Want to learn how to improve customer retention for SaaS companies?
SaaS companies only know too well the struggles of acquiring new customers. After investing in marketing and sales, your leads finally move down the marketing funnel and purchase a subscription to your product.
But your work shouldn’t end there. After every month, you realize more customers are churning out, and some even ask for refunds! Engagement rate is also going down, with paying clients not having signed in for weeks or so!
Getting new customers is much more expensive than retaining existing ones, so how can you minimize the leaks in your retention funnel? This week, we’ve compiled a guide on customer retention for online and SaaS companies.
What Exactly Is Customer Retention?
Simply put, customer retention for online platforms and SaaS apps consists of all the activities done to keep a user from leaving and consequently reducing churn.
For subscription-based businesses, customer retention starts as soon as someone purchases a subscription and extends throughout the time they’re subscribed.
The ultimate goal of customer retention is to increase a customer’s lifetime value (LTV) by making sure that they stay engaged and that they understand the product’s total value. How exactly can you increase LTV? Well, by:
- Retaining paying users for as long as you can.
- Cross-selling other offerings and features
- Upselling (Going from one subscription tier to the next)
Why Should SaaS Companies Think About Customer Retention?
Customer retention is one of the key ingredients for company growth, but many online platforms and SaaS companies make the mistake of leaving their retention strategy until the last minute.
After some time, you will lose subscriptions through attritions, cancellations, and non-renewals. And if acquiring new customers is your primary way to generate profits, then you’re not effectively compounding upon your efforts.
Over time, you’ll realize that you’re having a hard time growing in terms of revenue and profits, both of which are some of the toughest challenges in the SaaS world. Your users might even be churning too early to cover their acquisition costs.
Customer retention for online platforms and SaaS apps is vital because:
- Acquisition is much more expensive to maintain than retaining existing customers.
- You can still increase a retained customer’s lifetime value through upselling, cross-selling, and other engagement tactics. You have far fewer chances of attracting someone who’s stopped using your platform!
- Loyal, long-term customers often spend more than newer ones, thereby increasing your expansion revenue.
- Long-term customers refer your product to their network more often than new customers.
Measuring Customer Retention
The customer retention rate calculates the % of customers that continue to use your product at a time period from the total number of users at the beginning of the time period.
Customer retention rate = (# of active customers at a time period/total # of active customers at the start of that period) x 100
For example, let’s imagine a scenario of over 3 months. On the first day, you had 10,000 active users. By the end of month 3, there are only 8,000 users left from that cohort. Your retention rate would therefore be:
(8000/10000)*100= 80% — This is the retention rate.
What Retention Rate Should You Aim For?
In the SaaS industry, having a retention rate of 35% or higher over 8 weeks is considered to be excellent.
But remember that there are many factors at play that determine your retention rate, such as your pricing model, customer journey and sales process, or even target market.
Some companies may require as many as 5,000 customers to hit their annual revenue targets, while others that cater to enterprises may only need 50 users to achieve profitability.
Other Key Metrics to Measure Customer Loyalty and Retention
Customer retention can help answer important questions about your relationship with your customers as a SaaS business, such as:
- How can we foster and reward customer loyalty?
- Why did our retention rate drop in this period?
- How can we bring more value to the user journey for this specific customer segment?
- How can we encourage cross-sells and upsells?
In addition to the customer retention rate, consider these retention metrics:
#1. Customer Churn Rate
Customer churn is the direct opposite of customer retention: it is the rate at which you are losing customers. But don’t panic! A certain level of churn (5 to 7% per year) is considered normal and depends on factors like your business model changes, acquisitions, and the necessity of your service to your customer.
Churn rate = (# of customers at the beginning of the period – # of customers at the end of the period) / # of customers at the start of the period
Churn can often come from accidental cancelations (e.g., the customer’s payment bounced), improper onboarding, and lousy relationship management.
After figuring out your customer churn rate, you can then look for ways to reduce this number and retain future users in a much more effective way.
#2. Gross Revenue Retention
Gross revenue retention helps you understand the amount of revenue lost due to churned customers and indicates your company’s overall revenue retention ability.
If you score higher in revenue retention (closer to 1 than 0), this indicates that you have a sticky product that customers love to use. At the same time, a high number can demonstrate that your revenue from your retained customers will be able to help you go through tougher months when you aren’t getting as many customers as you’d like.
Calculating gross revenue retention is easy:
Gross revenue retention = 1 – (churned revenue / total monthly recurring revenue for the period)
#3. Net Revenue Retention
This type of retention metric dives deeper into the SaaS-specific finance area. Net revenue retention calculates the changes in net revenue during a certain period within a customer segment.
Excellent net revenue retention is a strong indicator that your company will be able to survive periods of downturn through cross-selling and upselling.
Here is how you can calculate the net revenue retention metric for the month:
Net revenue retention = current Monthly Recurring Revenue (MRR) from a specific customer segment / MRR for the previous month
#4. Customer Lifetime Value
Customer Lifetime Value or LTV is the total revenue that a single customer brings in while using your services. For a company to stay sustainable, its LTV needs to be higher than the Customer Acquisition Cost (CAC). Most successful companies achieve LTV that is at least three times higher than the CAC benchmark.
There are many different ways to calculate LTV. Here’s one of them:
LTV = average revenue per customer (ARPU) / MRR churn (or customer churn)
#5. Net Promoter Score
Net Promoter Score (NPS) measures the overall customer satisfaction and serves as a clear indicator of your company’s potential.
To obtain the score, ask your users to grade the probability that they will recommend your service or product on a scale of 1-10. To make the metric even more helpful, ask them to explain their grades.
- Grades below 6 harm your company, as these “detractors” actively discourage others from using your products.
- Grades 7 and 8 can be discarded, as these “passives” feel neutral toward your product.
- Grades 9 and 10 are the grades you should be trying to achieve. These users are “promoters” or active participants in your company’s marketing efforts.
Once you obtain the scores, you can calculate the overall Net Promoter Score as:
NPS = promoter percentage – detractor percentage
#6. Loyal Customer Rate
Loyal customer rate describes the number of people who have completed a repeat purchase from your company during a specified period. This may be a useful metric for SaaS companies that also features one-off purchases (e.g., remote video recording platforms sell hours of recording time for a certain time period).
You can calculate your company’s loyal customer rate as:
Loyal customer rate = (# of existing users who made multiple purchases during a period + # of new users who made multiple purchases during a period) / total number of customers during a period
#7. Existing Customer Revenue Growth
Customer revenue growth describes revenue change for a certain period of time and allows you to evaluate your existing customer base. You can triangulate this metric with other factors (e.g., marketing campaigns, feature releases, etc.) that enabled your revenue velocity to grow or decrease within that period.
Here is how you can calculate customer revenue growth:
Customer revenue growth = (end-of-the-period revenue – start-of-the-period revenue) / start-of-the period revenue
Proven SaaS Customer Retention Techniques That Work
Today, having a unique product is not enough. As more competitors are entering the SaaS market, you’ll need to find effective ways to retain your existing customer base.
As such, you need to be proactive in maintaining your retention metrics. Here are some tips on how to do just that:
#1. Make Onboarding Your Top Priority
If users can’t find their way around your software, they will choose the simplest route – to leave. As such, a smooth and effective onboarding process can make or break a customer’s decision to stick around.
Here are a few customer retention tips you should follow to improve your company’s onboarding process:
- Know your customers. Analyze customer needs and pain points that your software is intended to solve and frame your onboarding around them.
- Identify the “aha” or “wow” moment. Understand when your users experience the “aha” moment and get them there as soon as possible.
- Map out the user journey. Think of a path to show users the key features of your product to solve their pain points.
- Use interactive tours to guide users through the journey. Help new users to locate your software’s most attractive features with self-paced immersive onboarding tours. Nickelled allows you to easily create such tours and analyze customer behavior through real-time session recordings later on.
- Continue educating users after onboarding. Provide training, tips, and additional education regularly to ensure that your customers get the most out of your product. Here again, you can implement guided tours from Nickelled. For example, you could use them to show the current customer base how to use a brand-new feature or software update. You can also create tutorials and blog posts around how to maximize the value of your product.
#2. Engage with Customers to Help Them Succeed
Ongoing customer feedback loop and engagement are essential to fighting churn rates. Luckily, there is a variety of interaction and engagement tools available on the market today.
Here is how you can boost your customer engagement:
- Multiple communication channels. Firstly, make sure that you implement various channels of communication with your customers. For example, phone calls are necessary for retaining large, enterprise-level clients. In-app notifications are great for catching customers in the right place at the right time when they are receiving value from your software.
- Excellent experience for customers. Go the extra mile by offering a remarkable customer experience with your product or customer service. Excellent customer service is very beneficial to your business. Over two-thirds of customers are likely to share a positive experience with at least six people.
- Feedback. Asking for feedback can also be an excellent way to interact with your customers and better understand their concerns. Feedback can come in various forms: surveys, NPS forms, questionnaires, etc. Make sure that you’re gathering feedback in the right way based on your needs and customer behavior.
#3. Align Team Incentives Around Retention
Generally, each department within a SaaS company tends to measure success differently. For example, marketers like to measure qualified leads, which don’t always pan out; sales teams prefer to track dollars in the bank account each month, while product teams are busy calculating product metrics that aren’t compared with business objectives.
However, none of these metrics focus on actually retaining customers. To combat the issue, aim to align incentives for different teams around customer retention. Here is how you can do this:
- For marketing teams: Encourage the teams to focus on lead quality over volume. Instead of tracking Marketing Qualified Leads (MQL), use the number of Sales Qualified Leads (SQL) as a success metric.
- For sales teams: Limit the number of prospects that each sales team member is responsible for and modify the reward structures so that salespeople receive the commission only after customers stick around for some time.
- For product teams: Establish open and direct access for product managers to speak with customers. Without direct feedback, product development and improvements won’t help to retain users.
#4. Deliver Exceptional Customer Support
Today, customer expectations are higher than ever, and poor customer service can cost your company massive profits. If customer support tickets take a long time to close or even remain unresolved, the customer will be at an exceptionally high risk of churning.
Here again, Nickelled can prove helpful. For example, Gumtree, the UK’s largest website for local classifieds, handled one-third of support requests using Nickelled. Moreover, the customers who have used Nickelled guides rated their support experience 10% higher on average than those who haven’t. The overall Nickelled-powered customer support resulted in an impressive 470% ROI.
#5. Optimize Your Pricing to Promote Retention
Even though most companies choose to spend only a handful of hours on their pricing strategy, optimizing your pricing to balance profit and value can have an enormous impact on your company’s overall success, including customer retention.
First of all, forget about the discount culture. Offering significant discounts on your base prices may add some profits upfront, but the results will be short-lived.
The problem with discount pricing is that it doesn’t build loyalty. You can only build loyalty by having excellent product value and customer service experience that customers can’t find elsewhere.
On the other hand, raising your prices automatically increases the perceived value of your products and helps foster loyalty.
#5. Include Feedback Into Your Product Roadmap
As your company grows, you will notice that some features are more used than others. Your features must feel sticky and encourage people to keep using your product. Consider what features bring in the most engagement and convert first-time users into loyal fans.
As soon as this becomes obvious, re-focus the efforts on improving the power and quality of this particular feature. Making your product’s best feature even better and more visible will surely keep your subscribers from hitting the cancel button.
To ensure that users are in the loop regarding feature updates, don’t forget to send an email and even use a guided tutorial for comprehensive changes.
#6. Foster Transparency
Unfortunately, many customers are skeptical about SaaS companies: they see a software product that costs a lot but doesn’t appear to need a lot of overhead or maintenance. Of course, there are development and marketing costs, but where exactly is the customer’s money going?
Being completely transparent is the only way to build up trust and overcome skepticism. Here are a few ways to create transparency:
- Answer any questions that prospective users have.
- Explain to consumers where their money goes.
- Notify users of downtime.
- Make it easy for subscribers to cancel service.
- Give subscribers advance notice of contract or pricing changes.
Improve Retention with Nickelled
Customer retention is all about engaging customers and continuously providing real value to them. If you are a SaaS company that wants your subscribers to stick around for longer, you need to learn to understand their needs and establish regular touchpoints to ensure that they are reaping your product’s full benefits.
Interactive guided tours created with the help of Nickelled can be helpful throughout every step of the customer journey: from their onboarding experience to trying out new features to getting answers to customer support requests. Give Nickelled a try today.