The ultimate guide to customer retention strategy for SaaS
Explore what you need to build and implement a solid retention strategy for your SaaS business. Reduce churn, foster relationships with loyal customers, and drive growth with visibility over the metrics that matter.
Successful SaaS businesses implement growth strategies across customer acquisition, retention, and expansion.This is to say, they learn how to:
- Acquire more of the right customers
- Retain them for longer
- And expand their accounts or broaden the pool of customers they can serve.
This guide is all about part two of that journey, retention.
Buckle up, we’re taking you through everything you need to build and implement a successful (and compliant) retention strategy, including:
- An introduction to customer retention and why it’s more important than ever for SaaS businesses to get it right
- 4 ways to increase retention in your SaaS business
- How to make sure you’re recurring revenue doesn’t get you in trouble with sales tax authorities
- How to measure success with the metrics that matter
What is retention in SaaS?
SaaS retention is a measure of how well your business retains customers (or subscribers) over a period of time. You can measure retention in different ways, looking at the percentage of customers you keep versus those who churn or by looking at the growth or contraction of your recurring revenue.
There are a number of other SaaS metrics that provide leading indicators about the health of your retention strategy and subscription revenue, including customer and revenue churn, payback period, and customer lifetime value (CLV).
Why is retention important for SaaS businesses?
Retaining customers is crucial for SaaS businesses. Not only does it indicate the value your customers are getting from your product and whether they’re happy with the service you provide – successfully retaining customers can supercharge your growth. Here’s why:
It costs five times more to acquire a new customer than it does to retain an existing one, or so the saying goes “i”. While this particular statistic has become somewhat of a SaaS urban myth, 70% of companies do recognize that it’s cheaper to retain customers than it is to acquire them.
Increasing retention also helps you keep those acquisition costs in check. Acquiring customers costs money, and if you lose them just after they join you, it’s unlikely you’ll see the return on that investment. The best way to track this is by using the Customer Lifetime Value (CLV) to Customer Acquisition Cost (CAC) ratio. Here, a ratio of 1:1 would mean that you break even because the customer pays you exactly the same amount that you paid to acquire them. The benchmark for this ratio is 3:1 - where over their time as a paying customer, a user pays you three times more than it cost to acquire them. 💸💸💸
Did you know?
According to ProfitWell research, SaaS businesses with the highest CLV to CAC ratio generate 20-30% of their monthly revenue from existing customers.
Retaining and growing your existing customer accounts is key for sustainable and long term SaaS growth. The kind of growth that ultimately leads a business to become profitable.
In fact, research shows that increasing customer retention rates by 5% can increase profits by 25-95%.
If you look at some of the most successful SaaS businesses to IPO in recent years, retention was core to their achievement. We know this from looking at the Net Revenue Retention rate of those businesses - some just shy of 160%! For context, an NRR of over 100%, means that a business continues to grow even without acquiring any new customers.
Retaining customers is key to unlocking the third step on the SaaS growth journey, expansion revenue (which can actually drive retention even more in the long run).
Firstly, you can keep adding value for your loyal customer base and encourage them to upgrade or pay for access to additional products, features, or services. For example paying extra for Netflix so you can watch that murder documentary on one device, while your partner catches up with their favorite sitcom on another. Or, persuading your manager to add more seats to a tool like Miro so you can collaborate more effectively (and maybe even avoid yet another zoom meeting).
Knowing that you have a set of loyal customers who aren’t going anywhere also gives you the stability and steady recurring revenue needed to pursue new avenues for growth, like serving new customer segments, or expanding into a new market.
Did you know?
Research by Profitwell found that customers who have at least one add-on have a 20-50% higher CLV than those that don’t.
The power of retention isn’t new, yet only 40% of companies have an equal focus on both customer acquisition and retention. So, let’s look at what exactly you can do to build a solid retention strategy.
4 ways to strengthen your retention strategy
1. Reduce involuntary churn with improved recurring billing
Involuntary churn is when a customer churns without intending to. This can happen if their payment fails and it leads to subscription cancellation. In these situations, the customer didn’t fall out of love with your product, or intentionally stop paying their subscription fee – but you still risk losing them completely.
In fact, involuntary churn accounts for 20%-40% of SaaS churn. That’s an astonishing number, and bear in mind that these are customers (and revenue) lost every month that don’t actually want to stop using your product.
It can be a silent assassin for SaaS businesses. But it’s also avoidable if you take the time to understand the churn in your business and find out:
- How much of your business’ churn is involuntary
- What is causing it
From here, you can put measures in place to reduce or - even better - prevent it.
Reasons for involuntary churn
Payments fail for a number of reasons, from insufficient funds to incorrect payment details to fraud.
Firstly, different payment methods are more likely to fail than others. Payments that are taken from a direct source of funds, like a digital wallet or bank account are far less likely to fail than credit card payments. At Paddle we see payments made by credit card have twice the proportion of failed payments than those that run through PayPal.
The most common reasons for card payment failure are:
- Expired cards
- Hard declines after fraud attempts
- Soft declines after credit limit maxes
- Out-of-date billing information
- Charges not flagged as recurring
So, now we know a bit about why payments fail, we can look at how to stop them from becoming a problem. The tactics for which come down to two things:
- Preventing payments from failing: The best way to reduce involuntary churn is to optimize your payment processes so that fewer payments fail. You can do this by accepting a variety of payment methods, charging in your customers’ local currency, or using tools like card updaters to make sure you don’t get caught out by expired card details.
- Recovering failed payments: Some payments will fail so you should implement dunning and retry strategies to help you recover that revenue and most importantly, keep that customer subscribed. In fact, Paddle data shows that businesses with a payment retry strategy in place experience up to 10% less revenue churn.
For more on how to reduce involuntary churn, check out our guide.
2. Create a winning subscription experience
Your subscription experience needs to support your business goals and meet the needs of your customers.
For the business this means:
- Facilitating recurring payments and billing
- Supporting your pricing strategy and billing model
- Aiding retention with dunning and payment retries
For your customers it means:
- Flexibility in terms of how and when they make each payment
- The control to manage subscriptions themselves (for example to move between packages, purchase add-ons, pause or cancel their subscription with you)
- Robust support systems for subscription and billing queries.
Creating a winning subscription experience that ticks these boxes starts with a deep understanding of how your customers want to pay for and interact with your product.
- Are buyers looking to purchase your product long-term or does usage fluctuate (for example with seasonality or around project based work)?
- Would they prefer to pay monthly, or annually? What will they be expecting this process to look like and do they prefer to pay?
- How likely is it that customers will want to make changes to their subscriptions?
- What sort of customer support will customers be expecting to manage all of the above? Can they largely self-serve, or will you need to build out your support team?
Once you understand what your customers want from your subscription experience, you can start to think about how you can use subscription management to prevent churn and increase retention.
Here’s what some of those tactics might look like:
- Pauses over cancellations: 44 percent of consumers who are likely to cancel would instead pause their subscriptions if the option was available. Giving customers this option also gives you the best chance of persuading them to reactivate their accounts and avoid them churning for good. Examples where this would be a useful tactic include: briefly stopping your subscription to a research tool at the end of a project before you need it for something else or pausing your HelloFresh subscription and gym membership while you go on holiday.
- Make it easy to cancel: No business ever wants its hard-earned customers to stop using its product but trapping them into a subscription isn’t the answer. Making it easy for customers to cancel takes any friction out of that last touchpoint with you and gives you more chance of winning them back later down the line.
- Put the customer in control: Let your customers control how they use their subscription. Make it easy for them to purchase add-ons, upgrade or downgrade their subscription package.
Here’s our Subscription Senior Product Manager, Rebecca with more on using subscription management to reduce churn and increase retention.
Case study: Kaleido
Founded in 2017, Kaleido is now a global SaaS company with customers in over 180 countries. In 2021, it was acquired by the graphic design platform, Canva.
Along its rapid growth journey, Kaleido implemented new features and optimized processes that helped increase retention and reduce involuntary churn by 38%. Here’s what they did:
- Flexible subscriptions: Kaleido customers can pause or delay their subscription payments up to two times per year. This functionality was added to Kaleido’s retention flows, using Paddle’s Subscription API.
- Willingness to pay: Kaleido conducted willingness to pay surveys to help inform its pricing strategy. This helps increase retention by making sure customers are getting a service they expect for the amount they have paid.
- Localization: Kaleido’s products are sold in over 20 local currencies. This helps to reduce involuntary churn, by reducing the number of payments that fail.
3. Build lasting relationships with your customers
Even if your product is great and your customers love using it, a lack of customer support if something goes wrong will quickly turn an advocate into an ex-customer.
Rather than wait for something to go wrong, you should concentrate on building lasting relationships with customers throughout the entire customer lifecycle. This way, you give yourself the opportunity to reinforce the value of your product at different points and help your customers get the most out of it. Regular communication and feedback from your customers also give you the chance to spot and resolve any problems early on – before they lead to churn.
Here are some ways to foster lasting relationships with your customers:
- Consistency is key: Make sure every touchpoint with your company is positive and consistent. Every customer facing team and communication channel should fit with your company’s brand values and tone of voice. There should also be clear processes and service level agreements that ensure that customers with the same or similar issues receive the same support.
- Offer different support channels: Customers should be able to access support in a variety of ways, depending on the nature of the query. For smaller issues, it makes sense to create support content and guides that help people self-serve. This content needs to be easy to navigate – you could use a chatbot to help surface it more efficiently. This frees up your team to handle more serious or complex queries by other channels like email, phone, or live chat.
- Keep your finger on the pulse: Use Net Promoter Score (NPS) or customer satisfaction surveys to give you a sense of how happy customers are as users of your product. This helps you see what’s working well and identify any changes in behavior or satisfaction ratings early on.
- Keep adding value: Don’t rest on your laurels, just as your business develops so will the needs of your customers. Keep finding ways to add value, whether that’s with additional products or new features, give your customers even more reasons to stick with you. If you don’t your competitors sure will.
4. Test, iterate, repeat
Managing customer retention effectively is a complex challenge that adapts and changes as your business grows. You should view your retention strategy as a developing process that will change over time.
Speak to your current customers and find out what they like about your product, and what they don’t. What other features would they like to see? Is there something that would help them get even more value from it?
You should also ask departing customers for feedback to find out what happened, what features were missing, and what solution they plan on using instead. This gives you the best chance of addressing the problem - and once you have, you can target these customers with win-back campaigns that remind them how great you are.
Common pitfalls and how to avoid them
Retaining more customers means capturing more recurring revenue, which is great! But extra revenue and larger transaction volumes actually mean more than just more money in the pot at the end of the year.
It means more (and different types) of data to manage. It can also mean that your business is more likely to breach sales tax thresholds, with customers from different regions, with different financial regulations.
All of which is easier to manage if you plan ahead. So, here are some things to think about.
Sales tax and financial compliance
Firstly, how will this extra cash and additional transaction volume impact your sales tax liabilities with jurisdictions around the world?
Sales tax on software is dependent on where your customers are based, not just where your business has a physical presence - so it’s important to understand the regulations everywhere you operate before your business surpasses any threshold for sales tax.
Once you know where you’re liable, you’ll need to register with the sales tax authority in each jurisdiction, before filing and remitting sales tax payments accordingly.
Check out our Sales Tax Agony Index 🌶 for more on the different regulations around the world.
If you have customers from different markets, you also need to consider the local financial compliance regulations. Examples include PSD2 in Europe or 3DSecure -the requirements for which can even change by region.
Here’s our Senior Payments Product Manager, Quinisha Anderson with more.
Reporting and analytics: The metrics that matter
There are a number of SaaS metrics that will help you measure the success of your retention strategy.
Choosing the right metrics will depend on how you’re trying to improve retention. You see, some businesses might be trying to address a churn problem, where others are focused on adding value to increase retention and customer lifetime value. Yes, there’s crossover but understanding what you’re trying to achieve is key. Your overall business’ goals, your company stage, the industry you’re in and the customers you serve should also help inform which metrics will be the most useful.
Here’s some to consider:
- Retention rate: The percentage of customers you keep over a given time.
- Renewal rate: The number of customers who renew their subscriptions.
- Churn rate: The percentage of customers who stop doing business with you over a period of time. Or the amount of Monthly Recurring Revenue (MRR) that is lost because of churn or downgrades.
- Customer lifetime value (CLV): How much revenue a customer will bring during their relationship with your company.
- Average Revenue Per User (ARPU): The revenue generated by each user over a given period of time.
- Net Revenue Retention (NRR): The amount of recurring revenue from current customers you retained over a given period of time.
Once you know which metrics to track, you need to make sure that your revenue infrastructure is set up to give you that information. For this, your user and revenue data need to be connected - which means integrating all of the potential sources.
Some businesses build this in-house through their own reporting systems, others use the reporting functionality in their payments and billing tools, while others employ another tool, specifically designed for reporting and analytics.
Putting it into practice
To reduce churn and increase retention effectively, your revenue infrastructure needs to strike the balance between flexible subscriber experience and efficient business processes that help you take action before it’s too late.
For this, you’ll need a number of systems working seamlessly together, including:
- Payments processors
- Subscription billing and management logic
- Sales tax compliance
- Reporting functionality
- Customer support systems
This is your revenue infrastructure. And broadly speaking, there are three main ways to build one for your business:
- Build the system in-house: Using internal resources to build subscription billing logic that works alongside your payment gateway. Dedicating headcount to maintain these systems and manage compliance.
- Piecemeal revenue stack: Integrating a number of different specialist tools together to create a stack that works for your business type.
- An all-in-one platform: Either using a merchant of record (MoR) or revenue platform that acts as a reseller and manages all aspects of this system under one roof.
To help you understand what exactly is required to build a robust revenue infrastructure, we’ve put together this guide - complete with checklist.
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This guide is part of a three-part series on SaaS revenue infrastructure. Check out Part 1 to master customer acquisition or Part 3 to find out how you can build and implement a successful expansion strategy.