The terms “Renewal” and “Retention” are throw around like “Affect” and “Effect”. Most people just 50/50 YOLO it when broadly referring to “keeping customers around.”
Today we’ll show you how to calculate each, while explaining multiple points of confusion. You’ll leave being able to accurately slice and dice your customer base across various cohorts.
The proverbial “Leaky Bucket”
Cohorts are just a fancy word for a “group” with similar characteristics (like their start date). Don’t be intimidated by this jargon.
TL;DR:
Account Renewal Rate vs Account Retention Rate: Renewal is based on Contract End Date, Retention is based on Contract Start Date
Renewal Rate Land Mines: Beware of Pull Forwards to hit goals, over discounting, and comparability issues from period to period
Dollar Renewal Rate vs Account Renewal Rate Measurement: Dollar rate is almost always higher than Account rate, as stickier, larger accounts subsidize smaller, fleeting accounts
Gross vs Net Retention: Gross max is 100%. Net max is infinity. The difference is if you include expansion dollars or not
The Net Retention Rope a Dope: Beware of including expansion dollars from customers who were not already onboard at the start of the measurement period.
Time Frames: Decide if your timeframe is bounded vs unbounded. Also figure out if you’ll separate out Monthly vs Annual contracts, or create a Blended view
Real Life Examples: An example using Dollar Renewal vs Gross Dollar Retention vs Net Dollar Retention breakdown to bring it all home.
#1. Account Renewal Rate vs Account Retention Rate
Account Renewal Rate is based on contract end dates, while Account Retention Rate is based on contract start dates.
Account Renewal Rate tells you what percent of customers re-signed at the end of their contract.
In practice that means listing out all the customers that renewed during a period, ignoring contract start date.
Renewal rate is a measure of how many of your customers around a specific end date said “Yes”.
Example: You have one customer who originally purchased their software in November of 2019. Plus another who originally purchased in October of 2020. Plus a third customer who purchased in December of 2022.
For a multitude of different reasons (co terming, multi year commitments, etc.) they are all up for renewal in the same month (wohoo!) - November of 2023. All three would be included in your Renewal calculation, despite having different start dates.
However, Retention Rate is a little different. It measures how well you’re maintaining customers who signed up before a certain date.
Example: You are measuring twelve month Account Retention as of November 2023. That means to be eligible for this calculation you’d have to be a customer pre November 2022 (12 months ago).
So in the above example, you can include the first two customer contracts, since they were onboard pre-November 2022 (a year ago), but not the third, as the December 2022 contract just misses the cut.
The other big difference is Renewal Rate is measuring only what’s up for Renewal, while Retention rate is looking at your whole customer base as long as they were on board as of a specific date. That means there are usually more accounts being measured in Retention formulas than Renewal formulas, since not all customers Renew on the same date.
This is a key point - Retention rate can be significantly more statistically significant because you have you entire customer base (pre a certain date) in the measurement population, while Renewal rate only captures the contracts rolling off at the same time, which is probably fewer.
Now, both views are useful. Typically Renewal rate is used more internally amongst B2B sales teams vs externally with investors.
Renewal rate is great for keeping a tab on “in the moment” operations so customers who are up for renewal don’t slip through the cracks.
Retention rate is more commonly discussed at board meetings because it gives investors a more wholistic view of if you have a leaky bucket or not.
#2. Renewal Rate Land Mines
It’s totally possible for customers to Renew early. Let’s say the customer doesn’t expire until December. But the Sales Team may have a compelling event to Renew the contract in October. This is great in practice, because it de-risks the future. But there are three potential drawbacks:
Pull Forwards: Sales teams may pull forward renewals just to beat their quotas in the current period - it’s like borrowing from tomorrow to pay for today. This can be a slippery slope if you get aggressive and over-mine your renewal base
Discounting: This problem is further exacerbated if sales teams are not only pulling forward renewals, but also overly discounting them to hit their number
Comparability: Furthermore, pull forwards overinflate your true renewal rate for the period. They can throw off false signals, as you are increasing both the numerator and denominator with a win on something that wasn’t truly up for renewal yet. Depending on the magnitude of pull forwards, this can make compares tough from period to period.
3. Dollar vs Account Retention
When looking at either Renewal or Retention rates, most of the time you’ll have a higher Dollar rate than Account rate.
Why is this? Well your larger accounts tend to be stickier. The contracts tend to be longer (multi year), the procurement cycles tend to be more thorough, it’s harder for a larger org to rip you out, and there’s less risk of an enterprise company going out of business.
Account based rates treat every account the same - regardless of if it’s a $10K or $500K account.
As you can see from the example below, the Dollar Renewal Rate is higher than the Account Renewal Rate, as the smaller accounts churning out are subsidized by larger accounts that are renewing.
4. Gross Retention vs Net Retention
Your max Gross Retention is 100%. Your max Net Retention is technically limitless.
Gross Retention is a measure of how well you keep the dollars you previously signed up on board. The only way to improve Gross Retention is to churn less.
Net Retention is a measure of how well you keep the dollars you previously signed up on board, plus any expansion. That expansion can come by way of selling them more products, more licenses, or increasing usage. And like Gross Retention, you can also improve Net Retention by churning less.
To simplify the math - the only difference in the formulas is the inclusion of expansion dollars or not.
It’s important to look at both Gross and Net Retention - an incredible expansion motion may mask a leaky bucket. But Gross Retention will punch you squarely in the face if customers are leaving.
5. The Net Dollar Retention Rope a Dope
If you want to trick your investors, this is how you do it (not advice, just the truth).
Net Dollar Retention is typically measured on a trailing twelve month basis. But you shouldn’t include expansion dollars from customers who were not already onboard at the start of the measurement period. But many companies do what I call the “NDRRD: Net Dollar Retention Rope a Dope”.
This is where you shuffle in expansion dollars from recent customers (less than 12 months old) into the numerator. But since the customer isn’t actually in the annual cohort, their starting value is not in the denominator. This artificially inflates net dollar retention.
To avoid this, build a sales export from your CRM with every customer listed down the left side with a unique ID, and months listed across the top columns. Find the month you’d like to start your measurement at, and filter for all values greater than zero. These are the only accounts eligible for inclusion in your net retention calculation.
Then create a new column on the far right to calculate the expansion (or contraction) in revenue by account from the start to the finish of the measurement period. Keeping the filter on, you can now sum the starting, ending, and expansion (or contraction) dollars for your aggregate inputs into your calculation. This safeguards against including an “early” expansion dollars
#6. Timeframes
A point of complexity with B2B SaaS is when you are dealing with different subscription length types: monthly, 6 months, 9 months, annual, etc.
Per friend of the newsletter Olga Berezovsky of the Data Analysis Journal :
The best practice is to report retention separately for each type of subscription. Monthly users will be up for renewal every month, but annual subscribers renew only once per year. So your annual retention should be cohorted by years, and breaking it down by months or weeks isn’t that helpful because it won’t show any movement.
You can merge all subscription types into one metric - “Blended” Retention (or “Blended Churn”). But it’s harder to make decisions based on customer behavior with this broad-based view, as customers on monthly plans make buying decisions (and churn decisions) differently than those on annual (and multi year) deals. Plus, the mix of licenses can impact the overall number, skewing it towards the annual cohort’s behavior if the dollars are bigger.
As a personal preference, I like to use Net Dollar Retention on a trailing 12 month basis, so you can give customers time to expand their wallet share. But I like to use Gross Dollar Retention on a monthly basis.
This is because I don’t want to wait a full 12 months to know if customers are falling off month-over-month. This is especially true if they are on monthly, and not annual, contracts.
Plus, I can easily annualize my monthly rate pretty easily.
For example, a Monthly Gross Dollar Retention Rate of 99.5% = 0.5% x 12 months = 94% annualized gross dollar retention. I can then compare that to the prior month and see if I’m getting better or worse in the short term.
#7. Bringing It All Together
So which metric should you use? Ideally all of them. It’s more about how you apply them to the situations at hand. Different battles require different weapons. Also, I can’t believe I just wrote that.
Here’s one more hypothetical comparison using formulas to bring it all together.
Takeaways include:
Our Gross Dollar Retention is almost identical to Dollar Renewal Rate, meaning we are doing an equally good job keeping customers happy regardless of when they signed up or expired. That’s a consistent signal.
Our Net Retention is above 100%, which means we’d grow by 14% Y/Y without adding any new customers. More on Net Retention in this post.
“Dollars leaving the building” is comprised of 83% churn (complete goodbye) vs 17% shrink (partial goodbye)
Smart Stuff I Read at 2AM:
Renewal vs Retention Rates - Scale VP
Net Retention vs Gross Retention - Churn Zero
Customer Retention - Zendesk
Mostly archives:
Quote I’ve been pondering:
“He can’t take them all into the ring with him. It’s just going to be me and him”
-Marvelous Marvin Hagler
