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A look at customer retention benchmarks for SaaS in 2023
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Not too long ago, SaaS companies were focused on “growth at all costs.” That sentiment has shifted as the economy has changed. Investors are increasingly looking for “profitable growth.” In turn, the swing has rightfully put an increased focus on customer retention.
That conjures the question: how do you know if your customer retention rate is good or not?
Fortunately, SaaS Capital, which provides debt financing to growth companies, recently published its annual B2B SaaS retention study. The survey report tallied responses from roughly 1,500 SaaS companies and is based on sales data through the year ending December 31, 2022.
The report’s benchmarks are segmented by annual contract value (ACV) and annual recurring revenue (ARR) for relevance. Companies with similar ACVs tend to have similar cost structures, go-to-market strategies, resource allocation and sales cycles.
To break down the findings, we hosted a webinar with SaaS Capital Managing Director Rob Belcher and ChurnZero CEO You Mon Tsang. Watch the webinar in full here, and scroll down to dig into three customer retention benchmarks that stood out.
Customer retention benchmark 1: Median NRR by ACV
The median net revenue retention (NRR) rate across all SaaS companies was 102%. Keep in mind that NRR includes success with cross-selling and upselling, which can mask churn, and is what allows the benchmark to exceed 100%.
Source: SaaS Capital’s 2023 SaaS Retention Benchmarks for Private B2B Companies
This benchmark varied by ACV. For example, companies with ACVs on the low end—that is ACVs that are $12,000 or less in value—had a median NRR of 100%. For companies with ACVs on the high end—that is ACVs greater than $250,000—the median NRR is 110%.
The percentage difference—or graphical compression—between the top 25% and 75% quartiles on the low end is 12% (105% minus 93%). On the high end, it’s 17% (120% minus 103%). Both contribute to a slope suggesting a strong positive correlation between NRR by the size of the ACV. In other words, the larger the contract, the higher the NRR.
Source: SaaS Capital’s 2023 SaaS Retention Benchmarks for Private B2B Companies
It makes sense given products with lower ACVs may not be deemed “mission critical” by customers and hence are more prone to churn. In addition, those with larger ACVs tend to be “stickier” and usually have more features or products to upsell.
Rob noted this is a new twist in the study’s finding since before 2020 there was no correlation. It’s intriguing too, because the economy is still climbing out from the shadow of the pandemic.
Customer retention benchmark 2: Median GRR by ACV
The median gross revenue retention (GRR) rate across all companies was 91%. Overall, this number was up slightly compared to results from the prior years—where GRR was stuck at 90%. Remember that GRR excludes expansion revenue so the number cannot exceed 100%. This metric arguably better illustrates churn among existing customers.
Looking at the chart below, you can see a graphical compression on the right-hand side among those respondents with higher ACVs. To put it another way, the variance between the top 25% quartile to the 75% quartile is narrower. It’s effectively the inverse of the compression we saw on the previous chart with NRR by ACV.
Source: SaaS Capital’s 2023 SaaS Retention Benchmarks for Private B2B Companies
Looking at the left-hand side of the chart, you see a lot more variance between quartiles from respondents with ACVs of less than $12,000. This suggests there is currently some downside risk for those organizations with smaller ACVs. That’s all the more reason to review the actions your company is taking to retain customers.
Both Rob and You Mon agreed that 80% GRR for a company selling ACVs valued at $12,000 isn’t terrible. Further, 85% GRR for a company that sells to small- and medium-sized businesses (SMBs) is reasonable.
Customer retention benchmark 3: Median NRR and GRR segmented by ARR
ARR is a proxy for time. Typically, companies with higher ARR have been around longer. For example, when a company has less than $1 million in ARR, they are probably still in their first three years of business. This is another way to look at NRR and GRR.
You can see in the chart below that GRR tends to drop as companies grow—and then flattens to about 90%. It may seem counterintuitive, but Rob and You Mon say this shows companies get better at customer retention—and GRR by extension—over time.
Source: SaaS Capital’s 2023 SaaS Retention Benchmarks for Private B2B Companies
Why? They explained that GRR tends to be inflated in younger companies. Early-stage companies are so focused on new sales that they’ll often close deals with customers that aren’t quite the right fit. It takes a few years for both sides to figure out that it isn’t working, and that’s when the company starts to experience churn.
Similarly, the data shows NRR tends to improve over time. As companies grow in size, they often look to drive growth through existing customers with upsells and expansions. Larger companies tend to develop more products and features, which means they generally have more opportunities to offer something else of value to their customer base.
Customer retention has an exponential effect on growth
Customer retention has a powerful compounding effect on growth for SaaS companies. The chart below—which segments retention by NRR and overall growth—demonstrates that when companies are over 100% NRR, their overall company growth rate accelerates significantly.
Source: SaaS Capital’s 2023 SaaS Retention Benchmarks for Private B2B Companies
For example, looking at the x-axis, you can see that NRR segments increase in increments of 10%—peaking at 130% NRR. So, a business with 130% NRR has 30% growth “baked in” to its model. This means they only need 40% of new sales to achieve a 70% overall growth rate.
While it’s not shown in this chart, Rob noted that GRR does not have the same type of relationship with the overall growth rate. The data shows that 90% GRR tends to be the dividing point between SaaS companies that grow on par or exceed that of their peers.
In the full report on the survey data, Rob sums this up nicely: “Growth rate is positively and exponentially correlated with net revenue retention, while gross revenue retention is a ‘table stakes’ benchmark—to have a shot at performance parity with your peers, GRR must be at least 90%.”
Watch the full webinar—2023 SaaS retention benchmarks: How does your company compare?—to learn what other trends are shaping the industry.
You can also download the full survey report from SaaS Capital.