- Customer retention rate
- Renewal rate
- Customer churn rate
- Revenue churn rate
- Customer lifetime value (CLV)
- Existing customer revenue growth rate
- Average revenue per user (ARPU)
- Net revenue retention (NRR)
- Customer acquisition cost (CAC) payback period
- Net promoter score (NPS)
#1: Customer retention rate
Customer retention rate is defined as the rate your business retains customers over a certain period of time. It’s the most straightforward method of measuring customer retention, and gives you an idea of how well your current strategy is working.
In terms of benchmarking, research from Mixpanel suggests that a customer retention rate of 35% or more is good for SaaS businesses.
Calculating your customer retention rate:
- Decide what time period to focus on (monthly, annual, etc)
- Take how many customers you had at the beginning of that period (A)
- Add all the customers that converted in between (B)
- Take the number of customers you had at the end of that period (B)
- Subtract C from B, then divide the resulting number by A
In simple form:
Customer retention rate = (customers at the end of the period (C)) - (new customers acquired (B) ) / customers at the start of the period (A)*
*A = customers at start of period, B = customers acquired during period, C = customers at end of period
#2: Renewal rate
Renewal rate is the percentage of your customers that take out a new subscription after their current contract has expired. It's important because — typically — the longer a customer stays with you, the more profitable they are.
A high renewal rate can indicate that your business is in good health. But, if your business is more short term and transient in nature (like dating apps or price comparison sites, for example), then the renewal rate might not always be the best indicator of success.
For those this metric does work for: The closer you get to a renewal rate of 100%, the healthier your business is (80% is a good target to aim for).
Calculating your renewal rate:
The easiest way to arrive at your renewal rate is to divide the number of customers that DID renew by the number of customers that COULD renew.
You should also keep in mind your typical subscription term — whether it’s annually, quarterly or monthly — and calculate your renewal rate around that.
#3: Customer churn rate
Customer churn is the opposite of customer retention. It’s the percentage of customers who stopped using your product or service over a specific period of time.
Every SaaS company has a certain amount of churn. But if your churn rate goes beyond 5% to 7%, then you’ve got something to worry about. Make sure you dig deeper to see what's causing this churn.
Benchmarking your SaaS customer churn rate depends on several factors, including whether your company is established or early stage, and what sector it’s in.
Established companies should have a churn rate in the range of 2% to 4%, while churn rates for early-stage startups can be as high as 24% (Source: ProfitWell).
Now, let’s quickly look at how the churn rate can vary by sector:
- SaaS: 4.79%
- B2B services: 6.25%
- Consumer goods: 9.62%
- Subscription video on-demand: 10.01%
Source: Rocket Marketing Group
Calculating your customer churn rate:
Before calculating customer churn, it's important to decide how frequently to calculate it.
This mainly depends on your customer volume — if your customer list is in the hundreds or thousands, then it makes sense to track churn on a monthly basis. If your customer list is small, then tracking the customer churn rate once or twice a year should be enough.
Annual churn rate = (number of customers at start of year - number of customers at end of year) / number of customers at the start of year
#4: Revenue churn rate
Revenue churn rate is the rate at which your business loses revenue from existing customers over a specific time period. This can happen as a result of your customers downgrading their service plan or cancelling an order.
A high revenue churn rate can indicate that your existing customers are becoming dissatisfied with your product or service. So, you can see why it’s such an important metric to understand and track.
Within the SaaS industry, a company’s age and price point will have an impact on what’s considered to be an "average" revenue churn.
Companies less than three years old usually experience revenue churn ranging from 4% to 24%, while companies over 10 years old have revenue churn ranging from 2% to 4%.
In terms of price point, companies with monthly recurring revenue on the lower end tend to have revenue churn between 5% and 16%, while those with high MRR experience rates of 2% to 8%.
Calculating your revenue churn rate:
We recommend calculating your revenue churn rate in monthly intervals, but make sure your figures don’t include revenue from any new customers in this time bracket.
Revenue Churn Rate = [(MRR at Start of Month - MRR at End of Month) - MRR in Upgrades during Month] / MRR at Start of Month
#5: Customer lifetime value (CLV)
Customer lifetime value (CLV or LTV) is the amount a single customer will spend on your product or service over their lifetime as a paying customer. It illustrates how much each customer is worth, while also providing a picture of how much revenue you could generate per account.
CLV is an important metric to track consistently. Ideally, your CLV will either increase or stay constant. If it's decreasing, you might be acquiring too many low-value customers.
To get a clearer picture, we recommend calculating your CLV in relation to your customer acquisition cost (CAC). For SaaS businesses, the benchmark ratio of CLV to CAC is greater than 3:1.
Calculating customer lifetime value:
This formula is designed to estimate CLV for subscription-based businesses, while taking customer churn into account. Make sure that both your ARPU and churn rate numbers come from the same time period as the CLV you want to measure.
CLV = Average Monthly Recurring Revenue per User (ARPU) / Customer Churn Rate
#6: Existing customer revenue growth rate
Existing customer revenue growth rate lets you know how much revenue your customer success efforts are generating, honing in on all those up-sell, cross-sell, upgrade, and add-on promotion efforts.
If you're doing this effectively, then your existing customer revenue growth rate will keep increasing. If not, then it will plateau and maybe even decrease.
The latter scenario can be risky for your business and its scalability because customer acquisition is a pricey process. If your existing customer revenue growth rate is on a downward spiral, then you should invest more resources in your customer retention efforts.
Calculating your existing customer revenue growth rate:
Existing customer revenue growth rate is usually measured monthly, so start with your monthly recurring revenue (MRR). Because you're measuring a type of customer retention, only calculate MRR from your existing customers, not new ones.
You'll need these two MRR figures to use in the formula:
- MRRS = MRR from existing customers at the start of the month
- MRRE = MRR from existing customers at the end of the month
Monthly existing customer revenue growth rate = (MRRE - MRRS) / MRRS