The Ultimate Guide to Customer Retention
What is Customer Retention
Have you ever heard any manager saying he doesn’t mind losing customers now and then? Can the manager afford to acquire new clients every time he loses one of his existing clients?
No, right? The loss of MRR (monthly recurring revenue), the higher cost of acquiring new customers, etc. are some of the reasons behind this. Customer retention is one of the most important functions which requires a customer success manager’s constant attention.
Customer retention is the lifeblood of a SaaS business. If your customers stop using your services, you would not have any revenue whatsoever. The key is to keep, nurture and cultivate them. It is important to do so to become loyal to you and become strong advocates for your business.
What is customer churn and how do you measure it?
You might ask why do you need to understand churn when the discussion is about retention. Well, if you appreciate the nuances of the “churn” process, it would be quite easy for you to analyze and measure customer retention. The lower the churn you have, the more clients you retain!
Customer Churn is one of the most vital metrics that need to be evaluated accurately by a business (especially B2B SaaS). This measure can show you the true picture of customer loss and subsequent revenue loss of your business.
Simply put, it is the percentage of customers who the business lost during a certain period. It is also known as the customer attrition rate.
Now, let’s understand why do customers churn. A customer’s intention to cease using a specific product/service might be, most of the time, a decision formed over time. There could be a variety of explanations for the same.
Some of the reasons could be:
- * Your customers aren’t able to achieve their desired outcomes. If you’re able to get to the root of this problem, then you’d witness the magic of Retention (explained in detail later).
- * Your competitors have flexible and much better terms of payment
- * Service and support availability by your CSMs may not be competent enough.
- * Customers don’t see value in your product/service anymore.
- * You’re attracting the wrong customers in the first place.
- * The paucity of proactive support from customer success managers.
Pro tip: Know more about ‘why do customers churn?’.
Why is it necessary to measure and reduce customer churn?
Understanding your customer churn is indispensable to evaluate the efficacy of your marketing efforts and the overall gratification of your customers.
You would not be able to act on your weaknesses if you don’t acknowledge and measure your imperfections in the first place.
The rationale behind the exercise of measuring churn, among others, worth mentioning are:
- * To reduce the risk of revenue loss– You need to know your clients and the recurring revenue to predict any potential loss due to churn.
- * To build a competitive advantage– Many subscription businesses do not evaluate the churn as comprehensively as they should be doing. This creates a space where, if done correctly, you can build an advantage over your competitors.
- * To obtain feedback for improvement– Right feedback at the right time can raise your business to new levels and help in reducing your churn rate.
- * Lower churn rate results in vast revenue.- This is simple maths. If your churn rate is less, you have more customers, hence, more revenue.
- * To increase MRR (monthly recurring revenue)– Similar logic applies here as well. It is important to keep in mind that avoiding even a single churn will increase your MRR vastly.
- * To keep Customer LTV (Lifetime Value) at acceptable levels.- You need to retain your clients and keep them with you for as long as possible.
- * To lower CAC (Customer Acquisition Cost).- When you don’t lose customers while adding new ones, your CAC doesn’t go up.
How to measure churn?
As mentioned earlier, ‘churn’ is one of the crucial metrics that needs to be measured. Now that we know that since it is too important to ignore, the next step should be to measure it.
The churn rate can be calculated as follows:
For example, if you start your month with 500 customers and end with 450, your churn rate is 10% because you lost 10% of your customers.
There are, most importantly, 3 ways of measuring churn. They are:
- * User churn- The percentage of users that you’ve lost.
- * Logo churn- The percentage of accounts that you’ve lost
- * MRR churn- The percentage of monthly revenue loss that you’ve incurred from your churned customers.
However, there are different types of churn and different ways to measure it. Every business has its way of measuring and analyzing churn.
What are the different types of Churn?
There are 7 types of SaaS Customer Churn you may not be aware of! Besides customer churn, there are other types of churn such as logo churn, revenue churn, etc.
MRR or revenue churn
It is the percentage of monthly revenue loss that you’ve incurred from your churned customers. This can happen if your clients downgrade to an inexpensive product or a lower subscription pack. While they’re still doing business with you, it may not necessarily be at the same scale as before. This is a criterion that your customer success team will want to tread cautiously on especially as they keenly observe your most loyal customers.
This type of SaaS customer churn occurs when the customer never got started with the product. It’s quite common in some businesses to have customer churn at the very beginning of their journey. You should ensure that the customers are onboarded properly so that they know how to use your product/service exactly. Otherwise, they would’ve to figure it out on their own which would mean high chances of churn right there!
This is another name for customer churn or account churn. It is a vital metric used by SaaS or subscription businesses as input to the holistic health of the business. SaaS investors are more concerned with logo(customer) churn and they rely upon the measure to analyze CLV (customer lifetime value) calculation.
This churn is also sometimes referred to as subscriber churn as well. The calculation of the logo/account/subscriber churn is as follows:
This type of churn happens when the product doesn’t solve the problem that the customer needs to be solved. This can be disastrous if not resolved; not only are you going to lose the customer, but you have got a detractor, who is going to be dismissive about your product/service with others.
Credit card churn
This type of churn is the ultimate fuss for any business that uses credit cards and it occurs when the payments do not come in due to expired cards and/or other reasons. This type of churn is extremely vexing and difficult to manage. The strategy is to keep a close eye on the dollars which are expiring in the next 30-60-90 days, etc. Past data can help analyze the future trend if you’ve got a strong AI-empowered customer success platform.
Churn due to missed outcome
Missed outcome churn occurs when the customer is unsuccessful in getting the desired outcome. This means that even though your product is capable of delivering the exact outcome your customers want, but despite that, they are not able to get to it. This is the worst and unacceptable type of churn. This type of churn needs to be handled immediately because despite your product being ideal, your customer is not satisfied. This can destabilize you have got your product’s position in the market and lower expectations.
The company acquired/merged/closed
This could be a little predictable because you know your customers well and what stage they’re in their business lifecycle. The Merger or Acquisition can play a great role in deciding the future of the merged/acquired entity. The key, here, is to identify and understand your customer’s business very well. If you can predict such a churn, chances are that the new customer will provide more opportunities than the previous one for obvious reasons.
How do you reduce churn?
The subsequent step should be to lessen the churn rate as it would directly convert to increased retention. Here are some simple yet paramount steps that you can take to reduce churn in your organization.
- Provide proactive support and attention to your loyal customers– This point can’t be stressed enough. Predicting churn can go a long way in avoiding it. Address the concerns before they happen. Customer success managers have a great role to play here
- Target the right audiences for your business– Start with the right customers in the first place. A bad fit can become the reason for your churn numbers if not identified properly.
- Look for early warning signs of the possibility of churnn.- Most of the churn doesn’t happen overnight. The customers might give out some signs if notices and addressed can reduce your chances of churn dramatically.
- Keep your customers satisfied by providing excellent customer service.- Customers expect a great deal of support and services and from you and your product/service. Understand their expectations and provide them with the same is the key to retaining customers.
- Ask the right questions.– It is the step to be taken if you aspire to be proactive in addressing the concerns of your customers. This will assist the CSMs in preventing customer churn to a great extent. Prevention tactics help reduce plenty of involuntary churns. This is the bedrock of customer retention.
- Choose your customer success tool wisely. – This is one of the most overlooked means of decreasing churn. Customers usually do not look further than the overall appeal of a customer success platform. However, detailed scrutiny of the tool should be carried out to see if it matches your business requirements or not.
- Keep a goal for a negative churn rate.- Negative churn simply means that your MRR is greater than the revenue lost to churn. In layman’s words, you’re earning more than you’re losing. Maintaining a negative churn rate fuels company growth. There are research studies that show that businesses with a 5% negative churn can grow more rapidly than those struggling with positive churn rates.
- Handle B2B and B2C churn differently- The business models are completely different for both of them. Hence, strategies to be adopted to reduce churn, need to be differentiated. It becomes imperative for you to understand this and categorize most of the transactions accordingly.
You can check this out if you’d want to know more fool-proof ways to reduce customer churn.
Also, you can download the free e-book if you would like to reduce your customer churn in 90 days!
Why is customer retention important?
Churn is an inevitable part of a SaaS business journey. No matter what you do some customers will leave your business for something else. Hence, the next best option for customer success managers is customer retention.
Customer retention is nothing but making your customers stay with your offering of a product/service. In the SaaS business model, the customer only pays 5-15% of total potential Lifetime Value upfront, the rest will only come in as future revenue (only if the client is retained).
Want to know more about the importance of retention? Check here ‘Why is Customer Retention Important for B2B SaaS Business’?
Gross and Retention Rate
These two KPIs will give you a holistic picture of your customer success metrics. If you desire to get deep insights into your revenue retention analytics, these are the metrics to go for.
The Gross Retention rate (GRR) measures your ability to retain customers over a while. GRR is a representation of your success in retaining your existing customers.
The 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.
Confused about choosing between the two metrics? Check out GRR or NRR – Which are the key customer retention metrics to track?
Gross Retention vs Net Retention
The measures-both the GRR and NRR-are equally important. Both the KPIs are churn indicators. Hence, you should be extremely careful while dealing with the numbers and you need to have a clear understanding of what, when, how, and why are you measuring?
NRR is an all-embracing measurement that looks at the wider facets of your revenue retention. It helps you focus on how fast your revenue is growing from upgrades. This can give you a perception of how well your cross-sell and upsell approaches are working.
However, GRR is advantageous as it measures the long-term robustness of your business. The ability of your business to grow is visible clearly with GRR. The key difference between GRR and NRR is, GRR does not take into account the revenue earned due to expansion, upsell or cross-sell.
Also, the point to be noted here is that the NRR can exceed 100%, whereas the GRR will never exceed 100%.
How to calculate gross retention rate (GRR) and net retention rate (NRR)?
Calculating both of these metrics is important, hence, you should be cautious while doing the same.
For example, if your MRR at the start of the month was $10,000, your MRR from renewals at the end of the month was $9500, you lost $250 from the churn and lost another $250 from the month downgrades. Replacing these numbers into the formula would give:
Going by the same example, with an additional $1000 from upgrades, the NRR would come out to be:
Do you know about Customer Retention Cost (CRC)?
We have already seen how crucial customer retention is for a SaaS business. All the major metrics like the Churn, MRR, ARR, CAC, CLTV, etc. are indicators of actual customer health.
However, the key to running a successful SaaS business lies in how well you retain your existing customers.
There is very little guidance for customer retention efforts when compared to metrics on customer acquisition.
Customer Retention Cost (CRC) is a vital missing component in the box of metrics that the subscription businesses track and measure.
In simple terms, CRC should include all costs which a company incurs in retaining, nurturing, and growing its existing customers. Thus, the following costs will be considered while calculating CRC:
- Staffing cost- all the major teams for ensuring retention
- Tools and software cost
- Cost of Customer Engagement and Adoption Programs
- Cost of Professional Services
- Cost of customer marketing
- Cost of loyalty and training programs
What is Customer retention software?
Customer retention is, essentially, an action or a strategy for making your customers remain loyal to your brand and business over time. The purpose of retention software is to provide metrics that will help you to understand customer behaviour and predict their churn.
Experienced professional marketers will vouch for the fact that customer retention strategies allow you to create meaningful interactions with your customers. The strategy coupled with strong software helps you understand crucial features and metrics, which could prove resourceful.
An interesting insight: Know about the 7 Data Points That Drive Customer Retention For SaaS Business.
However, in the absence of a strong analytics tool, these could be easily lost in the noise. In short, retention software can retain your customers, improve loyalty and skyrocket your profits.
Research proves the above point as well. A McKinsey report states that “executive teams that make extensive use of customer data analytics across all business decisions see a 126% profit improvement over companies that don’t” (McKinsey, 2014).
Customer retention software is this tool that helps you to minimize the loss of existing customers. It focuses on optimizing customer retention and reducing churn. It helps you to keep your customers, maintain growth, and study thoroughly why and when your customers are leaving.
Retention software and related analytics helps your business to reduce all types of churn, lower CAC, better forecasting, and high customer satisfaction.
Benefits of a customer retention software
Decreased Customer Acquisition Costs (CAC)
The logic, here, is simple. Retaining customers is much cheaper than acquiring new one in SaaS. Of course, customer acquisition is important, but it is also costly. You’re better off focusing on nurturing and cultivating strong relationships with the customers you still have and providing them with incentives to stay with you.
Understanding Your Customers’ Requirements
Retention software can help you study the needs of your customers and, also, the most appropriate way to deliver those needs to them. Goes without saying how important it is to know your customers properly so that you can provide them with the best experiences.
Increased Cross-Selling and Upselling Opportunities
Go through the purchases which your customers have made from you in the past. Great software gives you an insight into what they perceived about your products/services. With this information, you can make relevant and suitable cross-selling and upselling recommendations.
Facilitates Sustainable Growth
Retaining customers allows for more sustainable growth. Studies have shown that increasing customer retention rates by 5%, can grow profits by anywhere from 25% to 95%. This data would be enough to showcase that keeping existing customers makes more business sense. This task is made easy with the assistance of retention software.
Build and Measure Customer Loyalty
Retention software helps you find that route through which you can build a competitive advantage and gain more traction with the customers. Now, let us be honest here. In today’s day and age, it’s hard to get customers who are loyal to you and your business. Hence, it requires a lot of pain and effort to create them. Utilize every opportunity to identify them and make them realize the importance of their patronage.
Bonus: Are you Choosing a Customer Retention Software? 5 Points To Consider to invest in the right tool!
Suggested Read: Take customer retention to new heights with CustomerSuccessBox
Types of Customer Retention Software Analytics
This is the first step in helping you understand your clients’ behavior when interacting with your business. This method uses historical patterns and trends to give you in-depth insights into how you should approach particular customer interactions and retention strategies.
This technique allows marketers to accurately foresee future customer behavior based on their past purchases and interactions with your business. This could be giving them the next best offers, understanding churn risk, and renewal risk analysis. However, it’s based on a pattern of activities such as recurring purchases, not a standalone event.
The information obtained from the above analytics is vital for you to devise solutions to potential issues that may crop up in the future. Through trial and error, this data tool gives you the chance to prescribe variously doable and proven panacea to help you increase your customer retention rates.
The purpose of diagnostic analytics is to diagnose a particular problem or event, to answer the questions of why and how something occurred. Examples of diagnostic analytics include churn analysis and customer health score analysis. It mainly looks at past events, focusing on causal relationships and sequences.
Outcome or consumption analytics helps you understand why certain customers behave the way they do. It concentrates on consumption patterns and associated business outcomes. Utilize it to understand your customers in-depth and learn how they are making use of your offerings.
What are customer retention metrics that matter
There are plenty of customer retention metrics that are crucial for your business to keep track of. Churn measures were already discussed. Now, let’s check out some of the other important ones: RCR, CAC, LTV, and NPS which are explained below.
Repeat Customer Rate (RCR)
The ratio is the backbone of customer retention. It measures the percentage of customers eager to make a second purchase from you. This metric is a pretty good indicator of customer loyalty. The higher this metric is, the more inclined the customers are to make the next purchase from you.
Customer Acquisition Cost (CAC)
Customer acquisition cost is how much you are paying to get new customers. It is an important metric because it calculates how much you’re spending on new customers. It is the opposite of customer churn. Now, you may ask then why to measure this when we’re measuring churn. It is because measuring CAC completes the picture. You’d get a better understanding of why churn matters.
Customer Lifetime Value (LTV)
LTV measures how much money is generated by a single customer. It is the customer’s lifetime value or, simply put, a measure of how much revenue a customer would spend throughout his/her tenure with the company. Your LTV should be greater than your CAC. The higher the LTV, the more the costs coverage.
Net Promoter Score (NPS)
NPS measures the loyalty and general satisfaction with your brand and business. It tells you how many customers of yours could be potential advocates for your brand. This score is decided by asking your customer a single question: “How likely are you to recommend our company to a friend or colleague?”. The customer then will be prompted to give a score between the range of 1-10. Not only customers giving a score of 9 & 10 are promoters, and customers providing a score of 6 and less are considered to be ‘detractors’.
What are customer retention strategies
A customer retention strategy is about retaining the customers you’ve acquired. It includes developing programs to improve customer loyalty.
Following strategies could help you with your retention objectives.
Listen to and understand your customers
You might believe that your customer service is a superior one. However, your customers might respond differently to the above statement. The issue of different perspectives comes to the fore. Focus on your customer support by listening to them. If you pay attention to their concerns, you will have your customer retention strategy right there!
Define your retention strategy
Now that you know what tactics to apply to keep your existing customers from churning, devising strategies should not be a headache. Your brand strategy and the ‘approach to deliver value’ you adopt should steer your retention plan.
Monitor for Warning signals closely
Those signs that speak volumes about the future might be ignored by you or your team as irrelevant. If you pay close attention, you can always notice the signals of your customer’s impending churn. To identify these “warning” signals, you need to understand the key variables of customer behaviour, such as purchase patterns, product usage, etc. Further, you’ll need to analyze these signs and take steps to stop your customers before they churn.
You can check out the three Kinds Of Early Warning System To Drive B2B SaaS Customer Retention.
Specific marketing to your existing customers
Everything can be gained with persistent pain and effort. Put efforts in current customer campaigns after studying your customers thoroughly. Know your audience, seek their attention, incentivize them and measure your results. Use your campaigns to cultivate your customer relationships and also deliver on your value proposition and brand promise consistently.
Incentivize clients for renewals and new purchases
Nothing beats the satisfaction of having purchased at a price lower than the actual price. Customers love that, right? But you need to be prudent enough to know which customer to incentivize and how much. Existing customers should be provided with offers and discounts so they remain loyal to your business. Down the line, they might become one of the fiercest advocates of your business.
Measure customer loyalty
Customer surveys on their feedback can help you improve your products and your relationship with the customers. Concentrate on consumer behavior: Ask whether they intend to purchase again and why or why not. Better to ask what you can improve upon and whether they’ll give referrals. These questions provide more actionable insight than mere “satisfaction.”
Reach out with personalized and engaging emails
Email marketing is the backbone of the customer retention toolkit. Emails give you the best chance to continue building a relationship with your customers before and after their initial purchase. Each message you send must add value to your customer’s experience. If it doesn’t, you are at the risk of losing them.
Suggested Read 1: Retention Casestudy
Suggested Read 2: 6 Exclusive hacks to accelerate customer retention
Customer retention during an economic downturn
The capriciousness of an economic downturn, such as the current COVID-19 pandemic, can set in motion uncertainty into almost every event. This is true for your relationship with your customers as well. Unexpected external forces beyond your control can also lead to rushed and hasty customer decisions.
Some customer success best practices work in any economic environment. However, those coupled with consistent efforts from your end is the approach suitable for tough times like this.
Revise your communication strategy
A proactive approach with clear, empathetic, and personalized communication with the customers will help add value to your business. The focus should be on maintaining strong relationships with your customers via digital channels that will boost your reach. Working remotely, as the Covid-19 pandemic has shown, is here to stay. Hence scaling up or modifying your digital approach to your customers is the only way to stay connected.
Rethinking your Customer Goals
You should already have realized, by now, how every customer of yours is being affected by the current economic situation. You need to collaborate with your customers to rethink their established objectives for future success. Desperate times demand desperate measures. So, change your metrics, if needed. The goal here is to adapt to change and grow.
Maintain your social media presence
To win customers’ confidence during a crisis, you must display preparedness to acclimatize to their changing needs. Making relevant changes to your business website and social media handles is one of the key steps in keeping customers updated at all times.
Engage with customers with accuracy
To maximize the effectiveness of your customer engagements, segment your customers based on shared traits. This would ensure that you can offer more personalized engagements that provide value to your customers. Create updated campaigns, and other materials set to be sent to them. When you evaluate customers with greater clarity and thoughtfulness, you will be able to see change quickly and be prepared to initiate action without any further delay.
Turning Data into Action
There is no point in trying to do everything and getting relevant data if you’re not converting that data into actionable insights. This data will help your success managers focus on customer relationships and retention. An ‘early warning system’ will make sure you make the right decisions at the right time on how to proactively deliver value.
You can read about an experienced customer success professional’s views on customer retention during a downturn here- Ari Hoffman’s Customer Success Strategy for an economic downturn!
Driving Customer retention during Lockdown with Jay Nathan and Andrew Marks
Pro tip: Webinar on Customer Success Strategy for an Economic Downturn would give you a fair idea about how to retain customers in an economic crisis, the new KPIs, etc.
Customer retention (or churn) is an inevitable metric for customer success managers. Improving customer retention (by reducing churn) and building customer loyalty doesn’t happen overnight. You’d need to invest a lot of time and effort to scale your relationship with your customers and gain their confidence and trust.
Customer retention starts and ends with customer experiences. The whole process involves everything customers think and feel when they come across your brand. If you can create a seamless experience that makes them happy every step of the way, then you’re bound to get life-long customers.
Since a “recession” is likely to occur every four years or so, every firm including B2B SaaS firms should be prepared to take these events head-on by studying how to shift gears and prioritize goals.