Success in SaaS isn’t only about acquiring new customers. It's also about hanging onto (or retaining) the ones you've got.
Customer retention strategy involves engaging customers and encouraging them to continue buying products or services from your business. Its role in the success of your SaaS business shouldn’t be overlooked.
In this guide, we unpack the metrics that will help you know if you have a problem with your SaaS retention rate in your business, and how to improve it.
Why is measuring customer retention important for SaaS businesses?
Acquiring new customers can be an expensive and time-consuming process. Especially in a world where the cost of digital advertising is just going up and up.
You have to attract new customers, engage them, and then convert them. And once they’ve converted, you then need to turn them into loyal customers because — while new customers are important — your existing ones tend to be better for your bottom line.
In fact, current customers spend an average of 67% more than new ones. Not to mention the fact that it’s nine times cheaper to retain existing customers than acquire new ones. So it’s confirmed: retention = an excellent way to boost your overall revenue.
How to measure customer retention
The process of measuring SaaS customer retention rate will typically vary on your company’s industry and subscription model, but the basic steps include:
- Determine the total number of customers at the end of a specific period
- Subtract the total number of new customers acquired during that period
- Divide the number by the total number of customers you had at the beginning of period
- Multiply the result by a hundred to express the customer retention rate in percentage.
So, if you’re selling a software subscription for annual billing (so customers are mainly engaging with your service on an annual basis), it makes sense to measure your SaaS customer retention rate over the long term.
If your customers engage with your service more frequently, such as the common monthly subscription model often used in B2C, then it's better to measure customer retention over a shorter time frame to ensure you can spot key trends and opportunities in the data.
Once you've decided on which suits your business best, it's time to look at the essential metrics for measuring customer retention.
How about 10 of them?
10 metrics to measure customer retention in SaaS
- 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
#7: Average revenue per user (ARPU)
Average revenue per user, or ARPU, is the average amount of revenue that each subscriber generates over a given period. It's a helpful metric for any business, but particularly relevant in SaaS, where subscribers can upgrade, purchase add-ons, or make repeat purchases of some other products.
Tracking your ARPU over time is a good way to evaluate your growth but a word of warning: ARPU alone can be misleading. Use it in conjunction with other SaaS metrics.
As ARPU is a number instead of a rate, you should try to be judicious when referring to industry benchmarks. It's unproductive to compare your business to others with completely different characteristics and/or priorities.
According to data from Mondaynote, ARPU benchmarks can fluctuate wildly according to factors such as country, market segment, or product/user segment.
Calculating your ARPU:
Calculate ARPU by dividing total revenue by the number of users during a specific period (typically one month).
Total revenue $500,000 per month
Total subscribers 50
ARPU = $10,000 per month
#8: Net revenue retention (NRR)
Net revenue retention is a metric that indicates how secure your SaaS business is. It tells you how much recurring revenue you’ve retained from current customers over a given time period. NRR encompasses upgrades, downgrades, and churn to paint a clear overall picture of how much your business could grow, just from its existing customer base.
If you’re a small business, then you should aim for an NRR of at least 100%. Larger enterprise-focused SaaS firms should aim for 130% (according to this 2020 round-up from SaaStr).
In short, the higher your NRR, the better.
Calculating your NRR:
Here’s the formula for calculating net revenue retention:
NRR = (Starting MRR - Contraction MRR) - (Churn MRR + Expansion MRR) / Starting MRR x 100%
#9: Customer acquisition cost (CAC) payback period
To maintain a healthy business, it's critical you don’t spend more on acquiring customers than what they’re actually paying you. Luckily, there’s a metric to work all that out. Customer acquisition cost (CAC) payback period is the number of months it takes to earn back what you spent on acquiring your customers.
So, what does a good CAC payback period look like? The main rule of thumb here: the lower, the better.
A good CAC payback period for SaaS startups is 5-12 months, although this can fluctuate while companies are in their early stages. In general, you should aim for a CAC payback period that doesn’t go over 12 months.
Calculating your CAC payback period:
First, you’ll need to know your CAC, ARPA (Average Revenue per Account), and Gross Margin percent figures. From there, you’ll divide your CAC by your ARPA multiplied by Gross Margin percent:
CAC / [ARPA X Gross Margin Percent] = CAC Payback Period
#10: Net promoter score (NPS)
A key metric for customer satisfaction — NPS — helps measure the overall satisfaction of your customers and how likely they are to recommend your business to others.
NPS scores range from -100 to +100, but what’s considered to be a "good" or "bad" score varies across industries. For the SaaS industry, a good NPS score is around +28. Anything higher than that is extremely positive.
Calculating net promoter score:
NPS is measured via a customer feedback survey. It will ask questions considering things like:
- How satisfied your customers are with your product/service
- Their level of loyalty to your business
- How likely they would be to recommend your product
Survey responses are measured on a scale of 1 to 10, which you can evaluate like this:
- Scores 0-6: These customers are known as "detractors," meaning they’re unhappy with your product and are the most likely to churn.
- Scores 7-8: These customers are seen as "passives," and have a neutral opinion of your business.
- Scores 9-10: These are the "promoters" — they love your business and will happily recommend it to others.
Net Promoter Score = % of Promoters - % of Detractors
Keep on tracking
Retaining your returning customers is a great way to maximize revenue at the same time as saving on acquisition costs. But you do need to track your results on a regular basis to keep on top of this, and get a clear picture of just how well your SaaS business is performing. And guess what? Knowing (and understanding) your key customer retention metrics is a massive leap forward towards achieving this goal.
You’ve got the metrics, now take the next step – check out our guide to building a SaaS retention strategy for your business.
Customer retention metrics FAQs
What is a KPI for customer retention?
Customer retention as a KPI is the measure of a business’ ability to retain customers and generate revenue from repeat customers.
Why is customer retention important?
SaaS and other businesses should focus on customer retention rate because the cost of acquiring new customers is higher than retaining existing ones. A solid customer retention strategy is expected to deliver a better ROI than your acquisition efforts.
What is the difference between customer acquisition and customer retention?
Customer retention includes all strategies that aim to keep existing customers, while customer acquisition refers to tactics businesses use to attract new customers. While customer retention focuses on improving customer satisfaction by offering consistent quality and loyalty programs, acquisition involves all marketing efforts geared toward promoting products and services to a broader audience.