At every board meeting (for a company with a recurring business model), we wonder — is the renewal rate good enough?

To answer that question at every board meeting, the VP Customer Success reports the obligatory renewal rate — usually with the best spin. We soon learn that there are multiple definitions of the renewal rate and that everyone is working hard to improve it. So, it seems physically impossible to improve the renewal rate.

Then the VC board member constantly pushes for a higher renewal rate (everyone plays a role on the board). But, what really should be the target renewal rate?

What is the Minimal Renewal Rate required for “Success”?

Going IPO is a good definition of success.

The table below shows the LOWEST renewal rate from companies that went public in the last few years.

This table comes from Pacific Crest’s review of retention rates in IPO’s:

Public SaaS Company Disclosure Metrics for Retention and Renewal Rates

Now, what if the renewal rate is just 10% lower?

Missing by 10% seems small. After all, achieving 87.5% of the goal (70%/80%) is still a B+ in school. So, should we really care if the company had a “slight” miss — especially given all the company’s hard work? More specifically, should executive bonuses be tied to this slight miss?

Reducing the $ retention rate (without upsell) from 80% to 70% reduces the company’s revenues by 35% after 5 years and by 50% after 8 years (assuming a new business growth rate of 40%). Please see the chart to the left.

Since slower growth also results in a lower valuation to revenue multiple, the 10% retention miss will reduce the company’s valuation by way more than 10%! The miss unfortunately is not linear.

Visualizing IPO Retention Rate Data

Below are two visual representations of the IPO retention data from the Pacific Crest report:

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