Customer retention

3 Reasons Why Customer Loyalty and Retention are Important for SaaS

October 26, 2022

If you work at a SaaS firm, you better know how to read the numbers – especially when you’re early to mid-stage. At this point in the game, your margins are thin, and you’re fighting for every incremental improvement. Numbers are what tell you when you’re winning.

Numbers also provide deep insights that help you make smarter decisions. Like when you need to be conservative and when it’s time to go all in.

While you could watch plenty of metrics, there are three we follow closely. They show what’s working and what needs attention. And they illustrate why customer loyalty and retention are essential for long-term health and profitability.

3 reasons why customer loyalty and retention are important for SaaS

You can’t grow if your customers keep leaving and you’re constantly leaking profits.

Loyalty and retention are directly tied to profitability. To get and stay profitable, you need loyal customers who stay, renew or upgrade their subscriptions and maybe even send a few referrals your way. Improving the following three metrics will get you going in the right direction.

Reason #1: Customer acquisition is expensive

Early on, you’ll pay a premium for every new customer. That’s why your cost of client acquisition (CAC) is one of your most important metrics. This figure includes every investment you make to bring clients on board, like sales, marketing, property, and equipment expenses. As you scale, you’ll be able to spend more, but the margins are tight in the beginning.

Formula: Cost of sales and marketing divided by the number of new customers acquired 

For example, if you spent $1.5m on marketing in 2021 and acquired 2.4m new customers, your CAC is $0.62 to get $1 in revenue.  

SaaS benchmark: varies widely by funding level

Reason #2: Churn is an early warning system for customer retention issues

There’s no way you’ll keep every single customer who signs up for a free trial or subscribes to your service. But when you consider that it costs 7x more to acquire a new customer than keep one you have, it’s clear why you want to keep churn as low as possible. Here’s another stat to drive the point home: increasing customer retention by only 5% can increase profits anywhere from 25-95%.

Formula: Take lost customers over a certain period and divide it by the total number of customers at the start of that same period, then multiply that number by 100.

For example, if your business had 1,000 customers at the beginning of the month and lost 25 customers by the end, you would divide 25 by 1,000 to get 0.025. You then multiply 0.025 by 100, resulting in a 2.5% monthly churn rate. We recommend calculating monthly and annual churn rates to watch both closely.

SaaS benchmark: 5-6% for SaaS

Reason #3: Growing LTV is the key to long-term financial health

Customer lifetime value (LTV) is the total amount of revenue received on average from a single customer throughout their relationship with you. This invaluable number helps you make strategic decisions about how much it’s worth spending to keep a customer from churning. It also helps you determine which customer segments are most profitable for your business.

Formula: Take your (average purchase value) x (the number of times subscription will renew annually) x (average length of customer relationship – in years) = LTV 

For example, a subscriber of a video streaming service might be worth: ($25 subscription cost) x (12 renewals annually) x (5 years) = $1,500

SaaS benchmark: The generally accepted ratio is a 3:1 LTV to CAC

Importance of customer loyalty and retention for SaaS with ProsperStack 

At ProsperStack, we make it easy for subscription-based brands to prosper by automating the customer retention experience. Our customers reduce their churn by up to 30% by integrating our super-smart solutions and powerful insights into their existing tech stack. 

Here’s how it works: deploy a few lines of code, and you’ll be ready to deliver exit surveys and persuasive offers to customers right at the point of cancellation. Even better, you’ll have the tools you need to build the cancellation flow of your dreams without constant support from your dev resources.

Ready to control your churn and keep more of your revenue? Book a ProsperStack demo.

Sign up to stay current on all things retention