Running a SaaS business, you might wonder how well you are keeping your customers. Maybe you even worry if poor retention is slowing down your company’s growth. If so, this is normal and is critical to focus on, especially when it pertains to SaaS retention rates. Let’s talk about key ways to impact SaaS retention rates for your business.
Gross revenue retention (GRR) and net revenue retention (NRR) are vital metrics. Understanding and using them helps with how you run things over the next month, quarter, and even the upcoming year.
Table Of Contents:
- What Are SaaS Retention Rates?
- Tactics For Improving SaaS Retention Rates
- Conclusion
What Are SaaS Retention Rates?
Retention helps you figure out how to retain customers. For any SaaS business, you can measure it by customer retention, net revenue retention (NRR), and gross revenue retention (GRR).
Retention can be measured over any period, but 12 months is most common. Analyzing retention rates over a year allows time for customer habits to play out. This can include expansion.
Why Retention Matters
Retention might not solve all your problems, but it’s very important. When companies have good net retention and good gross retention, they grow way faster. We’re talking up to 3x faster growth.
When you retain customers, it indicates something. It proves that you are helping them with a pain point. Retaining customers shows you’re providing real value.
Calculating Retention Rates
You should always figure out your retention based on groups of customers who all started at the same time. Here’s an example, to calculate retention on a yearly basis.
Your SaaS Business had 4 customers. Out of those, 3 customers are still using the app a year later. In this case, customer retention is 3 divided by 4, or 75%.
Net Revenue Retention (NRR)
To build a healthy SaaS business, think of revenue retention as being your company’s mission. Focus is on net revenue retention (NRR). It’s important to stay on top of.
Net Revenue Retention, or NDR, is the amount of recurring revenue. It’s measured over a certain period, such as monthly. How much of that first month’s revenue do you keep after one year?
Calculating Net Revenue Retention Rate
Here is the equation you want to follow for net revenue retention.
Let’s use another example here for a 1-year net retention rate:
Your business has total monthly revenue of $10,000 at the start. A year later, some have stopped subscribing (churned) while others have paid more (expansions). Now that group that was spending $10,000/month with you a year ago is spending $12,500/month with you today.
You then calculate the Net Revenue Retention, so divide 12,500 by 10,000. Your net revenue retention or NRR is 125%.
Good Net Revenue Retention Rate
Companies that find success often have net retention over 100%. A company making between $3-15 million in revenue sees a net retention of about 99%.
You need to keep ARPA in mind for benchmarking purposes. It stands for average revenue per account. So if you see a similar average revenue for an account in SaaS, consider several things.
Think about cycle length of sales or what contract durations are normal. SaaS businesses often discount for long-term contracts.
Gross Revenue Retention (GRR)
This is the percentage of revenue you retain that doesn’t include expanded services over a period of time. Think a month. In SaaS, people focus heavily on net revenue retention, but the real secret might be the Gross Revenue Retention (GRR).
Often, you can get the most understanding out of Gross Retention versus NRR. It’s good to think about where SaaS businesses get hung up on sometimes.
It’s really around looking at the question; “What’s a Good retention rate?”. The GRR shows you a better idea on if your customers feel like your service gives them the full value of what they are paying you for.
Calculating Gross Revenue Retention Rate
Let’s make it even simpler this time:
Here is the equation you want to follow for Gross Revenue Retention (GRR).
Think of 3 businesses who are subscribers on day 1 for a service you sell, paying $10/month. That’s a recurring revenue total of $30 for those customers. Next, find out how much money all 3 of those subscribers spend in a year of using the app.
Take out upsells from what they buy for that time. What percentage of $30 in recurring revenue do you have after those 3 businesses had their services over that full year?
Good Gross Revenue Retention Rate
Top gross retention is around 86% for best-performing SaaS businesses. SaaS companies have about a 3-8% churn rate per month.
That means a great SaaS company retains from 92-97% on a monthly basis. So consider these as great ranges for SaaS Gross retention rate. Annually, that’s retaining somewhere around 50% to as high as 70%.
You may see ranges between about 32% to 50% annually on average.
Customer Retention
This tells you the number of customers who have kept their services during the course of the month. If a SaaS company retained 80 out of 100 total number of customers in a month, its Customer retention rate for that month is 80%. Think of this one more simply than either the Gross Revenue Retention or the Net Revenue Retention rate.
As businesses grow and adapt, Customer Retention goes up. Top customer retention hits around 80.4% for businesses with ARR of $3-8 million.
A key is figuring out product-market fit, which means customer satisfaction improves when you provide a tool that solves their real problem. Then, SaaS companies begin reaching for scaling opportunities at even higher retention rates.
Ways To Track Retention Rates
It’s normal to get sidetracked on your retention metrics, thinking just of the retention as numbers that get shown on a report. Consider looking at customer interactions over their initial sign-up period. Tracking the total number of interactions can indicate engagement.
You want to determine retention trends of specific customers. Find the retention rates after a quarter of a business signing up. Focus more on customer churn here, so you find if those new customers drop off fast.
Consider giving different plans with price changes or free periods to try. Then do some segment tracking in data on those different trials or offers. You’re seeing how customers respond to promotions by finding what they value more or are using more.
Different channels bring in customers too, some being more sticky than others. Consider creating a table to show your retention rate based on the customer acquisition channel.
| Acquisition Channel | Retention Rate |
|---|---|
| Organic Search | 85% |
| Paid Advertising | 70% |
| Social Media | 78% |
| Email Marketing | 90% |
This data allows you to see where your most loyal customers are coming from. It helps to inform you where your marketing efforts can focus.
Tactics For Improving SaaS Retention Rates
It might be frustrating. You try adding things, fixing errors, only to see those adjustments might still see high numbers of people stopping services. Some tips can improve customer retention and help to improve customer loyalty.
Not all customer acquisition is worth going after. Focus is important on the “right customers” when talking about SaaS retention rates.
Focusing just on “revenue retention” only solves part of the problem. Retention of those who actually benefit and align with the value is vital to improve customer retention.
Offer Add-ons For Revenue Expansion
A good upsell of add-on services expands what you’re already making in revenue. Consider selling added capacity on data usage or more advanced features. Even higher levels of subscriber tiers work to help expand revenue.
Here are other ways you can expand your SaaS Revenue:
- Give cross-selling opportunities. This could be other complimentary software that improves the primary customer experience.
- Focus sales to users most-aligned with your platform’s value. Do not sell to customers where it doesn’t make sense. It should be based on how often and to what capacity they are utilizing your app.
Make Sure The Ideal Customers Keep Renewing Subscriptions
Not every subscriber brings equal worth to your revenue, growth, and retention rates. Customer types align very specifically to how SaaS apps provide support, benefits, and more. Improving customer retention begins with a customer base full of good customers.
Customer expectations is an area that many companies might underestimate in its importance. If an existing customer is satisfied, they renew their subscription. Customers also stay engaged, showing you have high retention.
A subscriber cancelling might occur when rolling out a new update. Try communicating upcoming adjustments ahead of their official changes with notifications or in-app call-outs. This communication could indicate a strong indication of reducing customer churn.
Customers expect a response and a change when reporting something negative. Look to the SaaStr Fund approach here. Give feedback loops, get information, and make improvements for retaining customers.
Check Common SaaS Customer Patterns for Possible Churn
Look for churn patterns before it’s too late. There are indicators before a person pulls their business away from a product, impacting your user retention rate. The best way for SaaS businesses to grow is by spotting those patterns.
Common signals show in how frequently customers are signing in, what their duration of usage is on each visit, and also total use cases are per person. Even how fast customer requests are taken care of and get cleared with help or customer support assistance show the story. Look to see if newly acquired dollar amounts have dropped significantly.
Find ways that solve recurring problems before they build. Offer targeted incentives. A successful SaaS business is built around improving customer satisfaction.
You can use self-service assistance to give support too. The customer support area of any SaaS business greatly influences a good portion of success, too.
Self-service gives answers to commonly asked questions, faster. That’s especially critical around how an app functions. Support tickets could show insight into where an issue or customer struggle appears the most, too. This can give a strong indication on product-market fit.
Conclusion
Focus should be on customer journeys and user patterns. Finding ways to increase your SaaS retention rates impacts all of these indicators in a really meaningful way.
It’s true that some may fixate on growing the customer base. However, with SaaS, it is all real and not fictitious.
How you provide a service and what assistance is in place shapes all things revenue. How your existing customer base feels will impact net revenue retention, so companies need to factor those two pillars more for best-in-class retention.
