You should absolutely celebrate every new customer your SaaS company lands. However, if you’re losing two customers for every one you gain, you need to take a closer look at your customer retention strategy. Building a business with poor retention is like trying to fill a leaky bucket. No matter what you do, you’ll never fill it up with enough water (customers) to sustain a healthy business.
Customer retention is essential to maintaining the health of your business. It provides more recurring revenue than acquisition. Understanding what it is, how to measure it, and how to improve it will keep customer satisfaction high—helping you gain more renewals and deal with less churn.
What is customer retention and why does it matter?
Customer retention is the process of retaining your current customers and getting them to return to your product for subsequent purchases, user sessions, or engagement. It goes beyond having a customer success team that answers requests and facilitates onboarding. A good customer retention strategy provides value to existing customers through great experiences that drive long-lasting relationships.
Strong customer retention provides your company with :
- A greater ROI from your existing customers (who are 60-70% more likely to buy and try new products from you.)
- Improved customer loyalty. But remember, loyalty and retention are intertwined. Retention means you’ve managed to bring your customers back for repurchases, while loyalty signals their satisfaction. A good retention strategy creates sticky customer experiences that ensure your customers are happy.
- Increased net promoter score (NPS). Happy customers are more likely to organically refer your product to their family and friends.
A high retention rate means your product meets your customers’ needs and addresses their pain points. (It also means you’re doing a great job—yay, you!) Satisfied customers stick around longer, giving you opportunities for upsell and renewal over the course of their extended lifecycles.
Your customer retention rate directly impacts a business’s bottom line. Companies spend anywhere between 5 and 25 times as much money to bring in a new customer than it costs to hold onto an existing one. You’ll see higher customer lifetime value (LTV) over a longer period of time if you double down on a solid retention strategy.
📖 Read more: The importance of customer retention by the numbers
How to measure customer retention
You want to achieve the highest possible retention rate to minimize churn and fuel growth. However, before you can improve your existing customer retention rate, you need to measure it first. You can calculate your basic customer retention rate using this formula:
Customer retention rate (CRR) = number of customers at the end of the period / total number of customers
To get the most out of the customer retention rate formula, you must make sure you:
- Know what customer retention rate benchmarks are right for your company.
- Measure retention correctly with the right tools.
- Are able to quantify and understand progress.
Measure your customer retention to get a deeper understanding of how and why your users churn, how valuable your users are, and which users are on the brink of churning. This enables you to see churn as more than just “customers in” versus “customers out.” Instead, you get an idea of who, when, and why your customers are churning. With this information, you can take the necessary steps to retain your customers and get the most value out of them.
Not all customer retention metrics are used in the same way. You can use several different metrics to get an all-encompassing view of your customer retention situation.
If you’re losing too many customers and you’re not sure why, you need to gain an in-depth understanding of your customer experience. All too often, revenue churn is mistakenly taken as the main indicator of churn issues. Instead, you should look at different touchpoints across your customer lifecycle to identify pain points along the way. Once you identify and understand these pain points, you can address them and encourage your users to stick around longer. Once you have a clear picture of your retention rate, it's time to start improving it.
How to improve your SaaS customer retention strategy
A SaaS business isn’t sustainable if it doesn’t retain its customers. Negative retention—aka churn—is bad. But if you're experiencing high churn rates, take comfort in the fact that you're not alone.
According to Q3 stats from 2021, most mobile apps retain 24.3% of their users one day after download. By day 30, a whopping 96.6% of users churned. The good news is that it's possible to improve these abysmal numbers.
To improve customer retention, treat each customer segment differently. Customer expectations and experiences change throughout their lifecycle. It’s important to address the problems specific to each customer as they progress along their journey to improve retention and make your customer relationships last.
The best retention strategies target customers at different stages in their user journey. Break down your strategies into these three stages to address customer needs at any given point in their life cycle:
- Early-stage retention: During this stage, focus on getting new users to use your product more than once. That means new users need to be onboarded, engaged, and develop proficiency with your basic use cases without too much hand-holding.
- Mid-stage retention: Focus on establishing a pattern of repeated product use. You want to engage proficient users and inspire them to dive deeper into your product to explore additional use cases and functionality. This also makes for a great opportunity for follow-up and upselling through customer support.
- Late-stage retention: At this point, you want to keep your loyal customers invested by providing ongoing value and empowering your customers to provide feedback about continual product improvements.
Stage 1: Onboard new users
User onboarding is the most important part of the customer journey. You only have a narrow window of time to drive users to their moment of value before you can expect to see a 2.6x increase in revenue through onboarding improvements. The better you can engage prospective customers on day one, the more likely they are to buy, engage, and stick around for longer.
Onboarding optimization encompasses anything from tailoring the onboarding process to different buyer personas, finding ways to offer users wins (or “aha moments”) early on, and thorough testing to improve your UX patterns. Onboarding doesn't have to be complicated. In fact, it shouldn't be. With a few simple best practices, it's easy to put together a top-notch product tour that will lead your customers from novices to adept users. After all, it's worked for companies like Slack, Duolingo, and Grammarly.
Stage 2: Engage seasoned customers
Software companies often make a grave mistake when onboarding their customers: they quit onboarding at their customers’ first activation event. Avoid this mistake within your own product and keep pushing customers to adopt new features and use cases.
Celebrate whenever they reach important milestones to keep customers motivated as they deepen their engagement with your product. Celebrate whenever they reach important milestones. Little things like this simple congratulatory message from Nike Run Club can go a long way:
New feature releases are an important place to educate and retain new customers. New features provide value to seasoned customers, and communicating that value is key. Do this through things like product release note emails, in-app feature announcements, and even blog posts.
There are places outside of your product from which you can engage your seasoned customers. Consider building communities and using different mediums for communication. Also, broaden your customer engagement strategy with different ways to level up your customers.
Stage 3: Empower power customers
Your power users are a special group. These customers who get consistent value out of your product and stick around for years have a lot to say about your business. Their perspective on your product should be amplified to bring in more customers like them.
You can create customer feedback loops within their product, like the Norwegian healthcare platform PatientSky did with the help of Appcues. They used the Appcues NPS survey to gather information on their users’ sentiments that provided quantifiable feedback for use in follow-up campaigns.
How PatientSky uses Appcues to create feedback loops to understand user sentiment.
Retention tools you should know about
You can’t outsell a bad churn rate, so attaining a healthy customer retention rate is critical to the overall success of your product. Luckily, thousands of tools exist that can help you boost your retention rate. A number of smart SaaS companies shared the strategic and surprising ways they chose their retention stack. You should also dive deep into the best customer retention tools so you can choose the best stack for your business.
And remember: your efforts to improve customer retention should never end. A single positive experience won’t satisfy a customer forever. You’ll need to subscribe to a retention model that focuses on keeping customers happy day-in and day-out through killer features, terrific customer support, and a stellar UX.