Confusion in Calculating Membership Renewal Rates

Probably the most frequent question I get asked from clients and inquirers is how to calculate renewal rates.  I think the confusion stems from getting lost in the trees instead of starting out looking at the forest.

Let me explain.  In very simple terms, an organization’s renewal rate calculates how many members remained with the organization from twelve months earlier.  To get these numbers, you first need to know how many members you had at the beginning of the period.  Next you need to know how many members you have now.  Then to determine how many continued  their membership over the past year, you subtract the total number of new members from your current membership (new members were not eligible to renew).  This gives you the count for how many members your organization retained.

Here is an example.  Let’s say you had 10,000 members on May 1, 2012.  And twelve months later you also have 10,000 members.  But of the current 10,000 members, 2,500 were added as new members over the course of the year.  That means your net continuing members were 7,500.  And if 7,500 of your original 10,000 members continued with you, you have a 75% renewal rate.

So that is looking at the big picture – the forest.  But what happens if your computer report gives you a different number?  This discrepancy typically comes because of the business rules that were used to set up the database report.

Here are a couple of common problems.  One is how reinstated members (those who renew late) are counted.  If they are included in your new member count, they will lower your renewal calculation.  With the example above, if 500 reinstated members were now counted as new members, the new member count would be 3,000, pushing your renewal rate down to 70%.  The other common problem is where Life Members or multi-year members are counted.  They continued their membership, so in the example above, they would be counted as renewing members even though there was not a separate financial transaction.

My personal opinion is that reinstated members who pay after the grace period ends should be counted as new and Life and multi-year members should be counted as continuing or retained members.  But wherever you choose to count them, you need to build this into your calculation.

The bottom line is when you are attempting to calculate your renewal rate, start out with the big picture.  Do the simple math first then if reports come out of your database that do not corroborate the simple math, look into what business rules have been factored into your report.

The goal is to get an accurate renewal calculation where your math and the database report sync.  Ultimately, the economics of members and calculating lifetime value, maximum acquisition cost, and steady state calculations depend on an accurate renewal rate.

1 comment:

daphne@smallbusinessmarketing said...

Thanks for makes sense :)