Renewal... Retention... it's all the same right?
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So while in the process of developing these CXOps capabilities it dawned on me it might be helpful to articulate the difference between renewal and retention rate. They can often be conflated for one another. Executives may be talking about retention rate when in fact they’re talking about renewal rate. It might have been so much easier to just label these two differently without using the same starting letter “R”.
Let’s put on our Webster’s mask on and get into definition mode.
Retention is measures how a specific cohort of customers remain with you as a customer
The key date metric to look at is the start date. Specifically, when did they begin as one of your customers. Say for example you signed up 10 new customers in January on month to month contracts. After six months you see that four of the customers dropped off, then you would describe your retention at the six month mark as 60%.
Let’s look at each of the four churned customers:
Customer #1: did not renew after month 1
Customer #2: did not renew after month 3
Customer #3: did not renew after month 4
Customer #4: did not renew after month 6
When we talk about retention we have to crystal clear about the timeframe. With the example above let's just imagine that we didn't acquire any new customers in any intervening month. That leaves us to have only one cohort to compare.
Retention can be described as such:
Retention after 1 month: 90%
After 2 months: 90%
After 3: 80%
After 4: 70%
After 5: 70%
After 6: 60%
Above is what we would describe as the account retention rate. You might also call it logo churn rate. We won't go into dollar churn in great detail since I’ve covered the concept of net revenue retention in a previous article.
Renewal rate is the ratio of customers who decide to remain customers when their current term ends.
For example, let's say it's March and there are five customers up for renewal. One decided not to renew. We would calculate the renewal rate as 80%.
But that's overly simplified.
Our RevOps team would set up a CRM report filtering for the close date this year with the record type or renewal pipeline. Instead of 5 deals, we see that 100 customers were up for renewal. Ninety customers renewed. That's 90%.
Perhaps we just had a bad luck streak a certain timeframe or our sample size is too small to draw any real conclusions. Both could be true.
Different from retention rate, the customers under review may have started at different times.
Customers with shorter contacts tend to have higher churn rates. Customers with smaller contract sizes also tend to have higher churn rates.
When you run these two analyses side by side it's common to see more records in the retention analysts. This is because when you run the renewal data there will only be a fraction of customers in the analysis. If you had an equal number of customers rolling off the books each month then you would have 1/12 of the customer base in your analysis.
Day-to-day vs the big picture
CS teams will find more value in the renewal data. For many customers, CSMs are responsible for renewing customers. Knowing when their contracts are up allows the CSM to have a “work backwards” date to execute a successful renewal.
Executives and investors may be more interested in the retention rate. It's a great indicator for how “sticky” your solution is to customers.
Are you a need to have? Or…
Are you a nice to have?
Now if you're a paid subscriber let's dive into a template on how to build a Customer Health Score. This will be used during the Renewal Process Window to identify accounts that are at-risk.
Revisit my other articles on Customer Success
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