Key Customer Retention Metrics for SaaS Companies
Increasing your customer retention rate by 5% may increase your profits by a rate up to 95%. But before telling you more about increasing this rate, let me tell you what customer retention is really about and why it’s important.
Customer retention is your brand’s ability to turn customers into repeat and engaged buyers. Any action you take towards improving customer loyalty is, essentially, about customer retention. This metric, which is made up of many different smaller metrics that I’ll mention below, is especially important for SaaS companies, as revenue is dependent on the size of the subscriber base. If your customers stop renewing their subscriptions and switch to a competitor, you lose the backbone of your brand’s funds. In short, customer retention reduces churn and keeps your company afloat.
However, most brands still fail to focus on customer retention and direct all their attention to acquiring new customers instead. This is illogical since acquiring new customers is nearly 25 times more expensive than retaining existing ones.
So how do you improve customer retention? Unfortunately, there is no way of measuring your customer retention success. This metric depends on a combination of different metrics that change from industry to industry. But you don’t need to look far for the key metrics for your SaaS company, as I’ve compiled the vital metrics below.
SaaS Retention Metric #1 Monthly Customer Churn Rate
What is the “customer churn rate” about?
Customer churn rate is the percentage of customers that cancel their subscriptions or stop buying from you in a specific time frame. The appropriate time frame changes based on the service you provide: for example, an airline will check yearly churn because people tend to buy tickets one or two times a year. When it comes to SaaS, the most appropriate time frame is usually a month. Subscriptions are often renewed monthly, and people need SaaS services monthly rather than yearly or daily.
Why is measuring your monthly customer churn rate important?
As I’ve said before, your repeating customers are the people who keep your SaaS company going. An acceptable annual churn rate is between 5 to 7%, which translates to a monthly churn rate of about 0.5%. Any higher than 3% means that you’re losing more than 3 out of 100 of your customers each month. If you start with 100 customers at the start of the year, you’ve lost approximately 30 of them by the end of the year. So, in order to grow your customer base, you wouldn’t need to just acquire a new customer–you’d need to make up for the lost 30 and then acquire new ones that’ll grow your company.
In summary, you need a low customer churn rate to grow your company without spending all your revenue on acquiring new customers. If you’ve lost your subscribers, chances are you don’t have the funds to acquire new customers either.
How do you calculate your monthly customer churn rate?
(# of Lost Customers ÷ Total # of Customers at the Start of the Month) x100
The formula above gives the monthly customer churn rate. To give an example, if you had 500 customers at the start of this month and lost 10 of them, your customer churn rate of the month would be (10 / 500) x 100 = 2% (a relatively high rate.)
Of course, calculating your monthly churn rate once in a while will not do. You need to keep track of your rate by doing this calculation each month. If you see an increasing trend or see that your numbers are too high, use HockeyStack to understand why: use the survey tool to ask your customers what you can improve, and use the analytics tools to reveal the patterns of customers.
SaaS Retention Metric #2 Monthly Customer Retention Rate
What is the “customer retention rate” about?
The customer retention rate is the rate of customers you’ve kept after a specific time period: they are the customers who stayed with your brand to continue engaging with your products. Again, this time period is a month for most SaaS companies for the reasons I’ve mentioned above.
Why is measuring your monthly customer retention rate important?
Your monthly customer retention rate is a neat little summary. It shows you how well your customer service has been doing, or how good your product has been working based on customer satisfaction. However, it’s important to remember that this rate is just a rate. It doesn’t tell you everything you need to know about customer retention, and only checking this metric would mean that you’re missing out on other important aspects of brand loyalty.
How do you calculate your monthly customer retention rate?
[ (# of customers at the end of the month – # of acquired customers in the month) / (# of customers at the beginning of the month) ]x 100
This formula gives your monthly customer retention rate. An example of this calculation would be: if you had 1500 customers at the start of May, and had 1800 by the end of May after acquiring 500 new customers over the month, your rate would be ((1800-500) / 1500) x 100 = 86.6%.
SaaS Retention Metric #3 Referral Rate
What is the “referral rate” about?
Your referral rate is the rate of purchases that come from your referral programs. So a 5% referral rate would mean that 5 out of 100 of your sales came from referrals. Considering that the global average referral rate is around 2%, this would be an incredible success.
Why is measuring your referral rate important?
Referral programs bring good/excellent leads according to 78% of marketers. Your referral program may be based on influencers in the industry, or it may be a customer-to-friend referral program. Both can be as effective as the statistic suggests, however, you can only know whether or not they’re doing good by checking your referral rate.
This rate also shows you how many of your customers participated in your program, which is another aspect of your program’s effectiveness.
How do you calculate your referral rate?
( # of referred purchases / # of total purchases ) x 100
This formula gives your referral rate. There are various referral tracking apps that you can use such as Tapfiliate and Affise. Using the right marketing tools is always helpful. These tools often use referral codes embedded in your referral links to understand the generated customers.
SaaS Retention Metric #4 Revenue Churn (MRR Churn)
What is “MRR Churn” about?
MRR stands for monthly recurring revenue. It measures the total revenue that you get from all of your subscribers in a month. So, MRR Churn is about the revenue you lose over a month in terms of subscriptions (and your revenue churn would be measured over another time period, maybe a year.) Usually, SaaS companies turn this metric into a percentage by looking at their MRR at the beginning of the month and comparing this with the MRR churn they have at the end. I’ve talked more about this calculation below.
Why is measuring your Revenue/MRR churn important?
Knowing about your MRR churn is important for two main reasons:
- Product-related Reasons: Your product should be updated with new features or fixes every month. Since your MRR churn tells you about the customers who stopped buying from you, it does a good job in showing you how your product is being received. When you compare this metric with your customer churn rate, you can also understand if the money you lose is coming from big customers or small ones, and make adjustments accordingly.
- Finance-related Reasons: Your MRR churn gives an idea about how well your brand is doing in terms of funds. It’s wise to decide on your spending (hiring, making new investments, etc) based on how well you’re doing on this metric.
How do you calculate your MRR Churn?
MRR Churn = (Total Lost Due to Cancellations + Total Lost Due to Delinquent Accounts) by the end of the month
You may also choose to include upgrades or downgrades in your churn value, but doing so may blur the bigger picture a bit.
To calculate your MRR churn rate, you would take your monthly revenue from the previous month by multiplying the total subscribers and their payments. Then, you would divide your MRR churn by this value and multiply by 100 to get your MRR rate.
SaaS Retention Metric #5 Customer Acquisition Cost
What is the “Customer Acquisition Cost” about?
The customer acquisition cost (CAC) is the resources and costs you need to spend to acquire a new customer. This cost includes all sales and marketing expenses, salaries, commissions and bonuses paid to marketers and sales managers, and any other expenses due to advertisements. By relating this amount to the number of customers you generate, you get your CAC.
Why is measuring your Customer Acquisition Cost important?
There are several reasons why:
- It helps you understand if your marketing efforts are fruitful. The average CAC value depends on the industry that your SaaS product is involved in, but just to provide a benchmark, SaaS brands involved in business services have a CAC of 228$ per customer on average. If you’re spending more than that in a similar industry, you may need to check out HockeyStack’s marketing optimization tools.
- Since CAC can (and should be) separated into different market segments, you can understand which segments are most profitable for your service and add this information to your ideal customer profile.
- This metric is also important for investors as it shows whether or not your company is based on a sustainable growth model.
How do you calculate your Customer Acquisition Cost?
Total Amount Spent on All Marketing Efforts / Total Number of New Customers
These numbers are mostly measured over a month or a year like the other metrics. So, if you had spent 2000$ on marketing this month and acquired 200 new customers, your CAC would equal 10$. However, you can measure and use your CAC after making a big change on your marketing team structure or technique if you want to measure success.
SaaS Retention Metric #6 Customer Lifetime Value
What is the “Customer Lifetime Value” about?
The customer lifetime value (LTV) measures the worth of a customer based on how much revenue they generate for your brand while they’re working with you. This value depends on how much they spend on your products and services.
Why is measuring your Customer Lifetime Value important?
This metric will be especially important when I talk about the LTV:CAC ratio below, but it’s also important by itself. When you measure your LTV, you can make predictions about the revenue that your customers will bring in the future. Also, just like any other metric, if you know the value, you can improve it. If customers do not spend as much as you’d like, you may want to add new features, or directly ask them what’s keeping them from doing more business with you.
How do you calculate your Customer Lifetime Value?
(Average Purchase Value x Average # of Purchases x Average Customer Lifespan)
The result of this multiplication gives you your LTV. The average purchase value may be calculated by dividing your total revenue by the number of orders. For example, if a customer bought a 50$ worth product 5 times over the lifetime of your relationship, their LTV is equal to 250$.
SaaS Retention Metric #7 LTV:CAC Ratio
What is the “LTV:CAC Ratio” about?
When you bring the two metrics above together, their ratio tells you about the price of acquiring a new customer, and the revenue they bring back to your company. The ideal ratio for SaaS is 3:1, meaning that a customer with a lifetime value of 300$ must cost around 100$ dollars to acquire.
Why is measuring your LTV:CAC Ratio important?
This ratio tells you about how profitable your marketing efforts are. If your ratio is lower than 3:1, chances are your customers aren’t spending as much as they should with the amount of money you put into marketing. If your ratio is higher than 4:1, you’re not investing enough in your marketing efforts, which would help your company grow its customer base. In short, this ratio tells you a lot about your marketing strategies’ productiveness.
How do you calculate your LTV:CAC Ratio?
Customer Lifetime Value / Customer Acquisition Cost
The formula for LTV and CAC are already above. The only thing you need to do is to take the ratio of the two values.
SaaS Retention Metric #8 Customer NPS Score
What is the “Customer NPS Score” about?
The Net Promoter Score (NPS) is actually a score that you get from customers. The question you ask is usually something along the lines of:
On a scale of 1-10, how likely are you to recommend us to a friend or colleague?
The NPS scoring system then puts your customers into 3 different categories:
- The Promoters: the customers who answer 9 or 10 are likely to stay loyal to your brand, and to grow your brand via positive word-of-mouth. These satisfied customers are great for demand generation and lead generation.
- The Passives: the customers who answer 7 or 8 are also satisfied with your product, but they’re not likely to recommend you to others. They’re also more prone to switching to strong competitors.
- The Detractors: the customers who answer 6 or less are dissatisfied customers who are likely to damage your brand’s reputation via negative word-of-mouth.
Why is measuring your NPS Score important?
Knowing about your brand’s perception is important. An average consumer reads 10 reviews before making a purchasing decision, proving that your reputation amongst the crowd is a determining factor in your sales. Your NPS score gives you an idea about how you’re doing in terms of customer satisfaction: most SaaS companies have an NPS of around 31 to 50%. If you find that your score is much less than that, or worse, if you find that it’s in the negatives, you may want to focus on certain aspects of your customer marketing strategy .
How do you calculate your NPS Score?
You’ll first need to collect data by surveying your customers (I suggest that you use HockeyStack’s survey to do so easily.) Then once you get the data, you can perform the following calculation to get a summary score called the Net Promoter Score:
Total % of promoters – Total % of detractors
The Passives are not included in this calculation, since they do not directly affect your brand’s reputation. So, if 80% of your respondents were promoters, 10% were detractors and 10% were passives, your Net Promoter Score would be 80% – 10% = 70%.
SaaS Retention Metric #9 Product Engagement
What is Product Engagement about?
Your Product Engagement Score (PES) consists of three different metrics:
- Retention: percent retention after 3 months
- Feature adoption: percentage usage for your products’ fundamental features (daily or weekly)
- Stickiness: Daily or weekly active users
These three metrics provide an overall view of how often your customers are using your products and their key features, and how much they have incorporated them into their routines.
Why is measuring your Product Engagement important?
You may put out new products and features, but you can’t know how well they’re performing unless you look at how your customers engage with them. Maybe there’s an important UX issue you’re not aware of, or maybe your customers are simply not finding what they were looking for. Your PES score will give you a sign if this is the case.
How do you calculate your Product Engagement Score?
(Feature Adoption + Stickiness + Retention) / 3
So your PES is basically the average of your three engagement metrics. If you had a feature adoption rate of 60%, a stickiness rate of 25%, and a retention rate of 85%, your PES would be (60+25+85)% / 3 = 53.3%.
SaaS Retention Metric #10 Time between website/product visits
What does the Time between website/product visits tell you?
Measuring the time visitors spend between visits tells you about how frequently they get information from you or how often they use your services. If your customers constantly check your blog, or if they often use your product, you’ve become a part of their business routine. This increases retention since they’re likely to become dependent on the information, service, and features that your business provides.
How do you measure the Time between website/products visits?
It’s probably impossible to manually measure the time each individual user spends between visits. However, there are multiple software products that you can use to do this for you, such as HockeyStack.
SaaS Retention Metric #11 Loyal Customer Rate
What is the “Loyal Customer Rate” about?
Your loyal customers are those who make repeat purchases from your business in a certain period. They can either be existing customers who make new purchases or new customers making additional purchases.
Why is measuring your Loyal Customer Rate important?
Your loyal customers drive the most profit to your business, and they are also the Promoters we have talked about under the NPS score. They are the customers that reduce churn since your product has become a part of their business lives.
How do you calculate your Loyal Customer Rate?
Number of Repeat Customers / Total Number of Customers
The number of repeat customers is equal to the number of your Loyal Customers, which I have defined above. Dividing that number by the total number of customers you have at the designated period gives you your Loyal Customer Rate.
SaaS Retention Metric #12 Days Sales Outstanding (DSO)
What is DSO about?
Days Sales Outstanding (DSO) is the average number of days it takes a business to collect payments from customers. It can also be defined as the time it takes a business to collect payments from Accounts Receivable. Since service-based organizations’ credit terms enable customers to pay up to 3 months after using the service, delays leading to a high DSO are inevitable.
In short, a high DSO shows that a company is experiencing delays in collecting payments, and a low DSO indicates that the collected money can be used back in the business quickly.
Why is it important to measure your DSO?
- Financial Aspect: a high DSO may make it harder for your business to pay its own bills and debts. In such a case, this metric will tell you that you need to optimize your sales terms or your billing/receiving process.
- Customer Satisfaction Indicator: dissatisfied customers are likely to delay their payments rather than getting into the process of suspending their subscriptions.
How do you calculate your DSO?
(Accounts Receivable / Annual Revenue) x Number of Days in the Year
We’ve mentioned Accounts Receivable (AR) above. If you don’t know what AR means, it basically is the credit sales that have not been collected from customers yet.
An example calculation: if a company has 120,000$ in its AR balance and a 3,000,000$ annual revenue, its DSO is equal to about 15 days, meaning that this company takes nearly 15 days to collect a typical invoice.
SaaS Retention Metric #13 Users That Are Close To Churn
How do you identify the customers that are close to churn?
SaaS companies collect loads of data from web and behavioral analytics. Machine learning algorithms can use these data sets to predict the number of customers that are close to churn. You can set up such an algorithm by following these steps:
- Gather historical data that has been determining for your customer base’s churn,
- Upload said data to a prediction service such as the Google Cloud ML Engine,
- Test and use the model to make predictions.
Why is predicting churn important?
Once you have a working model and are able to predict customer behavior, you can retain customers who were thinking of stopping buying from you. This “proactive retention” strategy requires effort, so knowing who you should be targeting is important.
Getting a good overview of your customer retention requires analyzing a wide range of metrics. These metrics all connect to customer satisfaction, customer acquisition, and value in one way or another. But the most important benefit they have in common is that using and improving upon them can boost your brand’s revenue and reputation greatly.
The answer changes from industry to industry, but a good retention rate for SaaS companies, measured over 8 weeks, would be around 35%.
A graph of average eight-week retention rates by industry from Mixpanel:
Retention is measured by getting the number of engaged customers you have kept after a specific time period and dividing this number by the total number of customers you had at the beginning of the said period.
For most industries, the average customer retention rate is around 20%.