Customer Retention Rate and related metrics are imperative for any SaaS product. They allow you to understand potential gaps in a customer’s experience and allow you to tackle them quickly so you can drive that much-needed growth.
According to Forbes, it’s actually 5x cheaper to invest in retaining current customers than it is to invest in trying to attain new ones. Pretty crazy, huh?
In this article I look at 6 customer retention metrics you should be tracking, why they’re important, and how to run those calculations. For more information, we also cover the best Customer Retention Management Strategies on another blog article.
Table of Contents
- 1. Customer Retention Rate
- 2. Customer Churn Rate
- 3. MRR Churn
- 4. Customer Lifetime Value
- 5. Customer Experience Score (vs NPS)
- 6. Customer Satisfaction (CSAT)
- The Big Takeaway – Customer Health Score
If you’re short on time today, here’s the TLDR:
- Retention and churn rates can help you understand why (and where) in the funnel customers are dropping off so you can make the appropriate adjustments.
- Understanding the number of customers you lose in a given timeframe is important, but so is understanding the impact on your revenue based on the different plans you might offer – it helps you forecast your earnings and losses.
- Get insights on how long a customer will stick around so you can increase that lifetime value and drive growth.
- Focus on what you can do for your customer, not what your customer can do for you.
- Calculate support interactions as a first-line of defense.
Metric #1: Customer Retention Rate
Customer retention rate is the percentage of customers you retain over a period of time. These are the customers who subscribed for a specific amount of time, and then resubscribed for your product or service. As far as customer retention metrics go, this is one of the most important ones!
Why Customer Retention Rate Is Important
Understanding retention is important as it gives you an insight into how your customers feel about renewing their business with you.
It is not and should never be a stand-alone metric, as coupled with Customer Churn Rate (outlined next) – it gives you visibility into the renewal rates in your business.
This allows you to forecast earnings better, and prepare to grow your team accordingly.
Most importantly, a low renewal rate could indicate a lack of customer satisfaction, so if you’re losing more customers than you’re getting, this is a great indicator of where potential problems might be.
How Customer Retention Rate Is Calculated
The first thing you need to do is determine the period of time you want to measure. There is no one-size-fits-all here. You could do it based on various time frames, such as quarterly and annually so you get a different perspective.
Once you have identified the period of time you want to measure, to determine retention rate you will need three pieces of information:
- Number of the existing customer at the start of the period
- Number of total customers at the end of the period
- Number of new customers added in the period
This data will help it measure customer retention and get a clear understanding of churn vs repeat subscription.
The formula itself looks like this:
Metric #2: Customer Churn Rate
Directly related to the Customer Retention Rate is the Customer Churn Rate (CCR). CCR is the flip side of Customer Retention Rate. If one tells you how likely someone is to continue business with you, the other tells you how quickly you are losing customers.
Why Customer Churn Rate Is Important
Calculating churn rate will allow you to plan for potential retention strategies. This is one of the most important Product-Led Growth metrics! If you can understand the rate at which customers are leaving, what can you do to prevent that? What strategies can you employ from within your product to show value throughout the customer journey?
By understanding how customers are leaving, why they are leaving, and where in the funnel they are leaving, you can start creating more well-crafted product experiences that will boost your retention rate and reduce your churn rate.
How Customer Churn Rate Is Calculated
As with any metric, the first thing you need to do is decide what time period you will be looking at. Most companies like to do this on a monthly, quarterly, and annual basis so they can get a full view of what is happening in the business.
Calculating different time periods can also give you insight into how different strategies employed over time are having an effect on reducing that churn rate.
Metric #3: Monthly Recurring Revenue Churn
While it’s important to understand the number of customers leaving you in a given time period, it’s also important to understand the impact that has on your revenue. This is where MRR Churn comes in.
MRR stands for Monthly Recurring Revenue, and as the name states, looks at your revenue per month. If you have a SaaS product, you likely have customers signed up to different plans with different values, and calculating this allows you to forecast potential losses. (I’m sure you’ve guessed by now, there is also ARR, which looks at your annual revenue!)
Why Monthly Recurring Revenue Churn Is Important
MRR churn shows you how much revenue was lost and the overall impact of losing that revenue. The lower the MRR churn, the bigger your opportunity for fast growth.
Calculating MRR can also give you insights into whether or not there’s a particular cohort that is churning faster than another.
For example, having a high Customer Churn Rate but a low MRR Churn Rate might indicate users in a lower-tier are leaving you faster and may be unsatisfied with your product or service. It’s now up to you to decide if you want to employ any retention strategies to not just keep them, but also get them to upgrade to a higher tier.
Likewise, if you just want to focus on your higher tier and keep finding profitability via product-led growth, finding the right retention strategies is a great way of driving that growth, catered to their own experiences.
How Monthly Recurring Revenue Churn Is Calculated
There are three key aspects to run this calculation:
- Contraction MRR: Any decrease in MRR due to existing customers downgrading to a lower plan, or getting a new or increased discount during the month.
- Expansion MRR: Any increase in MRR due to existing customers upgrading their subscriptions or adding a new subscription during the month.
- Reactivation MRR: any increase in MRR due to former customers that reactivate their subscriptions during the month.
💡 Top Tip
If you’re anything like me, I’m sure at this point you’re wondering: “This sounds super complicated and I don’t know where to even get started.”
Metric #4: Customer Lifetime Value
Customer lifetime value (CLV) is a projection of how much revenue the average customer will bring you over the course of their relationship with your product. This customer retention metric shows the value of every customer and the revenue you can potential generate if customers are retained and continue to pay.
Why Customer Lifetime Value Is Important
Increasing the value of your existing customers is a great way of driving growth. If you can extend the amount of time a customer sticks with you, you have a greater chance of increasing the return you get from them.
How Customer Lifetime Value Is Calculated
In SaaS it can be a little bit difficult to get a specific number as you will have different plans and different retention rates per plan. You can run this based on an average of all plans, or you can run it based per plan – it depends on what you’re trying to improve and what you want to look at in detail.
The basic calculation for CLTV requires the following information:
- Average purchase value: Divide the company’s total revenue in a time period (usually one year) by the number of purchases over the course of that same time period. This could be on a detailed per-plan purchase or total plans you offer.
- Average repeat sales: Divide the number of purchases by the number of unique customers who made purchases during that time period.
- Average retention time: Average the number of years a customer continues purchasing from your company.
Metric #5: Customer Experience Score (vs NPS)
I purposely chose not to talk about NPS in this customer retention metrics list- love it or hate it, we all know what NPS does and what it’s for (and we’ve also written about it before!)
Instead, I chose to look at a new metric called Customer Experience Score.
This metric focuses on the customer’s experience with your product or service during a given time period, and looks at where you can add improvements to retain the customer longer.
Why The Customer Experience Score Is Important
Whereas NPS focuses on what the customer can do for you (promote your business) – CXS focuses on what you can do for the customer (improve your product.)
By putting the focus on the customer rather than on your business, you change the conversation from what improvements and problems you can solve for them, thus opening the lines of communication and actually increasing loyalty by showing you are willing to act on the feedback they give you.
How Customer Experience Score Is Calculated
As with all the metrics we’ve seen so far, CXS should be calculated during a given time period. Most importantly, you should constantly be looking at trends and patterns, not just look at a static number.
The CXS Score asks a very simple question: How has your experience with our product been in the last x days?
By allowing the customer to answer from a 1-10 scale, you can break this down by looking at the allocation of votes:
- 0-4 = Not great
- 5 = Neutral
- 6-7 = Satisfied
- 8-10 = Extremely Satisfied
As with any scale, it’s always important to follow this up with ‘why’ or ask for further feedback to also get the qualitative aspect of the score.
Let’s say a customer answers 8 on their first CXS, and then gives you a 7 and a 6. This very clearly indicates there’s a problem and you should immediately offer a call to discuss what is causing that response.
Likewise, if a customer gives you a low score and then it starts improving, it’s a clear indication their experience is getting better.
The Reward Funnel
The key aspect of CXS is how you reward or respond to those changes over time. Put your customers on a reward funnel that counters their experience recorded.
Here’s an example of a customer that offered potentially gave a high score:
- 3 scores of 8 over 270 days = Send them some cool swag
- Another score of 8, 90 days later = Ask them for a testimonial
- A score of 7, 90 days later = Ask them for a case study and why there was a change.
Here’s an example of a customer that offered a low score but then improved:
- Initial score of 5 over 90 days = Offer them a call
- Score of 7, 90 days later = Offer them swag
- Score of 7, 90 days later = Ask them for a testimonial, and offer them a call for further feedback.
By constantly rewarding their interactions with you, you can immediately increase loyalty and turn them into product champions simply by improving their experience with you overtime.
Metric #6: Customer Satisfaction (CSAT)
I’ll be honest, I was a little bit unsure about whether or not I wanted to include Customer Satisfaction on this customer retention metrics list.
I’m sure you’re thinking I’m crazy, of course measuring customer satisfaction is a key aspect to understanding customer retention – but hear me out.
Customer Satisfaction looks at a very specific interaction your customer has with your team. It’s solely based on how that single conversation went, and usually has little to nothing to do with your actual product or even their experience with your product.
This actually makes it a bit deceiving, as someone can give you a negative score simply because they want your product to do something it does not, and that ‘something’ may not even be a focus you have at all (and remember, it’s ok to not be a feature factory!)
Why Customer Satisfaction Is Important
Let’s look at the positive side of CSAT though.
Customer Satisfaction is important to understanding customer retention metrics as it still does give you an insight into potential loopholes. Your support team is your first line of defense, so if there are any issues to be highlighted, it’ll most certainly be here.
How Customer Satisfaction Is Calculated
As CSAT focuses on interactions, a quick survey is generated after the interaction and asks the customer whether they had a positive or negative experience.
And this is where it can get tricky – if you have a customer that contacts your team often (particularly during their onboarding period) – constantly asking them how every single interaction went can get overwhelming.
It can actually get annoying and result in a negative response, which is the opposite of what we want to achieve.
I usually recommend triggering customer satisfaction surveys less often, so you can grasp proper insights more accurately.
For example, by triggering the survey on their first, fifth, and tenth experience and continuously adding space between those surveys, you will most likely get a score that reflects their overall experience, not a single experience.
The Big Takeaway: Customer Retention Metrics = Customers’ Health Score
By tracking all these different customer retention metrics, you’re actually looking at your customers’ health score.
A health score looks at various interaction points between your customer and business, from the amount of tickets they submit, to the trends and patterns in usage.
By discerning customer retention metrics as well as these various interaction points, you help success, support, and product teams be more responsive to a customer’s experience, making them more successful with your product.
Taking close note of this can increase the various customer retention metrics we’ve looked at and drives product-led growth.
As with all metrics, it’s important to note that no two health scores will be alike.
Metrics come with context – and context changes from customer to customer. This is why a health score is so important, because it looks and trends and patterns instead of just assigning a static number.
Before you start measuring things, always ask – what problem are we trying to solve by measuring this particular metric, and what strategies can we devise from them?
Don’t let metrics become a way to flaunt that you’re doing great, but turn them into actionable items you can implement to increase customer retention.
Likewise, adding context can allow you to understand how outcomes are tied to the metrics you are tracking.
Want to learn more about how you can improve your SaaS customer retention metrics? See a Userpilot walkthrough from an expert today.