Customer retention metrics help to paint a clear picture of your SaaS company's sustainability.
When it comes to assessing the health of your SaaS business, you must keep customer retention metrics at the very forefront of your mind.
In this article, we will break down how to measure customer retention using a range of popular customer retention metrics.
What are the best customer retention metrics?
To fully assess the health of your SaaS user base, we recommend monitoring and tracking a few different customer retention metrics.
Exploring user retention from different angles will enable you to identify issues and create targeted strategies for keeping your SaaS customers engaged.
Here are 5 essential customer retention metrics for SaaS businesses:
1 - MRR Churn
MRR Churn = Σ MRR Cancellation + Σ MRR Delinquent
This is one of the most important customer retention metrics for SaaS businesses.
Measuring your monthly recurring revenue (MRR) churn will give you a clear idea of how quickly you are losing customers each month.
To calculate your MRR churn rate, you simply add up all the cancellations.
With this number on hand, you can start to get a feel for the scale of your churn problem.
Once you know your MRR churn rate, you can begin to create strategies for reducing this number.
2 - User Churn
User Churn = Cancellations In Period / Subscribers At The Beginning Of The Period
User churn is the number of churned customers divided by the total number of customers.
The time period calculated can vary depending on how you wish to measure user churn.
While some companies may calculate churn on a monthly basis, others may do so quarterly.
Whichever way you choose to measure it, user churn is an important metric for SaaS businesses.
It will help to quantify how many users are leaving your SaaS business and, crucially, why they are leaving.
3 - Customer Lifetime Value (CLTV)
Customer Lifetime Value = Average Value Of Sales X Number Of Transactions X Retention Time Period
How much is a SaaS user worth to you across their lifetime?
This is what customer lifetime value (CLTV) sets out to answer.
To calculate a customer's lifetime value, you must first establish how much revenue they will generate while they are using your product.
You can then multiply the monthly subscription revenue by the number of months they have been a customer.
Unlike the churn metrics, the higher the CLTV is, the better.
SaaS businesses with sky-high CLTV are destined for greatness.
4 - Customer Acquisition Cost (CAC)
Customer Acquisition Cost = (Cost Of Sales + Cost Of Marketing) / New Customers Acquired
Customer Acquisition Cost is how much you are paying for users.
While this isn't technically a customer retention metric, it still offers vital insights into the extent to which churn can damage your SaaS business.
If you are investing considerable capital upfront to acquire new users, you must have a good understanding of how much subscription revenue you need to break even.
While you may have high CLTV, it's important to track this alongside CAC.
If the two metrics are out of sync, this could throw the sustainability of your business into question.
The combination of CLTV and CAC will unlock valuable retention insights.
5 - Net Revenue Churn
Net Revenue Churn = (Revenue Quit In Period / Upsells In Period) / Revenue At The Beginning Of The Period
Net revenue churn is the percentage of revenue you have lost from existing customers over a period of time.
This metric will help you to understand how much money you are potentially leaving on the table.
A negative net revenue churn figure is an indication that a SaaS company’s revenue would increase even if there were no new sales.
Why do customer retention metrics matter?
User retention can make or break SaaS companies.
If your user base resembles a leaking bucket, it won't be long before your business starts to run dry.
The best way to avoid this is by ensuring that you have robust customer retention strategies in place.
This will help you to keep your customers engaged and using your product, month after month.
Although, to start with, you must know which metrics to track.
When you are looking in the right places, you can identify problems early and deploy the best strategies to combat churn.
Why is customer retention management important?
Customer retention is important for any business, but it's especially crucial for SaaS businesses.
The reason for this is simple:
A SaaS business is only as strong as its recurring revenue.
If you're not retaining customers, you're not generating recurring revenue.
And if you're not generating recurring revenue, your SaaS business will eventually fold.
To ensure the sustainability of your SaaS business, you must focus on reducing churn and maximizing customer retention.
The best way to do this is to track the customer retention metrics we have listed above.
By understanding how these metrics work, you can make data-driven decisions that will lead to improved customer retention rates.
If you can keep your customer churn low and your customer retention rate high, you will be well on your way to building a successful SaaS business that potential acquirers will love.
Where can you find customer retention software?
To reduce your SaaS churn, you must have access to effective customer retention software.
This will enable you to conduct customer retention analysis and make data-driven decisions on how to improve customer retention rates.
There are a number of different customer retention software solutions on the market.
When it comes to deploying tried-and-tested strategies to prevent SaaS churn, Raaft is the clear winner.
Raaft gives you the tools you need to track customer churn, understand why users are leaving your business, and implement strategies to learn from mistakes.
Raaft makes it easy for you to collect user feedback and save customers with retention flows.
You can get started with Raaft for free.
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