Persistency Rate

Persistency Rate (also known as the Renewal Rate) is a key performance metric that measures the percentage of customers who continue their subscriptions or policies with a company over a specific period. Think of it as a loyalty scorecard. It’s particularly vital for businesses built on recurring payments, such as insurance companies, software-as-a-service (SaaS) providers, and media streaming services. A high persistency rate signals that customers are happy with the product or service and see ongoing value in it. For an investor, this is a beautiful sight. It points to a stable and predictable revenue stream, a strong customer base, and a business that doesn't have to constantly spend a fortune on acquiring new customers just to replace the ones who are leaving. It’s a direct reflection of a company's ability to retain its hard-won business, which is often a hallmark of a high-quality enterprise.

A high and stable persistency rate is one of the clearest indicators of a company's health and the durability of its competitive advantage, or economic moat. It tells you that the business has a “sticky” product or service that customers are reluctant to abandon. This stickiness directly impacts the bottom line. Retaining an existing customer is almost always cheaper than acquiring a new one. Therefore, a high persistency rate leads to lower marketing and sales expenses relative to revenue, which in turn boosts profitability and generates more predictable free cash flow. The persistency rate is the inverse of another crucial metric: the churn rate. If a company has a 95% persistency rate, it means its churn rate (the rate at which customers leave) is only 5%. A low churn rate is what every subscription-based business strives for.

The calculation is refreshingly simple and intuitive. You divide the number of customers who renewed their contracts during a period by the total number of customers whose contracts were up for renewal, then multiply by 100 to get a percentage.

Persistency Rate = (Number of customers who renewed / Total number of customers up for renewal) x 100

Imagine a company, “SecureLife Insurance,” had 10,000 policyholders whose annual policies were due for renewal in 2023. At the end of the year, they find that 9,200 of those policyholders renewed their policies. The calculation would be: (9,200 / 10,000) x 100 = 92% SecureLife's persistency rate for that group of policyholders is 92%.

As a value investor, the persistency rate is more than just a number; it's a story about a company's relationship with its customers. Here's how to read between the lines.

A single data point can be misleading. What you want to see is a consistently high or, even better, an improving persistency rate over several years. This demonstrates an enduring competitive advantage, not just a one-time success. Also, context is king. A “good” rate varies dramatically by industry. An 85% rate might be fantastic for a competitive consumer software company but concerning for a regulated utility. Always compare a company's persistency rate to that of its direct competitors.

A high persistency rate is often the direct result of a powerful economic moat. When you see a strong rate, ask why customers are staying.

• High Switching Costs: Is it a hassle or financially painful for customers to leave? Think of enterprise software integrated into a client's core operations or a bank that holds a customer's entire financial life.
• Intangible Assets: Does the company have a powerful brand that inspires loyalty and trust? Customers stick with Apple or Coca-Cola because they trust the brand to deliver a consistent, high-quality experience.
• Network Effect: Does the service become more valuable as more people use it? It's hard to leave Facebook or Visa when everyone you know or every merchant you visit is on the network.

Be wary when you see certain signs related to a company's persistency.

• A Declining Trend: A falling rate is a major warning sign that the company's competitive position is eroding.
• Lack of Disclosure: If a subscription-based company doesn't disclose its persistency or churn rate, it may be because the numbers are unflattering.
• “Buying” Renewals: Be cautious if a company achieves high persistency by offering deep discounts. This can prop up the rate but crush margins and long-term profitability.