Customer Retention Definition
Customer Retention by definition refers is the phenomenon or process of engaging your customers to continue buying your product or service from your business. By default, it is the lifeblood of the subscription business.
Why is Customer Retention Important ?
No matter what era we live in, SaaS customer retention is something that will never fade away. Why? Let’s see the process of acquiring new customers. You’ve spent considerable time creating various marketing and sales funnels to convince your customer how your product can solve their problems. They’ve moved down your marketing and sales funnel and have finally invested in your software.
What’s next? You’ve put in the time, energy, and money to acquire them. Will you let them be on their own? Leave it to hope and luck for them to renew at the end of their term?
Acquiring your customers is just a first step in the fruitful partnership process and retaining them is the next big thing.
Let’s talk about why?
Financial Mathematics of a SaaS business model
SaaS business models are different from traditional business models. It is the key to getting the pulse on the importance of customer retention.
Unlike the traditional business model, where once the opportunity is marked closed-won, it’s time to celebrate, but when it comes to SaaS, the acquisition is not the end game. In fact, that is when the customer journey truly begins.
In B2B SaaS you spent anywhere between 1 – 3X times the Annual contract value (ACV) as your Cost of Acquiring the Customer (CAC). So on the day of the acquisition in unit economics terms, you have just incurred a loss. So why do we do that? Because the plan is to retain and grow the recurring revenue from these customers for many years to come. That is fundamentally how SaaS customer retention is different. Retention is baked right into the foundation of the SaaS business model. It is no secret that a SaaS model without good retention is not sustainable.
A SaaS customer only pays 5-15% of total potential Lifetime Value upfront, rest will only come in as future revenue IF you’re able to retain that customer. Wondering How?
Financial Mathematics of a SaaS business model
1. Lifetime Value
The SaaS model gets you profitability over time and if your customers churn before completing enough payments cycle to break even the acquisition cost, all growth strategies will be ineffective. The goal should be to renew customers multiple times to lower the acquisition cost and increase profitability. In fact, as per industry statistics, boosting B2B customer retention by 5% increases profits by up to 95%.
2. Upsell, Expand, and Grow
As your customers become long-term users, it will give you more opportunities to upsell thereby increasing the LTV(lifetime value). Most importantly, long-term users are also much more likely to become promoters of your product and bring in more customers via referral or word of mouth.
3. Referrals and Advocacy
In an era where social proof is such a powerful currency for marketers, Customer advocacy opens up another channel for SaaS marketers to stand out from the crowd and reach out to more customers.
How to calculate customer retention rate ?
Customer retention has to be considered on two important parameter-
1. How much money am I retaining? and
2. How many customers/logos am I retaining ?
Mainly , 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. Although, it might be confusing when it comes to choosing the right retention metric to measure, so you can refer to this blog –Gross Retention Rate or Net Retention Rate- Which is the key customer retention metrics to track ?
Can we achieve a 100% SaaS customer retention rate?
Well, churn is inevitable but what pains in B2B SaaS Customer Retention are unexplained churn. Some percentage of customers would stop using your product but reasons could be beyond your control. One needs to put a check on the unexplained churn. The goal should be to target 125%+ Recurring Revenue retention aka Net revenue Retention (NRR) Rate. While there will be some customer or logo churn that is inevitable, the retained customers should make up for the loss of the recurring revenue from them and more. That’s the secret of greater than 100% retention rate. This nirvana state is also called negative churn. Fancy isn’t it! The importance of customer retention is undeniable!
So how to know how I am doing? What is a good SaaS Customer retention rate?
The retention rate is industry-specific.
That’s why it’s imperative to compare your retention rate to similar companies and niches rather than strive for a certain number. By looking at average customer retention rates by industry, you can draw conclusions about retention benchmarks to work with.
2020 roundup of statistica industry retention rates
Customer Retention Rate -Industry-wise
Compared to other industries, the retail industry has fairly low retention rates. The reason could be low exit barriers and a highly competitive market.
Clients prefer to stay with banks for decades and the only reason they switch is usually tied to relocation or other professional reasons.
The high retention rate could be attributed to “difficulties associated with leaving”. The telecom companies also lay an emphasis on loyalty and reward programs to retain users.
IT Services: 81%
The high retention rates could be attributed to companies laying emphasis on customer success. IT companies strive to ensure clients achieve their desired business outcomes in the soonest possible time, the failure to achieve could lead to churn.
The retention rate in Insurance companies doesn’t always predict the true picture. The number of new acquisitions is always higher compared to churn which boosts the retention rate. But the actual measure would be the time people spend with the company from the acquisition period.
Professional services: 84%
Companies offering professional services focus on building close relationships with clients. Personalization is a key approach adopted by these companies.
The high retargeting and marketing budgets help them keep retention rates high.
The key objective should be to keep your retention rate higher than the industry average and it’s here, Customer Success plays an important role.
How do I improve SaaS customer retention?
In a data-driven connected world trying to achieve negative churn without Customer Success software is like trying to write a snail mail in the world of emails and real-time messaging. Customer Success software comes in handy to onboard your b2b SaaS customers, keep your churn rate in check, and get you ahead of your competition. Don’t wait for the next churn to make your next move. Get talking to a Customer Retention technology expert right away.
P.S. – The main image has been taken from pexels.com