Customers are the lifeblood of a business. You can have a top-notch product, but you’re not going anywhere without customers.
SaaS companies, which rely on subscriptions and repeat purchases to stay afloat, need to work especially hard to acquire and keep their customers. That’s where customer retention comes in.
What is customer retention?
Customer retention refers to a company’s ability to retain its customers over a specified time period. A high customer retention rate means your current customers renew their business with you. A low customer retention rate means your customers don’t stick around for long.
Why are customer retention metrics important for SaaS companies?
Retaining customers is always important, but it’s particularly key for SaaS companies because their business model relies on repeat customers to grow their bottom lines, whether that’s through renewed subscriptions, expanded contracts, upgrades, or cross-sells.
The best way to ensure high customer retention is to measure, benchmark, and track it rigorously. That’s why you need customer retention metrics. Customer retention metrics show you how many customers you’re retaining and how well you’re engaging them. This information can help you determine how likely your customers are to increase their business with you or recommend you to others.
How do SaaS companies use customer retention metrics?
SaaS companies can use customer retention metrics for a variety of purposes, including:
- Reducing customer churn rate.
- Boosting customer loyalty and improving customer experience.
- Identifying good targets for upgrades and cross-sells.
- Focusing their retention strategy on the most lucrative opportunities, thereby reducing spend.
What metrics measure customer retention?
SaaS companies use eight key metrics to measure and track their customer retention.
At its core, churn refers to the loss of customers through cancellations and downgrades. It is the most straightforward assessment of how well you’re retaining your customers and how that will impact your overall growth rate.
There are two kinds of churn:
- Logo churn, sometimes referred to as non-addressable churn, refers to the loss of a customer entirely through cancellation of service.
- Contraction, sometimes called addressable churn, refers to customers downgrading their spend with you.
To calculate logo (non-addressable) churn, you simply add the number of churned customers within a given period. Another way of calculating churn is to subtract the number of customers who remain at the end of a given time period from the total number of customers you had at the start of that time period:
Non-addressable churn = sum of dollars associated with account churn
To calculate contraction (addressable churn), first look at either your annual recurring revenue (ARR) or monthly recurring revenue (MRR), depending on the timeframe you want to assess. Let’s say you go with MRR to get a nearer-term snapshot of your business. To calculate downgrades, you’d take your MRR at the start of the month and subtract your MRR at the end of the month, or simply add the number of customers who downgraded their services during that time period:
Addressable churn = sum of dollars associated with contractions
2. Net dollar retention (NDR)
Net dollar retention (NDR), sometimes called net revenue retention (NRR), tells you how much your annual recurring revenue (ARR) has grown or shrunk within a specific time period. It factors in both expansion through new customers and upgrades, and contraction from downgrades and logo churn, giving you a more holistic picture of how well you’re retaining and growing your customer base. NDR helps you gauge your business’s overall health and long-term viability.
NDR is a particularly crucial metric for SaaS companies to track because it measures their customer retention and their ability to engage and grow their customer bases. Because acquiring new customers is time-consuming and expensive, one of the key ways SaaS companies can expand is by upselling and cross-selling to existing customers. NDR helps them assess how well they’re doing that.
NDR is calculated as follows:
NDR = (Beginning ARR - churn + expansion) / Beginning ARR
You can also calculate NDR using monthly recurring revenue (MRR) instead of ARR if you want to look at a narrower timeframe within your business.
A good NDR is generally any percentage over 100, since that would indicate your net revenue is growing overall. That said, companies hoping to achieve hypergrowth, succeed in private equity partnerships, and launch initial public offerings, aim for a higher NDR. The average NDR of companies that successfully went public is nearly 107%, according to Crunchbase, while NDRs of 120% and higher would be considered exceptional. Alteryx and Okta, for example, had respective NDRs of 134% and 123% at the time of their IPOs.
A related but distinct figure to consider here is gross dollar retention (GDR). Gross dollar retention looks at how much revenue you’ve retained from your existing customer base without factoring in any upgrades. It is calculated as:
GDR = (Beginning ARR - churn ) / Beginning ARR
GDR underscores how well you retain customers. According to Blossom Street Ventures, some private equity firms prefer to look at GDR when evaluating a SaaS company; that’s because it’s much easier to learn to upgrade and cross-sell to loyal customers than it is to learn how to retain them in the first place.
3. Customer satisfaction (CSAT) and Net Promoter Score (NPS)
Customer satisfaction (CSAT) scores are based on direct customer feedback regarding their use of your product or service. Overall, CSAT scores measure how happy your customers are with you. Meanwhile, your Net Promoter Score (NPS) measures your customers’ experience, loyalty, and willingness to recommend your company to others throughout their customer journey.
Together, CSAT and NPS scores not only help you assess how satisfied your customers are, but also provide actionable data for your revenue team. For example, customers with high CSAT scores might be great candidates for renewals, cross-sells, or upsells. On the flip side, if a customer is unlikely to recommend you to a colleague or friend, they might be at risk of churning. These scores can also reveal any detractors—those who are actively dismissing your product or service to others, including on social media.
Several studies show that happier customers are likely to stick around longer, so their lifetime value (LTV) is going to be higher. They’re also more willing to advocate and produce referrals for you, so you can decrease your overall customer retention costs because they’re willing to speak highly of your product.
4. Annual recurring revenue (ARR)
Your annual recurring revenue (ARR) is the total revenue that your company brings in each year. ARR is a key performance indicator (KPI) for SaaS businesses because it indicates how much revenue they can expect from their customers in a given fiscal year. ARR also provides a quick snapshot of how well you’re retaining and growing your customer base.
ARR that is steadily increasing over time shows that not only are you banking more new customers regularly, but your existing subscribers are also sticking around and are likely spending more with you.
You calculate ARR as follows:
Annual recurring revenue (ARR) = (total value of a contract) / (number of contract years)
5. Average revenue per user (ARPU)
Average revenue per user, or ARPU, measures how much revenue an individual user or account generates during a particular time period. ARPU is a useful metric for SaaS companies because it can help them identify opportunities for revenue growth as well as uncover areas of focus for maximum impact.
For example, if you see that certain business segments generate the highest ARPU, you might want to invest more in those areas, because as customers they are willing to pay more for your products or services. Alternately, if certain customer channels consistently produce lower ARPU scores, that might indicate they see less value from your products and services, so you may want to refocus your sales and marketing efforts on better opportunities.
Tracking ARPU over time also reveals how much value your customers see in your products or services. A steady or improving ARPU metric indicates that you don’t need to offer deep discounts to attract and retain customers, meaning you won’t have to scramble at the end of the quarter to meet your numbers.
The equation to calculate ARPU is as follows:
ARPU / ARPA = (Total amount of revenue in given time period) / (Average number of subscribers during that time period)
ARPU is also critical to track during an acquisition or merger to ensure the transition goes smoothly. For example, if one company has a low or even negative ARPU, that means they’re losing money to acquire customers. When this company merges with another, the two businesses may need to adjust their product pricing as a result.
6. Customer lifetime value (CLV)
Customer lifetime value (CLV), sometimes referred to as lifetime value (LTV), is an estimation of the total value that a customer brings in throughout their relationship with your business. This is a critical metric for SaaS businesses because it can:
- Directly impact your revenue by identifying the healthiest accounts that can be candidates for cross-sells and upsells.
- Boost customer loyalty and retention.
- Reduce acquisition costs by focusing your efforts on the most valuable customers.
When assessed in relation to the customer acquisition cost (CAC), which measures how much money you spend to bring in a new customer, CLV can also help you measure how long it will take to break even on your investment and begin to make money from your customers.
You calculate CLV as follows:
CLV = (customer value [defined as average purchase value x average number of purchases]) x (average customer lifespan)
A higher CLV means your customers are loyal and likely to stick around, indicating a healthy business with room to grow.
7. Support tickets
One interesting way to evaluate and focus your customer retention efforts is to look at the number of each customer’s support tickets divided by the revenue generated by that customer. This monetizes the average amount of support given to each customer to determine which customers gain the most value from your product, as well as which customers seem to need the most help. This metric also shows you how much providing support costs your business, relative to how much revenue those customers bring in.
This is important because you might reevaluate your customer-vendor relationship if you have a customer that delivers $500,000 in annual revenue but generates hundreds of support tickets, costing hours upon hours of work for your customer success team.
8. Product adoption rate
Look at your monthly product adoption rate to get a sense of how healthy your customers are—and to uncover whether any are at risk of churning. Product adoption rate refers to the number of customers who are actively using your product and service on a regular basis.
To calculate monthly product adoption rate, you take the number of new monthly active users (MAU) and divide it by the number of monthly subscriptions or licenses sold, like this:
Monthly product adoption rate = (new MAU) / (new monthly sign-ups)
This is an important metric for your customer retention strategy because it shows you how much value your customers are getting from your product or service, providing an early indication of whether those customers are likely to renew their subscriptions with you. Product adoption rate also helps you discover opportunities for upsells and cross-sells.
Customer retention strategies for SaaS companies
SaaS companies can use several strategies to improve their customer retention, including:
- Listen to your customers. Create feedback loops so that you check in regularly with your subscribers, learning what works well, what doesn’t, and what they need. That way, you can continuously improve and enhance your product and jump in with support if necessary. A RevOps platform like Clari helps automate this process by automatically pulling in CRM data such as Net Promoter Scores (NPS) and sales activity data for quick reference.
- Concentrate resources where needed. When it comes to investing time, money, and energy, prioritize unhealthy and/or at-risk customers over satisfied returning customers. A RevOps platform like Clari can really assist here. For example, Clari’s Dashboards module aggregates data and analytics from Clari’s other modules, including Pulse, Forecasting, Opportunity, and Account Engagement, in a single view, so you can quickly and easily review your business by segment, health, risk, and expansion potential.
- Monitor regularly. Customer retention isn’t something to check once a year. Instead, proactively measure these key customer retention metrics and tie them to the success of your team every day. One way to make this process easier is by using a RevOps platform that delivers real-time data, like Clari. Clari automatically aggregates CRM, activity, and other data into a shared source of truth that can help your entire revenue team stay aligned, collaborative, and up-to-date as circumstances evolve over time.