Table of Contents
Key takeaways:
- Your customer retention rate measures the number of customers you’re retaining in a set time period
- Businesses can also track revenue retention metrics, which track how much revenue you’re retaining in a set time period from retaining customers
- It’s important to track retention rates closely, watching for trends and identifying opportunities to reduce churn
- Managing a strong customer retention rate with dedicated retention analysis and action plans for improvement are critical to long-term success
Retention Rate measures the proportion of customers you’ve retained over a specific time period. It’s a metric that’s indicative of your user’s affinity to your product or their enthusiasm for your service.
There are also metrics that track revenue retention, including net revenue retention and gross revenue retention. Tracking each metric can provide clear insight into how your retaining customers are influencing your bottomline.
How to Calculate Retention Rate
To calculate retention rate, use the following formula:
Customer Retention Rate = ((CE-CN)/CS)*100
- CE = # of customers at the end of the period
- CN = # of new customers acquired during the period
- CS = # of customers at the start of the period
Take a look at the example below for this set of customer data:
| January | February | March | |
|---|---|---|---|
| Customers (Start) | 5000 | 5050 | 5130 |
| New Customers | 250 | 300 | 720 |
| Cancellations | 200 | 220 | 250 |
| Customers (End) | 5050 | 5130 | 5600 |
If you started January with 5000 customers, acquired 250 customers and ended the month with 5050 customers, your retention rate for January would be 96%.
Customer Retention Rate (January) = ((5050-250)/5000)*100Customer Retention Rate (January) = 96%
If you started Q1 with 5000 customers, acquired 1270 total customers between January and March, and ended Q1 with 5600 customers, your retention rate for Q1 would be 87%.
Customer Retention Rate (Q1) = ((5600-1270)/5000)*100Customer Retention Rate (Q1) = 87%
Retention Rate vs Churn Rate
While Retention Rate is the proportion of customers you’ve retained over a specific time period, User Churn Rate, also referred to as Attrition Rate, refers to the percentage of customers who have canceled or unsubscribed from your service during a specific time period.
As such, if your retention rate for a certain time period is 90%, your churn rate for that same time period is 10%.
What About Revenue Retention?
Just as brands calculate customer retention, you can also track financial retention metrics, too.
Net revenue retention, for example, helps you track how much revenue you’re retaining from existing customers over a set period of time. It provides a comprehensive look at retaining revenue that accounts for refunds and discounts, giving you a clear look at how much revenue you’re generating and retaining despite fluctuations with upsells, expansions, discounts, and churn.
There’s also net dollar retention (NDR), which is a churn metric that calculates the percentage of recurring revenue retained from existing customer over time. Like net revenue retention, it considers all factors impacting recurring revenue like cancelations, pause requests, and expansions.
Additional Considerations
Calculating retention rate should typically be done using cohorts or groups. This simply means that when you’re calculating retention rate, consideration needs to be given to certain attributes of a customer. For instance, when a customer signed up and where they came from.
Rather than simply measuring retention based on averages, calculate retention rate based on cohorts like “customers who activated after February 2017” or “users who found your product through organic” vs “users who found your product through paid channels”. The more specific your cohorts are, the more insights you can glean about what you’re doing right and where you’ve missed the mark.
It’s important to regularly conduct a customer retention analysis to learn more about which factors are influencing retention and churn. This is actionable information that businesses can use to boost retention, which means boosting revenue, too.
What’s a Good Customer Retention Rate?
Simply put, a good retention rate is as close to 100% as possible. Likewise, a good churn rate is as close to 0% as possible. The specific numbers you aim for will be dependent on your particular business, but around 90% is generally considered to be good retention rate for SaaS businesses.
You can check out more SaaS benchmarks by using our Open Benchmarks, which uses data from 700+ small and medium-sized SaaS companies
Metrics to Watch to Improve Retention & Revenue
Most SaaS businesses continually make efforts to get their customer retention rates as close as possible to that magical (and elusive) 100% number they can. There are plenty of customer retention strategies that can help with this objective.
Knowing which metrics to watch, however, is key. These are the three retention metrics SaaS brands should focus on:
- Customer retention rate, which tracks how many customers you’re retaining in a set period of time
- Revenue retention rate, which tracks your recurring net revenue from retained customers
- Gross revenue retention rate, which tracks your recurring gross revenue from retained customers
Managing Your Retention Rate
It’s frequently said that acquiring a customer is significantly harder than retaining one. It’s true. Therefore, your retention rate should be a key focus. The best way to retain customers will vary depending on your product or service offering. For online products, tactics like frequent and personalized customer interaction and strong online help sections can be helpful in increasing retention and squashing attrition.
At the end of the day, make sure you’re implementing the 7 R’s of customer retention best practices:
- Reminders: Set up reminders to engage users
- Routines: Create customer routines around your product
- Restructure: Restructure your product to reduce friction points
- Records: Create easy access to user records
- Rewards: Leverage a simple rewards system to incentivize use and retention
- Relationships: Facilitate interaction between your brand, your client, and other customers
- Reflect: Consider new ways to improve the user experience
As you’re tracking your retention metrics, take advantage of accurate subscription analytics data with tools like Baremetrics. Baremetrics offers 26 subscription revenue data, including key retention rate metrics. We’ll help you understand which factors are influencing your business and how to retain customers (and revenue!) longer.
Tired of wasting time on spreadsheets? Get a free trial of Baremetrics today!
