ArticleBest PracticesMarch 8, 2018
Customer Retention and Renewal Aren’t the Same Thing Image

Customer Retention and Renewal Aren’t the Same Thing

By Lincoln Murphy

When I talk about reducing churn through Customer Success Management, to really drive the point home I'll mention both Customer Retention and Renewal. This always raises a few eyebrows (which is why I do it) and prompts the "wait, aren't those the same?" question.

They're not... and here's the logic I used to get to that conclusion.

Customer Retention

In a month-to-month setting, renewal and retention are pretty much the same thing since 100% of your customers could churn at any time and 100% of your customers renew every month, even if it's done automatically via Credit Card.

This is of course very different from a longer-term contract scenario where customers can only churn (at least in legal theory) when their contract is up. Technically, we'd say they didn't renew if they churned when their contract was up.

Customer Renewal

But when we're measuring churn in the months where they aren't up for renewal, we wouldn't include them in the churn calculation when figuring the churn rate since they couldn't actually churn.

Including customers who can't churn in your churn calculation makes churn seem artificially low.

That said, annual or multi-year contracts aren't always created to be in the vendor's favor, especially for early-stage startups and even more for those who aren't savvy to the Enterprise game.

Longer-term SaaS contracts are very often written "on the customer's paper" which means they use their terms, their legal department, and the contract basically locks the vendor into the customer some way (generally locking-in pricing for some time, usually at a discounted rate), but doesn't necessarily lock the customer into the vendor.

That means, even if the vendor has a long-term contract with the customer, the customer could still churn. Perhaps creating cohorts based on the type of contract (our paper vs. theirs) is a better way to measure churn.

So there you have my logic for saying both retention – where the customer doesn't actively cancel when they could – and renewal – where the customer renews the contract.

What do you think?

Picture of Lincoln Murphy
Lincoln Murphy Chief Customer Evangelist at Gainsight Lincoln Murphy is Chief Customer Evangelist at Gainsight
2 Comments

Leave a reply

Your email address will not be published. Required fields are marked *

  1. Richard Burnett
    Apr 1st, 2015Reply

    Great post on a subtlety of measuring churn. To just measure your retention rate against the full bucket of customers and contracts that you have does not really give you an accurate figure as you mention. Measuring against the customers that have the option to churn over whatever given period you are selecting is the way to go. I like the idea of rating the longer term contract customers by the ‘risk’ factor written into their terms

  2. Hansen
    Nov 12th, 2018Reply

    this is very helpful!

Shares