Retention rate measures how many of your customers remain active and engaged with your service over time, and it directly impacts your monthly recurring revenue (MRR). For example, a high retention rate means your current customers are sticking with you, leading to consistent MRR growth. If you’re in the business of selling software as a service (SaaS), estimating and improving your customer retention rate is essential to the long-term success of your business.
To calculate your retention rate in SaaS, deduct the number of customers you gained during your chosen timeframe from the number at the end of the period. Then, divide the answer by the total number of customers at the start of that period.
Read on for a rundown of how to calculate your customer retention rate, why this metric matters for your SaaS business, and tips for increasing your MRR.
How to estimate your Customer Retention Rate
The first step in improving your customer retention rate (CRR) is understanding what your current retention rate is. Before you can calculate your RR, you’ll need to answer these questions:
- How many customers did you have at the beginning of your chosen timeframe?
- How many customers did you onboard in that timeframe?
- How many customers did you have at the end of that duration?
Once you have those numbers, plug them into this formula to calculate your CRR:
RR = ((Ending Customers – New Customers Acquired During the Period) / Starting Customers)) x 100%
For example, let’s say you started the year with 100 customers and ended it with 85 customers. In that same year, you also onboarded 10 new customers. Using the formula above, your retention rate for that year would be ((85-10)/100)) x 100% = 75%.
Why Retention Rate matters
Your CRR is a crucial indicator of the health and sustainability of your SaaS business. Building your customer base is essential, but it’s also critical to keep those customers engaged and retain their business over time.
Here are a few reasons why tracking and improving your customer retention rate is essential for your SaaS business:
- Higher retention means consistent MRR growth. As I mentioned above, a high retention rate means you have a steady base of current customers paying their monthly subscription fees, leading to consistent and predictable MRR growth.
- It’s cheaper to retain a customer than acquire a new one. It’s generally more cost-effective to keep current customers happy and retain their business rather than constantly trying to attract and onboard new ones. According to a study by Invesp, the average business spends up to 5 times more to attract new customers than it does to retain its current base.
- Retention is a sign of customer satisfaction. Happy customers are likely to stick with your service and recommend it to others, leading to organic growth for your business. In contrast, high churn rates can be a red flag for problems with your product or customer experience.
Tips for increasing MRR & improving Retention Rate
Now that you understand the importance of retention rate for your SaaS business, let’s look at the strategies you can use to improve customer retention and grow MRR.
Here are a few essential ideas:
Offer value-adding upgrades & add-ons
One way to keep your customers engaged is by constantly offering new features that add value to their subscriptions. This not only helps retain customers but can also attract new ones.
Here are a few suggestions for value-adding upgrades and add-ons:
- Provide training and educational resources to help customers get the most out of your product. For instance, offer webinars or tutorials on advanced features.
- Offer tiered subscription options with different levels of access and features. That gives customers the flexibility to scale their subscriptions as their needs change.
- Provide premium add-ons for an additional cost, such as personalized consulting services or integrations with other software tools.
- Add integrations with complementary products to improve overall efficiency for your customers. For example, if you offer project management software, consider adding integrations with communication tools like Slack or video conferencing software.
Solicit feedback & act on it
Regularly gather feedback from your customers about their experience using your product and how you could improve it. You can do that through the following methods:
- Surveys: Send out customer satisfaction surveys or gather feedback through email or social media.
- Customer success managers: Have dedicated team members responsible for checking in with customers and addressing any concerns they might have.
- In-app feedback tools: Incorporate in-app tools that allow customers to provide suggestions or report bugs quickly. Act on the feedback you receive by implementing suggested improvements and fixing any technical issues.
Improve the onboarding experience
A smooth onboarding process can make all the difference in reducing churn and retaining customers. According to Appcues, improving your user onboarding process can increase MRR by up to 8% within 2 – 3 months. That shows the impact a positive onboarding experience can have on retention and MRR growth.
Here are a few tips for improving your onboarding experience:
- Make sure your product is easy to set up and use, with clear instructions and intuitive navigation.
- Provide a dedicated onboarding process, with a customer success manager or representative available to guide new users through the process and answer any questions they may have.
- Offer educational resources such as tutorials, webinars, or a knowledge base to help new customers learn how to use your product effectively.
Develop a loyalty program
Rewarding loyal customers not only shows appreciation for their business but can also incentivize them to stick with your service. Here are a few ideas for developing a loyalty program:
- Offer exclusive discounts or deals for long-time subscribers.
- Provide rewards for referring friends or colleagues to your product.
- Offer tiered loyalty levels with increasing perks and benefits for customers who have been subscribed for a certain amount of time.
Retention rate and MRR are important metrics for the health and growth of your SaaS business. However, you can’t simply rely on calculating these numbers – you need to actively work on improving retention and MRR through strategies such as:
- Offering value-adding upgrades.
- Soliciting and acting on feedback.
- Improving the onboarding process.
- Developing a reward program for loyal customers.
By implementing these measures, you can ultimately increase retention and grow MRR for your SaaS business.