dispute always erode satisfaction.
- Reward loyalty with an organized loyalty program
These are all signs your CX team will want to monitor continuously. Then follow up with the specific customers to prevent user churn.
4. Provide full-service support to clients with limited resources
Many SaaS firms cater to clients with different levels of internal IT maturity.
Clients with limited resources need special attention because they are more likely to churn without ever using your SaaS solution. By offering full-service integration when they sign up, you can ensure you properly configure their systems to take full advantage of your solution.
It’ll be a relief for them, and you’ll get to demonstrate how valuable your software is to their goals. Win-win.
5. Engage decision-makers
How often does your team get in touch with decision makers and your customers’ primary contacts?
Engaging people in certain roles within a company could have a positive or negative effect on renewal rates. Leading SaaS companies reach out to key decision makers to see if there are more ways they can contribute to their customers’ success.
6. Prevent unintentional churn
Unintentional churn is most often a result of failed payments. Expired credit cards are a common cause of missed payments.
Credit cards expire every three years on average. So, you can estimate that approximately one third of your subscribers’ credit cards will expire this year. While some customers will remember to update their payment details before that happens, others will not.
But with tools like Stunning, you can prevent this type of churn. Stunning automatically emails your customers about their payment details before subscription renewal failure occurs. In the event a customer cannot update their payment information on time, the tool will retry collecting the payment for up to three weeks to maximize your revenue recovery.
The alternative is to manually email your customers to confirm that their account details are accurate prior to the renewal date.
Besides, you can set up direct debit payments. This process uses their bank account number rather than their debit card number, so you and their bank have a direct relationship.
7. Perform renewal research 90 days in advance
Conduct some preliminary research before approaching the customer about renewing. Start with understanding their product usage, use cases, overall customer health score, and their individual Net Promoter Score (NPS).
You can use this information to track where your customers are experiencing gaps in your product’s value, as well as where they are most satisfied.
8. Share it loud with your customers
Have they had any big wins during the previous subscription period? Are they exceeding their targets? If so, let them know.
You can request a meeting to further explore this data together in more detail. Be sure to have visuals in hand to boost engagement. Both of you can then talk about their plans and how your product can help.
9. Acknowledge the renewal 60 days prior
Explain to your customers what to expect in the upcoming renewal period. Describe how your company intends to continue helping them achieve their goals.
It is not too early. Your team will have ample time to process negotiations, approvals, and explore ways to offer early renewal incentives to your customers.
10. Clear up the renewal process 30 days later
Your customers need to know exactly what they need to do to renew their subscriptions at this point. Also, provide multiple options for completing the renewal process, such as automated renewal, self-service, or hand-signed contracts.
Your customers will be more willing to renew if your SaaS renewal process is clear and intuitive. So, provide as much information as you can and, if they have questions, provide all the answers they require to renew.
Ensure that your customers know their options. If they wish, you can help them choose the best option for their needs.
11. Send out a friendly reminder
Remind customers to renew through an email or in-app notification.
Do you have upcoming feature releases, loyalty bonuses or discounts, or benefits for renewing customers? This is an excellent time to let them know.
Anything that can add value to your partnership goes.
12. Say thank you
This is an opportunity to affirm your customer’s choice toward their goal, reassuring them of your commitment to helping them achieve them over the next subscription period.
If you can personalize your message, even better. For example, offer ways they can get more value out of their current subscription. By doing so, you will demonstrate your sincerity and reliability.
How To Deliver Value At Renewal While Protecting Your Margins
Now here’s the thing. You want to onboard more users while keeping most of your existing customers. But with increased business comes rising costs. In the cloud, these costs can add up quickly.
As your current customers or tenants become more excited about your product or service, your costs could skyrocket. If your total AWS bill surprises you at the end of the billing cycle, you may need to consider a new strategy.
Yet, AWS Usage and Cost Report or AWS Cost Explorer will not tell you exactly who, what, and why your spend rose.
Even so, you do not want to cut costs indiscriminately as it could impede growth, stifle innovation, or degrade the customer experience. Instead, you’ll want to identify where to reduce costs without negatively affecting performance or eating into your SaaS margins.
With CloudZero’s cloud cost intelligence platform, you can see your cost per customer so you can find out who, what, and why your AWS costs are going up. You can also see your costs by product feature, team, project, and environment.
CloudZero’s intelligent cost mapping lets you track the cost of tagged, untagged, and untaggable resources automatically without tedious AWS tagging. So, you can also tell how much you spend on supporting specific tenants when you host them in a multi-tenant environment.
This can mean four things:
- When you know how much it costs to support each customer, you’ll know how to renegotiate their contract terms at renewal, reflecting the value you offer, while also protecting your margins.
- Knowing how much you spend on each feature will help you figure out how much you should charge for them to turn a profit.
- You can also tell which customers to market your services to more when you know your most and least expensive customers.
- Also, you can identify which customers are underutilizing resources by looking at their utilization metrics, a sign they may need help adopting your solution or are considering leaving. You can then take appropriate action.
Also, CloudZero’s cost anomaly detection alerts you about trending cloud costs via email, Slack, or your favorite incident response tool. You won’t have to wait an entire billing cycle, either. CloudZero detects cost anomalies in real-time, so your team can take action right away to avoid costly surprises.
Are you curious how CloudZero can help you price SaaS tiers, renegotiate existing contracts at renewal, and streamline your SaaS renewal process? Schedule a demo today!
SaaS Renewal Process FAQs
What is a good renewal rate for SaaS?
An 80% customer renewal rate is generally considered healthy, although this varies by industry and organization.
What is a renewal order?
This is a notice about renewing your software subscription.
What is renewal revenue?
The revenue renewal rate compares the amount of revenue renewed with the total amount of renewable revenue for a specific period.
What is the net renewal rate?
Net renewal rate is the percentage of renewable revenue, including expansion revenue. Successful SaaS businesses have renewal rates of over 100%.
What is the average churn rate for a SaaS company?
It varies widely from one SaaS company to another. But a good SaaS churn rate is 3% or less, while the average is 5%.
Why is renewal retention important in SaaS?
Renewals reduce your customer acquisition cost as well as increase your revenue through upsells, cross-sells, upgrades, and referrals.
What is a renewal forecast?
As with a sales forecast, it helps the organization by forecasting growth and churn rate compared to past results and industry benchmarks.
What does a renewal specialist do?
SaaS renewal experts help customers renew their subscriptions with their company to help them reach their goals.