By Victor Antiu
Guest author Victor Antiu is a Marketing Manager at Custify,
Churn is the killer of SaaS businesses. At the opposite end of the spectrum, we have customer retention, the only strategy that can save your business in the long term.
Imagine your business is a bucket full of water. Churn pierces your bucket, making it leak. The more holes you have (or the bigger they are), the faster your bucket will be emptied. Now, some businesses think they can easily solve this issue by adding more water to their bucket (customer acquisition), but long term, that’s not an efficient strategy. There are only so many customers you can acquire.
A SaaS customer-retention strategy, on the other hand, is the superglue that helps you fix the holes in your bucket and prevent your customers from leaving you.
How does customer retention help your business over time?
SaaS businesses are not profitable from month one, so acquiring more customers can actually hurt your bottom line. If your customers churn before completing enough payment cycles to break even on the acquisition costs, you’ll eventually run out of budget and won’t be able to grow your business.
Another reason you should focus on your current customers is because they’re your most promising users. They’ve already gone through the onboarding process and are paying you every month; it would be a pity to lose them now.
A customer-retention strategy will ensure your customers stay engaged and your product becomes a part of their daily life. As more time passes, you’ll even have the opportunity to upsell these customers, increase their lifetime value (LTV), and even turn them into promoters who can bring you more customers through referrals.
Sound good? Read on to find out:
- How you can calculate your retention rate
- How your retention rate compares to other businesses in your industry
- How you can improve your retention rate by avoiding some common mistakes
How to Calculate Your SaaS Customer Retention Rate
You can’t improve what you don’t know. So the first step towards improving your retention rate is calculating it. But first, let’s see what the retention rate is.
A retention rate is the percentage of customers you retain over a given period of time. Because retention and churn are closely related, a high retention rate leads to a low churn rate.
Taking this definition into account, a simple formula would be:
Retention rate = Number of active users who continue to be your customersTotal number of active users at the beginning of the time period * 100
Additionally, you might also find this churn calculator helpful.
Mistakes SaaS Businesses Make When Calculating Their Retention Rate
Now, because this formula is quite simplistic, it doesn’t cover all the use cases you might encounter. Here are a few common mistakes you might be making while calculating SaaS customer retention:
Mistake #1: You’re not calculating both customer retention and MRR retention.
You have customer churn (lost customers) and revenue churn (lost revenue due to downgrades), so it makes sense to also calculate retention separately. Yet many SaaS businesses don’t.
To calculate your monthly recurring revenue (MRR) retention rate, look at your MRR churn rate. If 3 out of 10 customers churn over one month, that’s a 30 percent churn rate or a 70 percent user retention rate. If each of these three customers paid you $50, that’s a $150 MRR churn. If the previous month you earned $700, your MRR churn rate is 21.42 percent, so your MRR retention rate is 78.57 percent.
Mistake #2: You count your canceled customers as churned customers.
Many SaaS businesses think that once a customer cancels their subscription, they’re gone for good. But that’s not true, in fact, customers can cancel their subscriptions involuntarily.
If you automatically count canceled subscriptions as churned customers, you miss the opportunity to reengage those customers and improve your retention rate.
Mistake #3: You’re not calculating different retention rates for different pricing tiers.
If you offer more than one pricing option, you should also calculate a separate retention rate for each pricing tier. Losing one customer who was paying you $1,000 per month is not quite the same as losing five customers who were only paying you $50 a month.
SaaS Customer Retention Rates by Industry
Now that you know what your customer retention rate is, it’s time to see how your business performs compared to other companies in your industry. Here are some SaaS customer retention rates by industry:
- Retail: 63 percent
- Banking: 75 percent
- Telecom: 78 percent
- IT Services: 81 percent
- Insurance: 83 percent
- Professional Services: 84 percent
- Media: 84 percent
SaaS Customer Retention Mistakes
If your SaaS customer retention rate is lower than the average for your industry, here are a few mistakes you might be making:
1. You’re not addressing involuntary churn.
Unlike voluntary churn, involuntary churn is completely avoidable. This means you can improve your retention rate with little or no effort.
The most common reasons for involuntary churn are:
- Expired cards
- Hard declines after fraud attempts (if the card details have been stolen before)
- Soft declines after credit limit maxes
- Out-of-date billing information
- Charges not flagged as recurring
Fortunately, all these issues can be easily fixed by using an account updater—a service that automatically checks your customers’ card details with their issuing banks before each renewal. On average, SaaS businesses that use this service see 2-5 times improvement in recovery rate.
2. You’re focusing on customer acquisition instead of customer retention.
It’s easier and more profitable to sell to existing customers. Research shows that increasing customer retention rates by 5 percent increases profits by 25-95 percent.
As we’ve previously mentioned, focusing on your current customers can help you grow your revenue over time through upsells and upgrades—not to mention that you get to build strong relationships with your customers. As they become more loyal, the cost associated with keeping them decreases and they also bring more business to you through referrals.
3. You have a poor onboarding process.
Underestimating the importance of a great customer onboarding process is a threat to SaaS businesses. The onboarding period is the only chance you get to make your customers realize the value of your product. If you fail to make your users reach their “aha” moment, you’ll lose them.
During the onboarding period, it’s important to inform your customers about your product’s features, updates they might not know about, and offer them resources (documentation, step-by-step tutorial, live demos, and so on) that can help them gain value from your product.
Another thing you should keep in mind is customer fit. If you keep selling to the wrong customers, you won’t be able to prevent them from churning.
4. You’re setting unrealistic customer expectations—and you fail to deliver.
Be careful not to promise more than you can deliver. Setting unrealistic expectations about your product’s capabilities can bring in more customers up front, but they will churn as soon as they realize the false advertisement.
This not only hurts your business short term (by having a higher churn rate) but also long term. It’s not only the good news that spread through word of mouth, so be wary of bad reviews. Analyze your sales funnel and make sure customer expectations are aligned with your product’s features. It’s better to have fewer but happier customers.
5. You’re ignoring customer feedback.
How good are you at asking and implementing customer feedback? There’s no such thing as a perfect product. But if you’re constantly working on improving it and considering your customers’ recommendations, you’re one step closer to improving your SaaS customer retention rate.
Negative feedback is actually the most valuable feedback you can get. Ninety-six percent of unhappy customers churn without ever giving a reason why. Positive feedback is also useful as you can use this information during the sales process. Use what your customers love most about your product to attract more customers.
6. You’re not proactive.
Having a great support team is excellent. But you know what’s even better? Helping your customers solve issues they didn’t even know they had! This will go a long way toward helping you establish strong relationships with your users. Additionally, you can also reward your most loyal customers with special discounts or exclusive access to new features.
7. The customer experience you’re offering is inconsistent or your product isn’t reliable.
You don’t have to have the best product out there, but the experience you offer needs to be consistent. If your product is unreliable (you experience frequent crashes or outages), it doesn’t matter how great it is when it’s working; your customers will judge you for the times it stopped working.
This not only applies to the technical side, but to your team as well. If your reps make different promises to your customers, the inconsistent customer experience may cause your customers to churn.
Use Customer Success to Stay Above Average
Customer success management (CSM) is a critical component of increasing the retention rates of SaaS businesses. That’s because a business’s health is directly impacted by how quickly and efficiently you can make your customers happy, thus retaining them long term.
Customer success helps you make your customers achieve their “aha” moment faster, so they start gaining value from your product before they lose interest in it. From then on, you need to demonstrate continuous value to keep your product relevant to your users.
There are four pillars of customer success:
Your job doesn’t end when customers buy your product. In fact, you should double down on your efforts after the initial purchase is made.
You’ll never be able to achieve 100 percent retention, but using customer success software will help you increase your SaaS customer retention rate by implementing the advice we’ve mentioned above.