February 17, 2023

How to measure and improve SaaS customer retention

Vincent Gouedard
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In a SaaS business, one of the keys to growth is customer, or user, loyalty. Acquiring new customers is always more expensive than retaining existing ones. That's why SaaS customer retention is a key KPI for this type of business, whose products are sold on a subscription basis. Here's everything you need to know to calculate and track it monthly, annually, or otherwise. You'll also learn about the objectives of this indicator. Finally, you'll learn how to optimize your business performance through retention.

1 - What is the retention rate in a SaaS company?

There are two types of SaaS retention rate: customer retention and sales, or revenue, retention. Let's look at these two types of retention, using concrete examples.

1.1 - Definition and calculation of SaaS customer retention rate

This ratio is used in marketing to measure the number of customers who remain loyal to your products over a period of time. Obviously, over the course of a week, month, quarter, or even annually, you lose some customers and gain others. The customer retention rate (CRR) calculates loyalty by excluding new subscriptions.

Before using the calculation formula, you need 3 pieces of information. Let's take a concrete example:

• number of customers present at the beginning of the selected period (D), say $90;

• number of new customers obtained over the same period (N), say $20;

• number of customers at the end of the period (L), say $80.

Calculate the customer retention rate as follows:

CRR = (L-N)/D × 100 = (80-20)/90×100 = 66.6%.

1.2 - Definition and calculation of net and gross income retention rates

Retention is also calculated in terms of sales, or revenue. NRR stands for net revenue retention. This KPI measures the incremental recurring revenue generated by existing customers over a given period. It plots changes in NRR due to expansion, contraction, and churn over a given period against NRR at the start of the period. As such, this ratio excludes revenue generated from new subscriptions. However, it does include the impact of attrition and contraction on MRR.

Here is an example of the data required to calculate the net revenue retention rate:

MRR (monthly recurrent revenue) at the end of the previous month (D), say $10,000. Now we calculate 3 types of MRR;

• Expansion, i.e. the increase in revenues obtained from customers already present at the end of the previous month (E), say $1000;

• Contraction, i.e. loss of sales due to downgrading of existing subscriptions (C), say $500;

• Churn, i.e. pure churn from lost customers (L), say $800.

As a result, the net revenue retention rate for this product is:

NRR = (D + E - C - L)/D×100, i.e. (10,000 + 1000 - 500 - 800)/10,000×100 = 97%.

💡 If the net revenue retention rate is above 100%, MRR gain from expansion covers churn and contraction (which is generally viewed favorably by investors, as it indicates significant growth potential).

The Gross Retention Rate excludes MRR expansion. The maximum is therefore 100%, and it is calculated as follows:

Gross retention rate = (MRR at start of period - MRR lost to contraction - MRR lost to churn) ÷ MRR at start of period

2 - Why is SaaS customer retention an essential KPI?

Any company that operates on recurring revenues, like SaaS companies, knows that it costs more to acquire a new customer than to retain an existing one. Alongside the churn rate, which measures the loss of users, take a close look at the retention rate, which reflects loyalty and the ability to grow your MRR with your existing customers.

2.1 - Customer retention is key to profitability

Companies with recurring revenues know how important it is to grow their revenue with the lowest possible customer acquisition cost (CAC). One way of reducing CAC expenditure in your organization is to work on customer loyalty over the long term. Indeed, by reducing churn, you reduce the amount of acquisition expenditure needed to replace lost customers and ensure that your MRR is maintained. The longer users stay, and the higher their subscriptions rise, the more profitable the business becomes.

The retention rate—and especially changes in your retention rate—shows how your customer loyalty. It measures your ability to upsell and cross-sell to existing customers to generate growth at lower cost, through expansion.

2.2 - Customer retention rate measures customer fit

This indicator reflects average customer satisfaction with the company's products. It therefore highlights the quality of your customer base and its suitability for your offering. If the KPI shows low customer loyalty, this may be due to your products, but it could also be that you're targeting the wrong clientele.

2.3 - Retention is the ability to maintain MRR without resorting to acquisition

By tracking this retention indicator, you can also measure the return on investment of your loyalty efforts. This way, you know whether your marketing or sales are helping to maintain or increase MRR, without having to resort to further customer acquisition.

3 - How to improve your company's retention rate?

You now know how to determine the retention rate in terms of both number of customers and revenue. Like the attrition rate, it's a valuable tool for tracking financial performance. Here are some ideas for optimizing this loyalty indicator.

3.1 - Track and compare retention over time

The first thing to do is to track retention rates over time. This is how you measure the improvement in loyalty and the effect of the marketing strategy deployed in this direction. And don't forget to compare your retention rates with those of similar companies, as they fluctuate according to your stage of maturity and average shopping basket (ARPA).

3.2 - Analyze the reasons for declining SaaS customer retention

Once calculated, the retention rate can be studied. Why don't customers seem to be loyal to your products? Carry out a cohort analysis to understand how customers work. In particular, try to identify when customers generally disengage. This data will provide you with the tools you need to improve customer satisfaction and reduce attrition. Stay in touch with customers. Regularly question customers through surveys or polls. Systematically do so every time a customer cancels a subscription.

3.3 - Ways to improve customer loyalty

A strategy to improve retention rates may include actions such as:

• listen to customers to retain those who are not satisfied and build loyalty;

• review the service or product offering to avoid disengagement in crucial phases of the customer's lifecycle;

• set up loyalty programs based on personas;

• fine-tune the user experience on the site or platform to increase customer satisfaction.

Of all the KPIs that are fundamental to managing a digital business, the retention rate is particularly relevant. Would you like us to help you set up this type of indicator, reduce attrition, and focus on your core business? At Fincome, we offer automated dashboards adapted to SaaS. Book a demo of our automated solutions for tracking SaaS customer retention and other KPIs.

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