Have you ever heard any SaaS founder or VP -CS saying,” I‘m okay with losing a few customers every month?”. Probably not. That’s because Customer Retention is critical.
Customer retention is critical — particularly for B2B SaaS companies. And the reason is manifold-
- Retaining a customer is way more profitable than acquiring new ones.
- Loyal customers contribute to your revenue growth through Upsells, providing referrals, and advocacy. Click here to know why customer retention is important.
Considering how important it is for companies to hold on to their customers, having visibility into the churn is very important. Churn Analysis will help you know what is working well and what needs improvement.
Here is a detailed process and framework for analyzing churn.
Calculating Customer Retention
When it comes to measuring customer retention, the two most important things are .” How much money am I retaining?” and “ How many customers/logos am I retaining ?”.
The Net Retention Rate (NRR) and Gross Retention Rate(GRR) show retention in terms of revenue retained over a period of time whereas Customer retention Rate or Logo Retention Rate show retention in terms of the number of customers. Measuring both of these metrics will give a more balanced view of your retention. You can know about other retention metrics which matters for your SaaS business
Net Retention rate (NRR)
Net Retention Revenue (NRR) takes into account the total revenue earned minus any revenue churn (caused due to departing customers or customers who have downgraded) plus any revenue gained through upsells or cross-sells,
NRR measures the total value of your renewed contracts as well as the revenue gained through upsells and cross-sells. You can calculate your NRR on a monthly or annual basis, depending on your needs.
Here is how you calculate NRR
- Add the value of your renewed contracts + expansion and cross revenue
- Divide by total value of contracts that were up for renewal,
In a Saas business, a Net Revenue Retention Rate >100% is a good growth Indicator. For SaaS companies selling into Small and Medium Enterprises (SMB) Anything over 90% is a good NRR whereas, for Enterprise SaaS, 125% is considered a good NRR.
Gross Retention Rate(GRR)
The GRR measures your ability to retain customers over a period of time. The key difference between GRR and NRR is, GRR does not take into account the revenue earned due to expansion, upsell or cross-sell. GRR is a representation of your success in retaining your existing customers.
Here is how you calculate GRR
- The total dollar value of the contract up for renewal at the beginning of the period
- The actual dollar value of renewed contracts from that period.
Unlike NRR, the Gross Retention Rate ranges between 0% to 100% and it will always be equal to or less than your NRR. For SMB customers, a GRR should be between 50-~80% whereas for Enterprise customers it should be between 70- 90%. Anything less than the minimum threshold level is critical and you need to plug the leakage immediately.
Which is the best revenue retention rate to measure? GRR or NRR
At first glance, it might seem that NRR is a better metric since it takes into account two revenue streams- upsell and renewals. But on the other hand, GRR has an advantage over NRR in the fact it actually measures the long-term health of the business because ultimately churn would erode expansion and upsell opportunities over time. You cannot keep upselling if you lose clients!
For more clarity around churn, it’s better to look at both metrics to get a full and balanced view of churn. It will also help you with the right numbers when you look for funding.
For example- if your business has an NRR of 120% and a GRR of 90%, investors can see at a glance and figure out that you’re financially stable and have good growth potential. Whereas if your NRR was at 120% but if GRR was at 50%, the investors would look at you less favorably as these figures indicate that your growth is poor and less predictable within the current customer base.
If you’re a fast-growing company, NRR may have a large economic impact near term whereas, for slow-paced-growth companies, you can get better ROI by optimizing your GRR and getting control on churn.
So Do I Optimize for GRR or NRR?
Which metrics to optimize will depend a lot on what stage of growth you are at or what is your immediate goal. If you’re looking for funding, probably focussing on getting your GRR to optimize level will help whereas if you’re on a high growth trajectory, your immediate focus should be on NRR retention. For example- if you’re a high-growth company with a GRR of 85%, you might not like to use your incremental hours in chasing those RED customers, rather you would prefer to double down on your successful one and help them expand.
Common Mistakes you make while calculating your Retention rates
Mistake 1- Counting your canceled customers as churned customers
There is a difference between churned customers and canceled customers. Churned customers have already stopped paying you whereas the canceled customers have indicated that they are not going to renew in the next billing cycle but their subscription has not expired yet. You still have a window of opportunity to win them back. When you start counting the canceled customers as churned, you’re throwing away the opportunity to retain them. Download -Reduce churn in 90 days
Though most of the canceled customers do have the intention of churning, some may have frustrations or run into obstacles that can be easily overcome by timely intervention. If you can convince even half of your canceled customers to retain, your user retention can go up to 92%. month to month. Counting canceled customers as churned is a huge mistake that eliminates this opportunity for improvement.
Mistake 2- The Retention rate at different stages of customer life cycle as same
The average retention rates across all stages of the customer lifecycle is not uniform. If you treat it as uniform, you will never be able to improve the retention rates. Customers churn for different reasons at different stages in their lifecycle and therefore you need different retention strategies as well. For example, the customers churn during onboarding as they didn’t find value in your product. To stop them from churning, you need to improve the onboarding experience and ensure the customer achieves early value. Similarly, at mid-cycle, the customer has used your product and they have incorporated it into their workflow. To prevent churn at this stage, you need to ensure the customer has a great product experience and constantly communicate with him about the new features that you are launching. At this stage, strengthening the relationship is very important to prevent churn. Similarly, you can prevent long-term churn by helping customers to move to a bigger plan that takes care of their growing needs.
Focussing on retention by stage allows you to target different reasons for churn at each stage and develop the most effective retention strategy for mitigating churn at that stage.
Additional Resource: A guide for VP of CS to reach 125% ARR
Mistake 3- Customers on different plans have the same retention rates
Customers on different plans typically showed different user retention rates. Enterprise clients tend to have higher retention. Customers with 4 digit ARPU generally tend to have 50% less churn compared to customers on 1 or 2 digit ARPU. Similarly, a higher percentage of annual contracts correlates to better retention because the contract presents less opportunity to churn. Moreover, higher ARPU makes you increase the likelihood of better service, hand-holding, and effort spent to get them to see the value and retain them.
Your highest churn comes from the lower tier plan customers or on quarterly contracts. They might not significantly impact your MRR when they churn but they can still impact your brand reputation which could negatively impact your future acquisition.
Suggested Read: The ultimate guide to customer retention
NRR and GRR are just not mere calculations to measure dollar values. Rather it is an important metric that lets you know about your customer journeys and successes with your product and services. It can help you pinpoint what is not working for your business and plug any leaks to improve your product adoption and revenue retention.