Would you continue to pay for something every month that you don’t use?
For most people, including your customers, the answer is no. Unless you’re talking about a gym membership of course.
That’s why improving your customer retention rate needs to be a top priority for every SaaS business. The success of your company literally depends on your ability to keep customers paying you for as long as possible.
The sad part is a lot of the reasons customers cancel are actually avoidable. In fact, one survey found that companies in the U.S. lose $136 billion every year to avoidable customer switching.
So, how do you avoid churn and boost your customer retention rate? Good news friends, we put together this entire guide for you.
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Acquisition vs. Retention
It’s pretty widely accepted that it’s more expensive to acquire new customers than retain existing ones.
Yet for some reason, the SaaS industry seems to be a lot more focused on customer acquisition than retention, despite the fact that SaaS companies need to keep customers long term in order to grow.
Focusing primarily on acquisition makes sense in the early days, when you’re just starting to get off the ground. But as your business grows and you start to get new customers (and build a solid funnel to bring more in), you should really shift your focus towards retention.
No matter how many new customers you bring in each month, if you’re unable to keep them around long term, it’s extremely difficult to grow a SaaS business.
You’ll find yourself in a never ending cycle of trying to acquire new customers each month to replace the ones that are churning. It's like spending more money than you make each month and trying to get out of debt.
Coming from a customer acquisition background, I learned a lot about how impactful retention and upsells can be for SaaS companies once I joined Baremetrics.
Unlike other companies I’ve worked with, a huge part of our growth strategy here is focused on retention and expansion (increasing revenue through upsells).
In fact, you can see just how much of our revenue comes from existing customers versus new ones here.
Don’t get me wrong. I’m not saying that you should only focus on your existing customers.
But if you’re dedicating a large portion of your time and resources (like over 90%) solely on getting new customers, you might want to reconsider the mix. Especially if retention and churn have been an issue for you.
How to calculate customer retention rate
First, decide what period of time you want to see your retention rate for. Typically it’ll be monthly or annually.
Then, you’ll need a few numbers:
Then, you’ll just put those three numbers into the customer retention rate formula:
((E-N)/B) * 100
Here’s an example. Let’s say our numbers looked like this:
- 100 customers at the beginning of the period (B)
- 110 customers at the end of the period (E)
- 20 customers gained during the period (N)
If we put that into our formula, we get:
((110 - 20) / 100) * 100 = 90% retention rate
If you’re wondering where to get the initial numbers (B,E,N) you should be able to get them through your payment provider.
You can also find them in Baremetrics. You can grab the "B" and "E" under Active Customers.
Then you can get your "N" from the New Customers page.
Then just plug those numbers into the formula and you've got your retention rate.
How to improve your customer retention rate
Ideally, you want to keep your retention rate above 90%. If yours is under that, or you just want to get it as high as possible, let’s talk about what you can do to improve your numbers.
1. Find out why customers are canceling (a.k.a churn analysis)
In order to retain more customers, you need to find out why they're leaving in the first place. That means it’s time for a little churn analysis.
Churn analysis is using data to understand why customers churn. We wrote an entire guide on how to analyze churn, which you can read here.
But here’s a quick summary.
Start by sending a cancellation survey to customers when they unsubscribe from your product.
Make it short and easy to fill out, not a 10 minute questionnaire. You just need to ask them why they’re cancelling. You can learn more about how to create an effective cancellation survey here.
Here’s an example of ours:
I highly suggest using our Cancellation Insights (CI) tool for this. After filling out the survey, we collect the data and organize it in easy-to-read reports and dashboards like this:
This way, you can get an instant look at the top reasons people are cancelling, and how much revenue you’re losing from each cancellation reason.
Once you’ve identified the top cancellation reasons, you know exactly what’s hurting your retention rate. It could be pricing, a lack of a certain feature, poor support or anything else.
As you’re planning out your growth and retention strategy, take into account the reasons people are cancelling and prioritize the ones that are causing the most lost revenue.
If you want to do some deep analysis, I recommend reading through the entire churn analysis guide. I dove into some very specific and more advanced strategies to analyze churn.
2. Track your retention rate by cohort
Taking the previous tip one step further, you can add in a little cohort analysis. In Baremetrics, we show you your customer retention rate broken down by cohorts (based on when customers signed up). It looks like this.
The percentages are the retention rates of each cohort month-to-month. For example, 79% of the 24 customers that signed up in April remained two months after signing up.
You can do some pretty nifty things with this little table. I wrote about it all in our cohort analysis guide, which you can read here.
But the short of it is you can use it to spot trends, and zero in on what makes certain people churn over others.
For instance, if you notice your retention rate in months 0-3 are on the low end, there could be an issue with your onboarding process, or you’re acquiring the wrong type of customers.
You can dive into their cancellation reasons (using tip #1) to learn exactly why these customers are cancelling so early on in their subscription.
If you want to see a step-by-step guide of how to do this, you can read my full guide here: How to Use Cohort Analysis to Reduce Churn & Improve Retention
3. Ask customers what you could be doing better
You don’t need to wait until customers churn to find out where your product falls short. When's the last time you asked your current customers what you could improve on?
The easiest way to do this is by sending out a quick survey to your customers, like we did earlier this year (we used Typeform).
If you send a survey, just be prepared to handle all the comments without being defensive or dismissive.
Some of the feedback will be hard to hear (it’s almost like someone calling your baby ugly), but if you really take in the responses, it’ll help you retain more customers in the future.
Another way to get feedback is to monitor what people are saying about your brand on social media. People on Twitter seem to be particularly upfront about how they feel.
Gathering the feedback is step one. But unless you do something with the info, it’s not going to help your retention. Based on the feedback you get, start to plan out the most important changes you need to make into your product roadmap.
As you start to roll out the updates, keep an eye on your retention rate to see what type of impact it makes.
If you want to get really detailed, you can use our retention cohort table to see how the retention rate of customers that signed up during the months of your changes compare to previous ones.
4. Make your product a part of your customer’s daily/weekly routine
If you want to retain customers, make it so they can’t function without your product.
Easier said than done, I know. But it’s possible. In fact, you probably use a ton of apps and software right now that you couldn’t function without.
For instance, as a content marketer, one of the things I do on a daily basis is see what websites have linked to our site to find opportunities to partner up on content or just to send a quick email to say thanks.
Buzzsumo sends me a daily report of our backlinks from the day before, so it’s become a part of my regular workflow in the morning.
If I were to cancel my Buzzsumo account, it’d interrupt my daily schedule.
The ability to do something similar depends largely on your product, but there are plenty of examples to draw inspiration from.
The simplest way is to send notifications or alerts with some type of actionable/useful information like the Buzzsumo example. Over time, you’re training people to expect emails from you, to the point that it becomes a part of their day-to-day function.
Here are some other examples.
Copper sends emails to customers suggesting new contacts to add based on people they’ve emailed and received emails from.
ContentKing is an app that monitors your website for content changes and SEO issues. When something goes wrong or they see a change in your website, they send email alerts.
ContentKing is also a good example of how you can build the “necessity” factor directly into your product.
Imagine using ContentKing for months, and getting all those notifications when something goes wrong on your website. You’re likely not going to cancel unless you’ve found a replacement tool. That automatically improves their chances of retaining customers, because the alternative is to leave your site unmonitored, which most companies won't want to do.
Another company that does a good job of this is Geniuslink. One of the key features of Geniuslink is the ability to create affiliate links that are easier to track.
Geniuslink gives you a special URL that looks something like this: geni.us/lettersandnumbers.
You take those URLs and put them into articles on your website, share them on social media and elsewhere. Once you’ve added a bunch of these links into your website, the chances of you wanting to go back and swap them all out are very slim.
So the inconvenience of changing can be a motivator to retain users. Obviously, this isn't something that should be abused. You don’t want people to keep using your product just because it’s a pain to stop using.
But if you make a product that customers can't function without, it makes retaining them a lot easier.
5. Innovate your product (then tell your customers about it)
You’ve probably heard the phrase “innovate or die” before. While it might sound a bit extreme, it’s a harsh reality for SaaS businesses (really all businesses).
No matter what type of software you sell, there are always competitors looking to create something better. And if you’re stuck in the past and refuse to make any notable changes to your product, customer retention is going to be a challenge.
A great example of this is Canva. It's a visual editing tool that makes it easier for non-design savvy people (such as myself) to remove background from images, create professional looking graphics and images.
While Canva is probably the most well-known tool in the drag-and-drop design space, there are a ton of similar tools on the market.
That level of competition has forced Canva to either innovate or get beat out by the long list of competitors. So they’ve done things like add video/GIF creation, text effects, animated stickers and other updates to distinguish themselves.
But here’s where a lot of companies go wrong. They make big updates to their product, then just assume people will find out about them.
When you’re trying to boost retention, you need to take the initiative and make sure all your customers know about updates you make, even if you don’t think they’re a huge deal. Because even though the update might not seem major, it could be the thing that keeps a customer from cancelling.
We use Announcekit to let customers know when we release a new product update.
And some companies post updates to their blog.
If you’re going to go the blog post route, follow in the footsteps of Mangools and send an email to your customers with a link to your article. Most customers don’t regularly check your blog just for fun.
And if you’re not sure what product updates to do first, refer back to tips #1 and #2.
6. Create USEFUL content for your customers
You know the feeling of learning something new? The excitement you get when you learn a new skill and start to practice it over and over again. Or when you find out about a new restaurant, so you go back every week to try different dishes.
When you can create that feeling for your customers throughout their subscription, you have a much higher chance of retaining them.
You could keep releasing more and more product updates to try to capture that feeling. But product updates take time, and there’s only so many you can do on a frequent basis.
An easier and more efficient way to keep customers coming back to your product is to keep educating them on how to get more from it.
Whether it’s tips on how to use different features, unique use-cases or tactics they might not know about, product education is key for customer retention.
If you do it effectively, this type of content can work both for customer retention and acquisition.
It’s something we do with our content here at Baremetrics.
If you read through some of our articles like this one on how to reduce churn, you’ll notice that we include a ton of tactics that show how to use Baremetrics.
6 Proven Strategies to Reduce Churn
(With Real Examples)
The great thing about this approach is it acquires and retains customers.
It helps with the top-of-the-funnel acquisition because it shows people who’ve never used your product how it can be valuable to them. And it helps with retention because some of your current customers might not have thought to try the tactics you're showing them.
Just make sure the content is useful and actionable for customers.
7. Create a referral program
When you incentivize and reward people, they tend to be more loyal to you. Just ask all the major airlines and credit card companies.
And one of the best ways to reward customers and improve your retention rates is to create a referral program.
It’s a win-win situation. You get new customers through word of mouth, and your customers get rewarded with some type of incentive.
The incentive could be a discount on their monthly bill, free credits, or even money.
We even recently even started our own referral program through Rewardful for our customers.
There are plenty of other examples out there too. For instance, Typeform gives customers 10% off for each person they refer to a paid account. And it was a big part of their growth strategy.
Since we’re pretty new to the SaaS referral game, I’ll refer you to this guide that goes in depth on how to start your own program.
What a high customer retention rate really means
Yes, improving your customer retention rate will give you more revenue. But beyond the monetary reward, it also means people like your product. Like I said in the intro, most people don’t tend to continue to pay for things they don’t use or want.
So, make it a priority to figure out how to keep your customers happy (and paying).
And if you want tools to track and analyze your customer retention, give us a try for free here.