Customer retention rate is a metric that tells you what percentage of your total number of customers continue their business with your organization over a certain period of time. It’s the opposite of customer churn, which measures the percentage of customers who stop doing business with your organization over a certain period of time.
Customer retention rate is a very important metric across various industries — however, it’s exceptionally important for businesses in the B2B SaaS industry since SaaS businesses are subscription-based. Customer retention rate tells SaaS businesses how many customers are still getting value from the product and decided to continue paying for it for another subscription cycle and how many decided the product was not worth the value and stopped paying for it.
Customer retention rate is a relatively simple metric that’s straightforward to calculate. Nevertheless, it’s one of the most important metrics you can track. Tracking your organization’s customer retention rate can provide a great deal of insight that can help you make smarter strategic decisions about growing your customer base.
What’s Customer Retention Rate?
Customer retention rate compares the number of customers who left your business during a given period of time to the total number of customers your business had at the beginning of that period of time.
Customer Retention Rate Formula
Here is the formula to calculate your organization’s customer retention rate:
( ( number of customers at the end of the time period – number of new customers gained during the time period/number of customers at the beginning of the time period ) x 100
For example, if you had 70 customers at the beginning of the time period you’re measuring, you gained 6 new customers during that time period, and you had 74 customers at the end of the time period, your customer retention rate calculation would look like this: ( ( 74 – 6 ) / 70 ) x 100
- 74 – 6 = 68
- 68 / 70 = 0.97
- 0.97 x 100 = 97 retention rate
In this example, you began the period with 70 customers and ended the period with 68 customers, so your customer retention rate is 97%, meaning you ended the time period with 97% of the customers you had at the beginning of the time period.
A common question is: “what is a good customer retention rate?” The higher your retention rate, the better. In the SaaS industry, organizations should aim to keep their retention rates around 93% or higher.
Customer Retention Rate vs. Churn Rate
Customer retention rate and customer churn rate are two sides of the same coin. Sometimes, people get these two metrics mixed up — however, even though they’re very closely related, they’re actually opposites. Customer retention rate is the percentage of your customers who continue doing business with your organization; customer churn rate is the percentage of your customers who stop doing business with your organization. By definition, a high customer retention rate results in a low customer churn rate and vice versa.
To calculate customer churn rate, use the following formula:
(Number of customers who left your business during the time period in question/number of customers at the beginning of the month ) x 100
In the example scenario above, you had 70 customers at the beginning of the time period, gained six customers during the time period, and ended the time period with 68 customers, which means you lost two customers during that period. Your customer churn rate calculation would look like this: ( 2 / 70 ) x 100
- 2 / 70 = 0.03
- 0.03 x 100 = 3
In this scenario, your churn rate is 3% — the opposite of your 97% retention rate. This means you lost 3% of your already existing customers during the time period you measured.
Why’s Customer Retention Important?
Customer retention rate is one of the most valuable metrics for many kinds of businesses — especially in the B2B SaaS space. Why is customer retention important? Let’s summarize some of the primary advantages of tracking your organization’s customer retention rate. These benefits are some of the best demonstrations of the importance of customer retention.
1. Save Money
One of the most well-known benefits of maintaining a high customer retention rate is affordability. Retaining existing customers is much less expensive than acquiring new customers. Expenses like marketing budgets and onboarding costs can add up quickly, causing new customer acquisitions to eat into your bottom line more than you might expect. Some sources report that finding a new customer can be six to seven times more expensive than retaining an existing customer. You can minimize these expenses by keeping your customer retention rate high.
2. Boost Your Bottom Line
Improving your customer retention rate is one of the best ways to boost your organization’s revenue. Out of all the actions you could take to improve your bottom line, increasing your customer retention rate is one of the most impactful. A mere 5% increase in customer retention can grow the company’s revenue by as much as 25 – 95%. Repeat customers also tend to have higher average order values and be more willing to purchase new products and features, which further contributes to your organization’s revenue growth.
3. Build Customer Loyalty
A high customer retention rate also helps develop customer loyalty toward your brand. When customers stay with your organization for a long time, it provides the opportunity to establish a relationship between the brand and the customer. A revolving door of customers isn’t as likely to allow them opportunities to form lasting relationships with your business. Customer retention can sometimes be a “snowball” effect, where a customer becomes more and more likely to keep coming back and making more purchases the longer they’ve been a customer. This is because the more time a customer spends with your products or services, the more time they have to realize the value your products or services can offer them.
4. Drive Word of Mouth
The more loyal customers your business has, the better chance there is that a new potential customer will hear a positive review from someone they know. Referrals are one of the best sources of new customers because people tend to trust the word of people they know more than typical marketing tactics. If you can retain a large group of customers over a long period of time, they’ll likely bring in more business for you. If customers are satisfied enough to stick around that long, it’s likely that at least some of them are recommending your business to their friends, family, or professional network. Leads you gain through referrals are some of the best kinds of leads because you don’t have to spend a dime on marketing to attract their interest.
How to Improve Customer Retention
Improving your organization’s customer retention rate is the key to unlocking benefits like the ones listed above. However, increasing your customer retention rate is much easier said than done. You might be wondering how to improve your customer retention rate without spending unnecessary extra time or resources in the process. No matter how you approach the problem, boosting customer retention will require some effort, but you can minimize the work involved by following some customer retention best practices like these:
1. Set and Maintain Expectations
Misaligned expectations are one of the most common causes of customer churn. It’s important to make it clear to customers up front what your product or service entails and what the customer can expect from a relationship with your business. Likewise, it’s important to give customers the opportunity to voice their expectations so you understand from the very beginning what you can do to serve them best.
2. Use Reviews and Case Studies
If you have customers who are already loyal to your business and happy with your service, use these voices to attract more customers. Find out what your satisfied customers like most about your business and present your findings in case studies published on your website. SaaS products are usually a significant commitment on the part of the customer, so keeping testimonials from existing customers can be a great way to convince new prospects that your organization has real value to offer.
3. Communicate with Existing Customers
It’s also essential to maintain excellent communication with your customers. If your product or service is not actively providing value for your customers, they have little reason to continue paying for it — but even if your product or service is getting results for the customer, they may not realize it unless you show them. Regularly reporting to customers on how your organization has benefited them and will continue to benefit them can be a great way to convince them to stick around longer. It’s easy to fall into a routine with long-time customers, but by continually delivering new value and communicating that value to the customer, you can keep them happier for longer.
4. Actively Seek Feedback
One of the simplest yet most effective ways to find out how to get customers to stay with your organization longer is to ask them. You can use a platform like Northpass to access tools that can help you analyze customer behavior, or you can solicit feedback directly. Regularly collecting and reviewing customer feedback can help you identify patterns that indicate where the most pressing issues are. If a large number of customers are frequently mentioning the same problems in their feedback, you know to focus on that problem to improve customer retention.
