Customer Retention

It’s hard work to grab a customer’s attention these days – and even harder to retain that customer.

Low customer retention is one of the leading causes of business failure, especially within the SaaS industry. Having an effective customer retention strategy is a critical component of long-term success.

We’ll go over customer retention, why it’s important, and strategies you can implement to increase your business’s customer retention rate.

What is customer retention for SaaS?

Customer retention is a company’s ability to keep its existing customer base over a defined period of time. The process of customer retention begins with customer acquisition.

To increase retention, first focus on acquiring high-quality customers who will likely stay with your company for the long haul. This entails identifying potential prospects who fit your ideal customer profile (ICP), which assesses a customer’s readiness to buy, capabilities, expansion potential, acquisition efficiency, and more.

Once you’ve acquired these customers, you need to nurture and cultivate them into lifelong promoters of your product. You can accomplish this by delivering an excellent, consistent customer experience, driving value attainment, and offering exclusive deals, content, and loyalty rewards.

Why customer retention matters

Customer retention is important because it costs significantly less to keep an existing customer than it does to acquire a new one. In fact, it’s estimated that the cost of acquiring a new customer is five times more than the cost of retaining an existing one.

In addition to being more cost-effective, customer retention allows you to build a relationship with your customers. The longer a customer stays with your company, the more likely they are to become a brand advocate and recommend your product or services to others. This sort of extensive relationship also gives you the opportunity to understand your customers better and demonstrate ROI, providing a higher possibility of upselling or cross-selling.

Finally, customer retention helps you predict future sales and increase your customer lifetime value. If you have a high customer retention rate, you can be fairly confident your customer base will continue to grow over time. Plus, if you notice trends in the types of customers that tend to stick around, you can refine your ICP and focus sales efforts on similar prospects.

Related resource: Logo renewal rate and how it ties into customer retention

How to calculate customer retention rate with examples

Customer retention is the measure of how many customers your company retains over a given period, usually calculated as a percentage. It’s important to track your customer retention rate because it gives you insights into the health and valuation of your business.

Customer retention rate formula

Here’s the most common method for calculating your customer retention rate:

  • Take the total number of customers in a given time period
  • Subtract the number of new customers acquired in that same time period
  • Divide this number by the total number of customers in that given time period (your first number!)
  • Multiply that number by 100 for a percentage

The resulting number is your customer retention rate.

Customer retention rate formula. To calculate, subtract the number of acquired customers from your total number of customers, then divide that sum by the total number of customers. Multiple the total by 100.

Customer retention rate example

Your SaaS company has 150 customers at the end of the first quarter. Fifteen of those customers joined during that quarter. This means your customer retention rate for that quarter is 90%.

Why track customer retention rate?

This metric directly indicates how well you’re retaining your customer base, which is an indicator of your business’ health. A high customer retention rate means you’re keeping your customers happy and satisfied, while a low customer retention rate indicates you may need to address issues with your customer experience and implement some new customer retention strategies.

When you examine your customer retention rate alongside other metrics, you can build an even more complete picture of the state of your business. If you analyze your customer retention beside your customer journeys and lifecycle phases, for example, you can see at what point customers most often discontinue service or where they get the most excited about your product.

Customer retention rate can also provide more context for your data (i.e. product feedback, feature usage) and help you improve sales touchpoints and support interactions.

It’s important to note that benchmarks for customer retention rates vary by industry. For example, the customer retention rate for SaaS is generally much higher than the customer retention rate for the retail industry.

How Customer Success teams leverage customer retention

Customer retention is one of the more basic yet important metrics for your Customer Success team. If your customer retention rate is low, you should be focusing all of your efforts on improving it. It can affect everything from sales to word-of-mouth referrals and the ability to secure outside capital.

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The benefits of customer retention

The following are just a handful of examples on how customer retention’s benefits extend beyond a better bottom line for your business.

1. Increases the value of every sale

Customer retention increases the value of every sale because each customer you retain is worth more to your company than a new customer you acquire. Remember, the cost of acquiring new customers is much higher than the cost of retaining existing customers.

Customer retention also increases the lifetime value of each customer. The lifetime value of a customer is the total amount of revenue that a customer will generate for your company over the course of your relationship with them.

The longer a customer stays with your company, the higher their lifetime value will be. They will continue to make purchases over time and, hopefully, refer new customers to your services.

2. Provide a deeper understanding of your customers

The longer a customer stays with your company, the more data you can gather on their purchasing habits and preferences.

This data allows your team to make better decisions regarding marketing strategies, product development, and sales efforts. With a clearer understanding of what your customers want, you can successfully provide them with the solution to their problems.

3. Build referrals, references, and loyalty

Customer retention builds customer loyalty, which in turn helps increase the number of referrals you receive. Satisfied customers are more likely to tell their friends, family, or colleagues about your services.

The longer a customer stays with your company, the stronger their sense of trust in your product and brand becomes. These loyal customers are more likely to continue to do business with your company even if/when they run into problems. They now have a personal connection to your brand and trust that you’ll resolve any of their issues.

4. Reduce customer churn

Since customer churn really is the opposite of customer retention, this benefit may seem obvious. The better you can retain your customers, the less likely they are to churn, and the less likely you are to lose their business to a competitor.

Customer churn is the percentage of customers that stop doing business with your company over a period of time. A high customer churn rate indicates major problems for a business because it means they’re losing more customers than they’re gaining, signaling a decline in revenue and profits.

Increasing retention reduces customer churn.

Additional resources on customer retention and SaaS metrics