Customer retention

SaaS Metrics 101: Understanding Retention Rate

November 21, 2023

The adage that acquiring a new customer costs more than retaining new ones is true. Numbers around this vary, with the most quoted being five times the costs. 

One thing is sure: businesses have increased spending on customer acquisition by 60%, but few have made similar investments in retention. SaaS retention rates are often high, but they aren’t perfect.

Those metrics mean nearly two-thirds of customers are churning each year, costing you plenty and impacting your ability to sell more to those people. If you want to stop this exodus, turning your attention toward customer retention can make a big difference in your bottom line.

What Is Customer Retention?

Let’s start with the basics. For SaaS, customer retention refers to which customers remain users over a defined timeframe. It matters because it has a revenue component. 

Retaining users means you have annual recurring revenue (ARR). You’ve already spent time and money on acquiring them. The longer they stay, the more you recover from these expenses and realize profit.

Within this concept, there’s also a difference between customer retention and monthly recurring revenue (MRR) retention rates.

Customer Retention Rate

Customer retention rate is the actual equation to determine the percentage of users you’ve kept over a period of time, usually a year. It’s a metric you track that has a relatively simple equation. 

One point to note is that you have to account for the new customers you bring on so the data doesn’t go sideways. Also, remember that a strategy to offset churn with acquisition is an expensive endeavor.

MRR Retention Rate

MRR retention is the monthly revenue you collect from the subscription to your software. It’s different from a customer retention rate because it’s revenue-focused. 

It can be crucial in measuring revenue stability. It’s forward-looking in forecasting the revenue you’ll receive as long as you have loyal customers.

Most SaaS companies put much emphasis on the MRR retention rate. You have more data and context by looking at customer and MRR retention rates.

Why Is Customer Retention Important?

Customer retention is critical for any business. Most use it as an essential key performance indicator (KPI). What does it tell you about your customers?

If it’s high, it indicates:

  • Customers are happy with your product and find it valuable. They may also be more apt to recommend it to their peers and provide you with a testimonial or case study, which can help you grow your user base.

  • You’ll be able to upsell those customers with new and existing products. They’ll be more likely to buy, as returning customers spend 67% more than new ones.

  • The product has a solid product-market fit, meaning many more customers need it.

  • It’s a sign of customer loyalty, which is hard to achieve in an environment of constant competition.

If it’s low, it means:

  • Your product may have some gaps in functionality or doesn’t meet the needs of your audience.

  • Support or customer experience may be lacking. It’s a big reason for churn, and many users have little patience. In fact, 61% of customers will switch to a competitor after only one bad customer experience.

  • The competition is encroaching on your market and could be aggressively underpricing as a way to steal customers.

Creating a strategy around SaaS customer retention is much less costly than new customer acquisition. When you measure and actively work on improving retention rates, they can help you improve your software, support and customer experience.

How to Calculate Customer Retention Rate

Now, it’s time for the math. It’s a relatively simple formula for calculating retention. First, you determine the timeframe you want to study (e.g., quarter, year). 

Then, you’ll need these numbers:

  • Existing customer base at the start of the period

  • Total number of customers for the period

  • New customers added within the period

Now, let’s work this into a useful formula.

The Customer Retention Rate Formula

The customer retention rate formula looks like this:

Retention rate = (The number of current customers - the number of new customers during the defined time period)/the number of original existing customers during the time period x 100

For example, you begin the quarter with 200 customers. During that time, you lose 20 and gain 25 new customers. At the end of the quarter, you now have 205. 

As a formula, it looks like this: 205 – 25/200 x 100 = 90%

Mistakes to Avoid When Calculating CRR

With customer retention rate calculations, there are also some things to avoid so your data is more accurate, including:

  • Forgetting to calculate the user retention rate alongside MRR retention for more context

  • Counting your canceled subscriptions as churn

  • Failing to calculate retention at different stages of a customer's lifetime, as this provides insights on when people may churn

Now that you have the basics and formula, let’s review how to boost customer retention with innovative strategies.

4 Customer Retention Strategies

Retaining customers has lots of positive wins for you. SaaS businesses that have retention rates over 85% grow much faster, as much as three times. Customer retention starts on day one, as you set the scene for the customer experience. 

Let’s explore these SaaS customer retention strategies to guide you through.

1. Make Onboarding Seamless and Set a Good Impression From the Start

Onboarding is a critical time in the new customer experience flow. It sets the tone. 

Failure here could mean immediate churn. With SaaS, there is a learning curve, no matter how easy your platform is, so you want this to be frictionless and deliver impactful information that gets customers using the software.

There are several ways to create seamless onboarding, including:

  • Designing a workflow of how-to tutorials for customers to go through that hits all the highlights

  • Hosting new user webinars and then making them on-demand resources

  • Developing an email nurture series that has bite-size learnings for users on specific features

  • Having customer success team members proactively reach out as soon as the user subscribes to answer questions and set up time to review

  • Personalizing any aspect of the onboarding with welcome screens

2. Track Customer Satisfaction

The next strategy focuses on quantifying how customers enjoy and use the software. From this, you learn how well the product delivers on user needs and expectations. By measuring this, you can be proactive in outreach, too.

Some tips for this include:

  • Sending surveys to new users for feedback

  • Recording sentiment from customer interactions with customer success and support

  • Looking at the time they’re spending on the platform

You can set up triggers in your system to create a response plan if surveys, feedback and sentiment are negative. If customer satisfaction is high, you’ll have proof points that your product checks the boxes for most users.

3. Listen to and Incorporate Customer Feedback

Many of the most successful SaaS companies do this well. After all, your customers are the ideal users and can relay what they most want from a product. This customer feedback loop is only complete if you use it to improve the software.

When you release these changes, be sure customers know it was because of their insights. Recognizing this shows your customers you care about what they say.

4. Work Hard to Retain Customers That Are Your ICP

Lastly, devise a plan to retain your ideal customer profile (ICP). Believe it or not, you may want to lose some customers because they are too high-need or not a right fit. 

Focusing on your ICP is good business because these are loyal customers who can become advocates. These repeat customers also have the most revenue potential.

In addition to these strategies, customer retention tools make it easy to improve rates and curb churn.

What Is a High Customer Retention Rate for SaaS?

SaaS businesses usually do well with retention rates. The average retention rate for SaaS is 85%, with minimal churn around 2%. 

Those best-in-class can reach a customer retention rate of 97%. There are differences in SaaS churn rate vs. retention rate, which are both important.

The key reason retention rates improve and churn is low is the “stickiness” of SaaS. Once people use it, it becomes part of their daily tasks. They need it for work or life, and they also don’t want to start over with a similar product because they’ve taken the time to learn yours and optimize it.

7 Other Key Metrics for Customer Retention to Pay Attention to

While customer retention rate is important, other key metrics can provide valuable insights. That said, keep these ones in mind. 

1. Revenue Churn Rate

The revenue churn rate is when your SaaS business loses revenue from existing customers during a time period. If it’s high, it indicates that existing customers are becoming dissatisfied and/or downgrading their plans.

2. Net Promoter Score (NPS)

NPS is a good measure of customer satisfaction. NPS is a number between -100 to +100. In SaaS, a good NPS is around +50. The number is part of a one-question survey that asks users how likely they are to recommend your product on a scale of 0 to 10.

Scores 0-6 are detractors and likely will churn. Scores from 7-8 are passive and neutral. Those giving you a 9 or 10 are your promoters and are very happy. The calculation of NPS is the percentage of promoters minus the percentage of detractors.

3. Repeat Purchase Rate

Repeat purchase rate (RRR) is a customer retention metric that calculates the ratio of returning customers compared to your total number of customers. It informs you of the number of returning customers, a sign of loyalty and satisfaction.

4. Customer Lifetime Value

Customer lifetime value (CLV) is the total amount a user will spend with you over their lifetime. It’s the measurement of their total worth to you and what you can generate over time. You want it to stay consistent or increase. If you see it decreasing, you’re acquiring too many low-value users.

5. Customer Churn Rate

Customer churn is the percentage of customers who stopped using your software within a specific period. Every company has churn, and you should keep an eye on this. When it grows larger than the average, you’ll want to investigate this and find the root cause so you can address it.

6. First Call Resolution Rate

First call resolution rate is a metric measuring the ability to resolve a customer question or complaint in the first interaction. You want it to be high, which means your customer success team understands customer needs and resolves issues. It also means fewer follow-ups, which can drain your support resources.

7. Monthly Active Users (MAU)

Monthly active users (MAU) is the metric that defines how many customers use your product each month. It measures engagement, popularity and reach. Decreases in this number are a concerning sign of falling satisfaction.

Looking Ahead in SaaS Retention Strategies

SaaS retention rates are metrics that matter, and you’ll need strategies to ensure they stay on the positive side. Many things impact retention, and you have the power to control many of them, from improving customer experiences to incorporating feedback into future product releases.

All these numbers also shouldn’t live in silos. Use all these retention metrics to be more data-driven in your strategies. Prioritize and monitor these to have greater visibility into customer satisfaction and needs. Apply all these tips to your SaaS business and get extra help from ProsperStack.

With ProsperStack retention software, you can reduce churn by 10-30%. It incorporates modern workflows and automated customer retention features.

Save customers and grow your revenue with an easy and innovative platform. Learn more about how it works by connecting with our experts.

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