Your customer retention rate is one of the most important metrics to track while growing a SaaS business.
It will tell you how well you're doing to retain existing customers, and show you whether your efforts to retain them are working or not.
There are many different ways of measuring your customer retention rate. Below I will answer the following questions:
- What is a Customer Retention Rate?
- How to calculate Customer Retention Rate
- What’s a good Customer Retention Rate?
- How to increase Customer Retention Rate
What is a Customer Retention Rate?
There are four primary ways to measure customer retention rates that are most commonly used in SaaS: dollar, user, feature and cohort-based retention.
- Account-based retention rate is the percentage of paid accounts remaining at the end of a period. This excludes NEW accounts added during the period. That’s an important distinction. For example, say you have 100 accounts in September. At month’s end, 90 accounts are still paying for your service (90% retention rate). That means that 10 people stopped using your product during that time period (10% churn rate).
- Dollar-based retention rate is the percentage of dollars you have from existing customers at the end of the period over the total dollars from those customers at the beginning of the period.
- Retention rate measures how well you’re keeping existing customers happy with your product or service; it doesn't measure how effective you are at acquiring new ones.
- Feature-based retention rate measures how many users return after using specific features within an app or website—such as watching videos or completing personal profiles—and compares them against other similar features' performance (e.g., "What percentage came back after creating their profile?"). This way we can identify which features are most effective at driving repeat engagement with our product—and therefore where we should focus our efforts when optimizing new releases going forward.
- Cohort analysis retention rate looks at cohorts based on when they joined instead of month over month or year over year comparisons (e.g., "How long do people stay with us? If someone signed up today versus last year?"). This method helps us determine whether there's been any change in behavior over time due. Maybe due to seasonal factors such as holidays or major events happening during certain months or product releases that would cause an increase/decrease in activity levels.
How to calculate Customer Retention Rate
How to calculate customer retention rate is simple.
I will first walk through how to calculate account-based retention rates and then dollar-based retention rates.
Account-Based Retention Rate = # of Accounts at End of Period - # of New Accounts Added in Period / # of Accounts at the Start of the Period *100
So let’s say on January 1st, you have $1 million in Annual Recurring Revenue (ARR) coming from 1,000 customers. One year later, you have 1,200 total customers. During the year, you added 300 new customers. That means you retained 900 of the original customers, resulting in a 90% retention rate.
Dollar-based retention looks a bit different because revenue comes from different motions of the business. Think about expansion revenue from buying higher priced plans or increasing usage or adding more licenses. We want to exclude that for a Gross Retention Rate (GRR). You will include those revenue lines when calculating your Net Revenue Retention (NRR).
Gross Dollar-Based Retention Rate = (Starting MRR - Churn - Downgrades) / Starting MRR * 100
Net Dollar-Based Retention Rate = (Starting MRR - Churn - Downgrades + Expansion) / Starting MRR * 100
So there you have it. That’s how you calculate customer retention rate in different ways depending on what you’re looking to measure.
What’s a good Customer Retention Rate?
We can use the benchmarks for good churn rates when we look at retention rates. Retention is simply the inverse of customer churn.
Here is what you’ll see for B2B SaaS monthly churn rate benchmarks:
- World-class: <1%
- Good: 1-2%
- Average: 3-5%
- Bad: >5%
That means the monthly retention rate benchmarks are as follows:
- World-class: >99%
- Good: 98-99%
- Average: 95-98%
- Bad: <95%
Take a look at your retention numbers to see how you stack up. I also recommend looking at your industry peers. The numbers above are general benchmarks. Retention rates different by industry, customer segment and product line.
How to increase Customer Retention Rate
To improve your retention rate, you first need to understand what's actually causing the problem.
There are several reasons why customers stop using a product or service, including:
- The product is not useful anymore.
- The company doesn't provide good support or customer service.
- Your prices are too high in comparison to other companies in your industry.
- Your competitors offer better products at lower prices than you do.
Here are a few ways to improve customer retention:
- Build a great product. The best way to improve retention is by staying close to your customers, understanding their problems and building great solutions for them.
- Provide great customer service. A bad experience will leave customers feeling frustrated and unhappy, which makes them more likely to churn out of your business or system entirely. Treat customers well.
- Develop product integrations. The more integrated your product becomes into the customer’s tech stack, the harder your solution is to rip out.
- Offer customers a good deal. Everyone loves a good deal. Make sure the cost of your product is a magnitude greater than the perceived value of it.
- Make your product reliable. Make sure there aren't any technical glitches. Most people have a low tolerance for products not working.
Retention rate is one way to gauge how well your customer-facing efforts are working and whether users find value in what you're offering them. Easily measure your retention rate using the Sales Forecast Template.