Retention rate is the percentage of customers that stay with your business over a given period.
Churn rate is the flip-side of retention rate: it's the number of customers who cancel or do not renew their subscription during a given period. It is commonly expressed as a percentage.
Since it is ultimately about customer relationships. The better the relationship, the more you have at your disposal to reduce churn and maintain a high retention rate.
Holding onto customers is an essential part of building and sustaining a successful SaaS business.
The key to understanding customer relationships lies in the data, which tells you why customers are leaving — or staying — to begin with.
Acquisition vs. Retention
SaaS businesses usually focus on customer acquisition. This is always important, but as your company gains traction, the shift to retention is even more important.
At launch, you may spend all of your resources on acquisitions. However, once you've reached maturity, resources should be split evenly with about 50 percent covering acquisition and 50 percent covering retention.
Retained customers cost less than new ones, which means your margins are greater with loyal customers. Things like customer expansion can make existing customers even more profitable.
Additionally, forgetting about your existing customers will lead to dissatisfaction and a high rate of attrition. This leaves you in a never-ending cycle of constantly having to acquire new customers just to stay afloat.
How to Calculate Customer Retention Rate
Retention rate is expressed over a given period.
- Start with the number of customers at the end of the period.
- Subtract the number of new customers gained during that period.
- Then take that number and divide it by the number of customers at the start of the period.
For example, if you ended a period with 2000 customers, acquired 200 during the period, and started the period with 1850, your retention rate would be (2000-200)/1850, or 97 percent.
Retention Rate vs. Churn Rate
Churn rate is the percentage of customers you have not retained.
In the above example, the churn rate (also called the “attrition rate”) is 100 percent minus the retention rate of 97 percent, giving you a 3 percent churn rate.
What's a Good Retention Rate?
In an ideal world, a company would have no attrition. While that’s simply impossible, your retention rate should be as high as possible.
Low retention is a red flag for any business, as it signals poor customer satisfaction. A good rate is as close to 100 percent as you can make it.
How to Improve Customer Retention Rate
Since the ideal retention rate is 100 percent, there's always work to do to achieve a churn rate of zero. Here are some ways that you can get the retention rate you are looking for.
1. Do a churn analysis.
- In this process, you simply ask old customers why they left. You can send them a quick survey with potential reasons.
- Baremetrics offers a cancellations insights tool that automatically calculates survey results on your behalf, so you can immediately begin delving into the data.
2. Track retention by cohort.
- To gain more insight, narrow down your attrition results according to a particular cohort. A cohort is just a way of categorizing a group of customers by a common characteristic.
- It might be the time they signed up, the type of onboarding they received, the product they bought, the e-commerce marketing strategy, or the lifetime value of these lost clients compared to retained customers.
3. Ask for feedback.
- Often, getting customers to return is as simple as asking how you can improve your product or service offerings.
- This helps with your existing customer relationships as well. If there are things you can do better, long-term customers will also benefit.
4. Create good content.
- Regular download options, updates, and product information can help current clients get the most value out of their SaaS subscription.
- Ultimately, creating great content will also help build a community.
5. Start a referral program.
- Bringing on new customers always helps, and your current customers are your best advocates in helping you attract new businesses.
- If you receive a new customer via referral, they may be more likely to stay with you.
There are many other ways that you can tweak your sales strategy to get a high retention rate, but starting with this shortlist will already put you many steps ahead of other businesses that overlook these critical strategies.
What High Customer Retention Rate Means
Remember high customer retention means you're doing your job right and that people like your product.
Baremetrics is a powerful tool when it comes to figuring out who’s staying, why people are leaving, and what you can do better.
Learn more about what we can offer your growing business by signing up for a Baremetrics free trial today!
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