Companies with best-in-class retention grew at least 1.8x faster than their peers in 2022. In an uncertain market, customer retention is key. So if you are keeping a close eye on your retention metrics this year, you’re not alone.
Retention is one of the most important metrics when building a successful SaaS business. A low churn rate means more loyal customers that contribute to sustainable business growth. After all, acquiring a new customer can cost much more than retaining an existing customer.
This is your guide to customer retention in 2023. In this post, we will explain customer retention, how to calculate it, why it matters, and what a good customer retention rate looks like in 2023 based on a study of over 2,100 businesses. Then, we’ll share some practical advice for tracking retention metrics and suggest 4 strategies SaaS businesses can use to improve customer retention.
Navigate to the chapter that is most relevant to you:
- What is customer retention and how to calculate it?
- What is a good customer retention rate?
- Tips for tracking customer retention
- Four strategies to improve customer retention
- SaaS retention FAQ
Is revenue retention more relevant to your business at the moment? Whether net revenue retention, gross revenue retention, or customer retention is your north star metric, we’ve got you covered. For more on net and gross revenue retention, check out this guide, or keep reading for all things customer retention.
What is customer retention?
Retention measures how well you can retain and expand revenue from your existing customer base. For any SaaS business, you can measure it in three ways: customer retention (aka logo retention), net revenue retention (NRR), and gross revenue retention (GRR). The acronyms NDR and GDR are also popular in SaaS (net dollar retention and gross dollar retention).
Customer retention measures the percentage of customers retained over a period of time.
The formula to measure customer retention
To calculate customer retention, divide the number of paying customers (from paying customers one year ago) by the number of paying customers one year ago.
Sounds convoluted? Let’s look at an example.
One year ago, you had 400 paying customers. What percentage of those customers do you still have now? Let’s say that of that original group, you retained 300 customers (while 100 customers churned in the last year). So, your customer retention is calculated by dividing 300 by 400. Your customer retention is 75%.
Whether you have annual or monthly subscriptions (or a mix of both), it is common to measure retention over 12 months. Why? It allows for the full customer lifecycle, and it reduces the risk of any impact from seasonality, which can cause short-term fluctuations.
Why is customer retention important?
There are many reasons why customer retention is important. Here are our top 3.
- Companies with retention rates over 85%grow 1.5-3x faster
As we found in the study of over 2,100 businesses, SaaS busiensses with retention rates over 85% grow much faster. 1.5-3x faster, in fact, which is a staggering number. You can’t achieve sustainable growth relaying solely on new business. Retaining your customers is equally important.
- High retention is a strong indication of product-market fit.
Customer loyalty proves that you are solving a real problem and are providing value to your customers. Are you ready to implement strategies to scale rapidly? You first need to prove that you can acquire customers AND retain them.
- Repeat customers are more likely to recommend your product
In time, you can turn your customers into true advocates for your solution. A positive experience with your product increases your chances of customers using your brand as part of their marketing strategy (for free).
What is a good customer retention rate?
We studied over 2,100 businesses to be able to answer this question confidently. Let’s look at customer retention from the perspective of your ARR.
Naturally, customer retention is low at the beginning of your journey of building a SaaS business, on average 55%, while the best companies reach 72%. Retention improves after you find product-market fit; it can go up to 78% when your business reaches $1m and later $3m in ARR.
Companies in the $3-8m ARR bracket can aspire to a customer retention rate of 80%. And as businesses reach scale ($15-30m ARR), the top quartile customer retention rate further improves to 84%.
Best-in-class SaaS businesses have an 87% customer retention
Best-in-class customer retention rate at any stage of business stands at ~85-87%.
Interesting fact: only 11-19% of SaaS businesses have customer retention over 85%. If you’re like most companies out there still working on improving retention, read our tips for tracking retention and strategies to increase customer retention.
One dimension of looking at customer retention is ARR. However, comparing your business to others with a similar APRA range is equally valuable. Download the SaaS Retention Report, a study of over 2,100 businesses, to get all the data.
Tips for tracking customer retention
Run cohort analysis on top of your customer retention metrics
Using cohort analysis helps you identify trends in a particular group of customers. A cohort analysis is commonly used to uncover trends in your customer churn, revenue churn, as well as the inverse, your customer retention and revenue retention.
Reminder: in SaaS, a cohort is a group of customers that start their first subscription in the same month and year.
In the example below, you can see the percentage of customers retained since April 2022. You can clearly see that this business is not great at retaining its customers in month 3. What happened? Dig into the data to learn more and prevent churn.
Segment your retention data by plan, region, or acquisition channel
There are so many ways to slice and dice your data and gain insight into your business.
For example, you can determine the health of your new customers in their first few months of paying for a subscription and identify when the new customers are dropping off.
Or, your customer success team might segment this data to determine if customers with discounted plans are more prone to churn.
A marketing executive, on the other hand, might look into how retention data compare against different acquisition channels – which channels are bringing in customers that stick around?
4 customer retention strategies
Customer retention strategies are methods that SaaS businesses employ to maintain and strengthen relationships with existing customers, encouraging them to remain loyal and continue their engagement with the brand. Here are our 4 customer retention strategies that you can start applying today:
Start with a frictionless onboarding experience
How you interact with your brand-new customers determines how they experience your product and company long-term. Make sure you leave a good impression from the start. If you want to increase customer retention and start building customer loyalty, you should start with your onboarding experience.
Product tours, product training sessions, and live webinars are great opportunities to get new customers started fully equipped to make the best out of using your product. Make sure that your sales, marketing, and customer success team are aligned and working together to achieve a great experience for your customers.
Track customer satisfaction
Customer satisfaction measures how well your product meets the needs and expectations of users. In SaaS, it is crucial to maintain a steady stream of revenue, and you can only do that with a satisfied customer base. Improving customer satisfaction means improving the customer experience.
To track customer satisfaction, you can use several techniques, including surveys, customer feedback, and customer support interactions. Surveys can provide valuable insight into how satisfied customers are with a product or service, while customer feedback allows you to understand their customers’ needs and expectations better. You can collect feedback through surveys like Net Promoter Score, focus groups, social media, and customer support interactions.
Implement a customer feedback loop
So you already know how satisfied your customers are? You gathered some great feedback. Make sure to implement a feedback loop. A feedback loop is a process that involves gathering customer feedback, analyzing it, and taking action to improve the customer experience. Don’t miss out on the “taking action” part!
Pro tip: Share your results with the relevant teams or even the whole company.
Retain the right customers
Retain customers that are within your ICPs. There is huge value in acquiring and retaining the right customers.
ChartMogul lost a large number of legacy customers when migrating them to a new pricing model, however, the highly engaged `good fit` customers enabled ChartMogul’s continued growth. Read the whole story of our pricing migration told by Ingmar, our VP of Customer Success.
Mapping your ICP can be useful across teams. It will help your marketing team with marketing to the right type of audience. Your sales team will focus on high-value prospects. And your customer success team can support existing customers much better. After all, customer retention starts with acquiring the right type of new customers.
What is good customer retention?
Customer retention is low at the beginning of your journey of building a SaaS business. it can go up to 78% when your business reaches $1m. Best-in-class customer retention rate at any stage of business stands at ~85-87%.
What is logo churn?
In short, logo churn measures the rate at which customers are leaving your SaaS business. It measures the number of customers lost over a period of time. Depending on the revenue concentration, customer churn can be different from revenue churn. Hence, it’s good to look at both numbers.
What is the difference between retention and renewal?
Renewal speaks to the is the number of existing customers who actively opt to renew their contract with you. Customer retention pertains to customers who have made the deliberate decision to maintain their subscription without canceling it, even when they had the opportunity to do so.
Can logo retention be over 100%?
Customer retention can never be over 100% (neither can gross dollar retention). Only net revenue retention can be higher than 100%.
What is logo vs net retention?
Logo retention (aka customer retention) measures the percentage of customers retained over a period of time. Quite often, measuring retention by revenue yields more meaningful results. Gross revenue retention (GRR) and net revenue retention (NRR) are the key metrics to understand how well your SaaS business executes on the promise made to customers.
What is a good customer churn rate?
Ideally, your customer churn rate is as low as possible. Even a seemingly low monthly churn rate of, e.g., 5% corresponds to an annual loss of nearly half (46%) of existing customers.
In our analysis of data from SaaS businesses, the lower your business’s average revenue per account (ARPA), the higher your churn rate. For a SaaS business with less than $10 ARPA it can be relatively high at 6–7% per month. For businesses with $500 ARPA or more, it tends to be lower at 1–2% per month. Check out our customer retention strategies to learn more.