Renewal rate is simply a measure of customers who have actively chosen to renew their contracts or subscriptions for your product or service at the end of their subscription period. A high renewal rate is therefore a strong indicator of value. The higher it is, the more likely you are to generate long-term revenue because customers are choosing to stick with you.
Renewal rate should not be confused with retention rate, which is a measure of customers who have actively chosen to not cancel their contract or subscription when they’re given the opportunity to. Retention rate can therefore include automatic renewals in its calculations whereas renewal rate cannot.
It’s important to note that when we talk about renewal rates, we’re specifically focusing on customers who actively choose to renew their contracts or subscriptions; automatic renewals don’t count. This is a very minor distinction but it’s an important one to be made when it comes to long-term contracts.
Customer renewal rates are often measure alongside churn rates to determine a clear picture of annual recurring revenue and projected expansion revenue.