Customer retention

SaaS Metrics 101: Understanding Retention Rate

November 21, 2023

Understanding your customer retention rate is critical for SaaS growth and sustainability.

For starters, retention rate can be a barometer of your business's health.

High retention 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.

  • It’s a sign of customer loyalty.

Whereas low retention suggests:

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

  • 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.

When you measure and actively work on improving retention rates, it can help you improve your software, support and customer experience.

The difference between customer retention rate and MRR retention rate

  • Customer retention rate is the percentage of customers who’ve remained customers over a period of time, usually a year. Be sure to exclude new customers brought on during that period.

  • MRR retention rate is the monthly recurring revenue retained during a time period (excluding MRR added from new customers).

Considering both metrics gives SaaS companies more data and greater context for understanding retention.

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How to calculate customer retention rate (CRR)

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

Then, you’ll need these numbers:

  • Total number of customers at the start of the period

  • Total number of customers at the end of the period

  • New customers added within the period

The customer retention rate formula looks like this:

Retention rate = (total number of customers at the end of the period - new customers added within the period) / total number of customers at the start of the 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%.

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

Four customer retention strategies

1. Make onboarding seamless and set a good impression from the start

Customer retention starts on day one, as you set the tone for the customer experience. Make onboarding frictionless, and guide users to production adoption.

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 on-demand recordings

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

  • Having your customer success team proactively reach out to new users to answer questions and set up time to review

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.

Some tips:

  • 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 your product offering.

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.

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4. Work hard to retain your ideal customers

Lastly, devise a plan to retain users that match your ideal customer profile (ICP). Focusing on your ICP is good business because these are loyal customers who can become advocates. These repeat customers also have the greatest revenue potential.

What is a high customer retention rate for SaaS?

The average retention rate for SaaS is 85%, with the best companies reaching 97%. These averages are significantly higher than in some industries do to the “stickiness” of SaaS. They become familiar with your product and don't want to change if they don't have to.

Seven other key customer retention metrics

Consider these key metrics as well.

1. Revenue churn rate

Revenue churn rate measures revenue loss 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 measure of customer satisfaction. Users answer a one-question survey that asks 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 final NPS result ranges from -100 to +100, and is the percentage of promoters minus the percentage of detractors. In SaaS, a good NPS is around +50.

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 (LTV) is the average 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.

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7. Monthly active users (MAU)

Monthly active users (MAU) refers to the number of customers who use your product each month. It measures engagement, popularity and reach. Decreases in this number are a concerning sign of falling satisfaction.

How ProsperStack helps reduce churn

Customer retention can be improved through many interventions, from better onboarding to better offboarding. ProsperStack's automated cancellation flows help high-volume subscription businesses reduce churn 10-39%. Save customers and grow revenue with an easy and innovative platform. Learn more about how it works by connecting with our experts.

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