4 common retention rate mistakes
It seems simple enough, but there are many factors that contribute to retention. With so much riding on your retention rate, it's absolutely essential that you calculate it consistently and correctly. Understanding the four common mistakes below and the resounding effects they can have on your SaaS company will help you make solid calculations that inform smart decisions.
Mistake 1: You're not calculating both user retention and MRR retention
User retention and MRR retention are two different metrics that tell you different things. User retention rate measures the percentage of users that stay on with your service from week to week, month to month, et cetera. It's the metric that is most often referenced as “retention.”
Meanwhile, MRR retention is the revenue maintained over time from recurring subscription payments. It's the revenue that your company makes on a recurring basis once you deduct MRR lost from active cancellations and failed (delinquent) payments. It's most useful to think of this metric in terms of its inverse, MRR churn.
Calculate your company's MRR churn rate by dividing the MRR churn by the total MRR at the beginning of the month.
We've explained that user retention provides important feedback on your company's product, marketing, customer service, and pricing. But your MRR retention lets you know if your company can sustain profitability.
It's important to look at the two types of retention in conjunction with one another or you may be misled. For instance, one month you may see 7 of your 100 users churn—that's a 7% user churn rate, or a 93% user retention rate.
If each of those churned customers were on your lowest-tier plan and paid $50/month, that's $350 in MRR Churn for that month. If your MRR at the beginning of the previous month was $9,000 ($2,500 from 50 low-tier plan customers paying $50/month, $4,000 from 40 mid-tier plan customers paying $100/month, and $2,500 from 10 enterprise-tier customers paying $250/month), your MRR churn rate is 3.9% and your MRR retention rate is 96.1%.
Now let's imagine that if instead of seeing 7 of your lowest-tier customers churn, you had seen 2 of your enterprise-tier customers churn. With user retention rate at 98% instead of 93%, this might look like a much better scenario for your company.
But by losing these 2 enterprise-tier customers, your MRR churn for that month is $500. That's a 5.6% MRR churn rate and 94.4% MRR retention rate.
Though the difference between a 96.1% and a 94.4% MRR retention rate might not sound significant, over the course of 12 months, it represents a 12% difference in your monthly revenue. If you started with $9,000 in MRR, that's the difference between making $5,580 MRR at the end of the year or $4,500 MRR at the end of the year.
If you had only looked at user retention, you would have assumed you were doing better in the second scenario. Meanwhile, valuable revenue would have been leaking out of your business while you doubled down on the wrong practices.