The Definitive Guide for Retention Metrics

In the growth era, many companies operate under the assumption that client acquisition rules over everything in the industry. Of course, closing sales deals is essential for any company, but getting too consumed in fast-growth tactics might also diminish your relationship with existing customers.

SaaS entrepreneurs know how high the customer acquisition cost (CAC) can climb, yet most companies continue chasing new clients. What if we told you that there’s a gentler, more mindful way to grow your business? You can avoid the chase by turning your attention from customer acquisition towards customer retention.

With a relatively low entrance bar in the SaaS industry, new companies appear and disappear every day. While novelty and change drive the industry, decision fatigue among customers is real. Contrary to popular belief, many customers would rather stay loyal to a fitting service than spend time adjusting to a new one. It’s simple for some people: have a service that they can trust and rely on.

Following retention metrics, learning how they impact your business, and harnessing them for your bottom line can be a better path to steady and calculated growth.

What Is Retention Metrics?

Retention metrics is a measurement system where you use data to calculate and evaluate your relationship with customers. It’s also an excellent way to put a numerical value on your business’s overall health and growth. Once calculated and analyzed, the numbers will help you answer some critical questions for SaaS growth:

● What percentage of your customers stop buying the product? Why?

● How to incentivize customer loyalty?

● Is there a way to make more money from an individual customer?

● How can you add more value to an existing user’s journey?

A ton of different factors influence these metrics: you can approach the evaluation from a myriad of angles. Subsequently, there are quite a few calculations you need to make for gathering comprehensive data.

The various SaaS metrics can give you a more elevated vantage point to view growth and reduction in customer numbers, their buying habits, eagerness to pay, and, most importantly, retention.

Below, we describe a few essential metrics and give you reasons to start calculating and improving them today.

Customer Retention Rate

What Is It?

Customer retention rate is the percentage of the clients you manage to hold on to from your previous period. You can calculate monthly, quarterly, or yearly retention rate, depending on your goals.

Suppose you want to calculate the retention rate for August. Divide the number of active customers from August by the customers active at the end of July.

Why Is it Important?

This calculation is one of the most straightforward ways to pinpoint if your company has a healthy relationship with your customers. This number needs to be as high as possible. However, it also depends on your market and individual contract value.

How to Improve?

The best way to boost your retention rate is to offer a top-tier product and customer experience.

Customer Churn Rate

What Is It?

Customer churn is at the other end of the retention spectrum: it’s the rate at which you’re losing customers. However, this metric shouldn’t terrify you. Some churn percentage (5–7% a year) is natural and depends on various factors: acquisitions, business model changes, and necessity of the service at the client’s end. However, if it surpasses your industry’s healthy balance, you might need a more in-depth investigation.

Calculating the customer churn is easy: you find the difference between the number of customers at the beginning and the end of a period, then divide the result by the number of customers at the start of the phase.

Customer churn, like the retention rate, can be measured in months, quarters, and years.

Why Is it Important?

This metric is the first diagnostic step to finding the reasons why customers leave your business. If the churn rate is over the top, there must be a problem with customer service, the product itself, or marketing. Either way, the clients aren’t getting the value they expect from you.

How to Improve?

You need to search for and eliminate the factors that cause customer loss. You can try getting feedback from the customers, implementing a CRM system, or boosting loyalty with incentives.

Once you understand and calculate the above concepts, other retention- and churn-related metrics will make more sense immediately.

Having covered two essential ones, we’ll now discuss some revenue-related SaaS metrics in this section.

Net Revenue Retention

What Is It?

This is a type of retention statistic that goes into a more specific, SaaS finance area. It helps you see the changes in net revenue during a given period within a set customer group.

Say you want to get the net revenue retention for the month. You’d divide current monthly recurring revenue (MRR) from a specific customer set by MRR from the previous month.

Why Is it Important?

Net revenue retention prepares us for a stagnation scenario. If the company failed to acquire new clients, it would need to make upsells and cross-sells to keep this statistic positive.

How to Improve?

While 95% or more is an excellent net revenue rate, shoot for higher results by lowering churn. Cross-sell and upsell to secure your net revenue rate.

Gross Revenue Retention

What Is It?

Gross revenue retention shows how much revenue you’ve lost because of the churned users.

Calculating this one is easy: divide the churned customer number by the total recurring revenue for the period, and then subtract it from one.

Why Is it Important?

This calculation will give you a percentage that shows your company’s overall revenue retention ability. If you score higher on this front, the slower months will be easier. Use this statistic in conjunction with customer retention, and you’ll know the profile of customers leaving the company.

How to Improve?

You use the churned revenue data while calculating this metric. It would be logical to say that one way to improve it is to stop your customers from leaving.

Customer Lifetime Value

What Is It?

Customer Lifetime Value (LTV for short) is the overall dollar amount a single customer spends as long as they keep using your services. All sustainable companies need to have an LTV higher than customer acquisition cost (CAC).

To get the LTV, you need to divide the average revenue per user by MRR churn (or customer churn).

Why Is it Important?

A prosperous LTV demands you meet a recommended benchmark against CAC, which is about 3x. Knowing this, you can construct customer acquisition campaigns and even leave space for a sustainable R&D operation.

How to Improve?

Customer spending depends on various factors, so there are several methods to scale LTV. Offering new products, upsells, and cross-sells to an already existing client are but a few ways to grow. If the value proposition is fair, the customer will become even more loyal and attached to your brand.

Existing Customer Revenue Growth

What Is It?

Knowing one customer’s life cycle value is useful, but you might also want a higher-level analysis. Customer revenue growth accounts for revenue change for a specific time frame.

Remember, SaaS finance can be tricky, and your cash flow can have significant volatility. You want to be as thorough in your revenue calculations as possible. Adjust the period, depending on your company’s size, number of clients, and goal for this data.

To get this statistic, calculate the difference between the end-of-the-period and start-of-the-period revenue, and divide it by the latter.

Why Is it Important?

This is another data point to evaluate and, subsequently, helps you add value to your existing customer base. It enables you to realize their potential and find ways to interest them with your service.

How to Improve?

Spend more resources on making the customers feel appreciated, and they will answer your call.

Another block of retention metrics calculates and analyzes the level of loyalty among your customers. We’ve prepared two interesting yet overlooked metrics for you below.

Net Promoter Score

What Is It?

The Net Promoter Score (NPS) measures overall customer satisfaction. You ask the customer to grade the probability that they will recommend your product at a scale of 1–10.

● Any grade below 6 harms your company because the customers can actively discourage others from using your services. They are called detractors.

● Discard grades 7 and 8 because these users are neutral towards your product.

● 9 and 10 are the grades you should be aiming for. These are the promoters and active ‘participants’ in your company’s marketing efforts.

Once you have collected the scores, subtract the detractor percentage from the promoter percentage to get the net promoter score.

To make this metric more useful, you need to ask the users to explain their grade. Make sure to include at least one open-ended question encouraging them to share their reasons.

Why Is it Important?

This data, combined with some other metrics like churn and revenue growth, is a clear indicator of your company’s potential.

How to Improve?

The promoters are a great source of referrals and word-of-mouth marketing. While it might seem that people listen to ads more, crossing the line of a ‘good friend recommended your company’ can bolster your growth. You can also incentivize promoters with gifts and affiliate opportunities.

Loyal Customer Rate

What Is It?

This one is the number of people who made a repeat purchase from you during a given period. While this statistic might not work for subscription-based SaaS companies, there is room to play with here.

Here is what you need to do:

● Find the total number of customers during a period.

● Add together the number of existing and new users who made multiple purchases.

● Divide the second by the first to get your loyal customer rate.

Why Is it Important?

Loyal customers have the largest LTV, they talk about your product, and they love your brand. Knowing them is the first step towards a long-time friendship and brand advocacy.

How to Improve?

It’s simple: loyal customers expect that you remember them, appreciate them, and wow them from time to time. Make sure to pamper the users that have committed to your business.

Conclusion

Calculating customer retention metrics is a lot of work. However, we couldn’t develop a cookie-cutter version of the most critical metrics for all the SaaS companies in the world even if we tried.

Your first step should be to overcome the tricky parts within each metric. Figure out which individual statistic fits your business and adds the most value.

Once you’ve made it through, handpick a few of them that work best when combined. Making the metrics bond will reveal a more advanced territory of data manipulation. You’ll be able to finally receive the keys to the immense potential of your business!

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Victor Maia

Victor Maia

CMO as a Service @Hack4Change, Head of Community @SaaSholic and Community Manager for Team GaryVee Brazil. Eventually writes on https://elemento.ag/blog/ and podcasts on https://growthdiaries.me/.

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