Customer Retention F'Ups
Understanding all the different types of Renewal and Retention rates at B2B software companies
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.
Cohorts are just a fancy word for a “group” with similar characteristics (like their start date). Don’t be intimidated by this jargon.
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.
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#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