How to calculate your customer retention rate

How to calculate your customer retention rate
Customer retention
Suprej Venkat Oct 10, 2022

How to calculate your customer retention rate

SaaS companies are highly reliant on returning subscription customers for recurring revenue. This means they need to convince customers to renew their subscription every month or year, instead of churning and turning to other solutions. But if it’s so simple, then why do so many SaaS businesses fail?

The answer is that there are all sorts of factors that combine to influence customer loyalty and retention. The main one, of course, is offering a superior product and service that draws customers in and keeps them coming back.

Although some customer churn is natural, since customer needs change and your product may no longer be relevant to them, it’s best to keep it as low as possible. Instead of directing all your attention towards acquiring shiny new customers, you need to divert significant resources into customer retention.

What Is Customer Retention?

First of all, what is customer retention?

Customer retention is the process of engaging repeat customers and earning their loyalty, so they don’t switch to a competitor’s product or service. While new customers are important to help businesses grow quickly, returning customers enable businesses to be sustainable and show that the product is worth its salt.

Customer loyalty is an important component of customer retention, because it means your product is sticky and customers will choose your brand over others. Improving customer retention means you have to keep bringing increasing value to your customers, so they don’t end up feeling dissatisfied with your service.v

You’ll retain your customers if you keep offering new product features, proactive customer success, discounts, loyalty programs and more. As long as you keep paying your returning customers attention and striving to meet their needs, your business will be on the right path.

Why Is Customer Retention Important?

Customer retention makes good business sense. Increasing customer retention by 5% results in an increase of profits between 25% and 95%. Obtaining new customers is not your only way of boosting revenue if you are a SaaS business,

Customer retention is also critical because it is far cheaper to retain an existing customer than it is to acquire a new customer, according to 82% of companies. You don’t need to spend so much on expensive marketing campaigns and sales teams, when you can give your current customers a small push in the right direction.

There’s also a much higher probability of selling to existing customers than new customers (60% to 70% versus 5% to 20%), opening up the possibility for cross-sells and upsells. Customers who are already a fan of your product are more likely to be open to buying from you again, because they trust that you will deliver a good experience.

customer retention

Customers who have been using your software for a long time will be more forgiving of any mistakes, and be likely to recommend your product to others. Investing in your existing customers is a surefire way to attract new customers because they can give positive reviews and testimonials, enhancing your business’s reputation and online presence.

There really is no excuse for avoiding customer retention if you want to grow your business successfully.

Calculating Customer Retention Rate

Next, we’ll look at how to calculate customer retention rate (CRR). It’s all about working out the percentage of customers you hold onto over a period of time. For example, if your business starts off the time period with 100 customers and loses 20 of them, you end up with an 80% customer retention rate overall.

Bear in mind that acquiring new customers cannot boost your retention rate if there are already serious flaws in your business. For example, if you start with 100 customers, lose 20 and gain 40, you don’t end up with a 120% customer retention rate.

To determine your retention rate, decide on the period of time you want to track – weekly, monthly or annually. Then collect three key pieces of information:

  • The number of existing customers at the start of the time period (S)
  • The number of total customers at the end of the time period (E)
  • The number of new customers added within the time period (N)

So, the formula for calculating customer retention rate is [(E-N)/S] x 100.

Customer Retention Strategies

There are certain time-tested strategies you can follow to boost your customer retention rate.

Show your customers you appreciate them

91% of customers said they were more likely to do business with a company that appreciated them.

When you demonstrate appreciation for your customers you’re giving them an incentive to stay. Instead of pouring all your energies into marketing campaigns for new customers, you take the time to show your existing customers that you value them. SaaS companies who neglect their recurring customers are at risk of sending the impression that their business is not important to them.

Show your appreciation by:

  • Sending handwritten thank you notes
  • Offering special discounts or freebies
  • Disseminating company updates
  • Calling and asking how they’re doing

When you’re operating a low-touch SaaS model with very little human interaction, it’s very easy for your customers to come to feel taken for granted. Checking in with your customers is a great way to show them that you care.

Improve customer onboarding

63% of customers view onboarding as key to their decision to subscribe to a product. If customers aren’t properly introduced to your software, they are unlikely to stick around for the long-term. When customers don’t understand how to use your product or how it can benefit them, they are prone to cancelling their subscriptions and taking their business elsewhere.

Using common methods for onboarding customers such as tutorials and walkthroughs is crucial for bringing customers towards time to first value (TTV). They much more quickly reach their “aha” moment, where the software suddenly makes sense to them.

Raise your customer service game

86% of customers say that good customer service turns them from one-time clients into long-term brand advocates. When customers need help, you must be there for them to solve their problems and create a positive impression of your business. Customers who purchase your software are looking for a consistent level of service as well as a great product.

customer success upsell

You can train your customer support agents to handle all manner of situations that arise. You can track key metrics such as customer satisfaction (CSAT) score and Average Handle Time (AHT). Hire only the best agents who are willing to go above and beyond to help your customers.

Proactive customer success

Successful SaaS businesses need to implement proactive customer success programs which seek to determine whether customers are getting the most out of their software. For example, customers who are only using one or two features of your application are much more likely to churn than those who are engaging with all the features you have to offer.

Customer success managers (CSMs) are able to step in before customers are about to churn, unlike customer support agents who are merely reactively responding to queries. CSMs have their finger on the pulse of your customers and are best positioned to act when customers are showing early warning signs.

That’s why 72% of businesses have reported that customer success is a priority for them. Businesses that take steps to ensure customer success will see a significant increase in retention.

Employ customer success software

You won’t be able to launch your customer success program without the right software to power it. You might want to consider trialling a solution like Churn360, which is AI-powered customer success software that helps B2B SaaS companies turn data into actionable insights to reduce churn.

It has been designed from the ground up to enable businesses to retain more customers through features like integrations with all your third-party software, segments that group customers with similar attributes together, and plays that mean you can turn your customer success processes into reusable templates.

With Churn360, you can generate a health score which tells your CSMs when your customers are likely to churn, enabling them to take preventative action. CSMs have a single dashboard which gives them a 360-degree view of every customer, so they never have to log into another system. You can track every customer throughout the customer journey and consistently keep track of their progress.

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Wrapping Up

Customers who are retained by your business are responsible for the majority of your revenue. Persuading customers to subscribe to your software again and again is the key to sustainable business growth. If you acquire a customer and they simply churn a few weeks later, not only have you lost their business but also the amount you spent attracting them to the company in the first place.

Retaining existing customers may not be as exciting as acquiring new ones but it’s important if you want your SaaS business to be successful. Pay attention to these key customer retention strategies if you’re looking to earn loyal customers.

Customer Retention FAQ

1. What are the top 3 factors to customer retention?

  • Offer a superior product
  • Interaction with your customers through every channel they want to contact you on
  • Pay attention to what your customers are saying to keep improving your product

2. How do you improve customer retention rate?

Find out how many of your customers are returning customers and then use key tactics to improve retention rate, such as a smoother onboarding process and outstanding customer service. It only takes a little effort for your business to increase retention, because so few businesses pay attention to their existing customers.

3. What’s more important, customer acquisition or customer retention?

SaaS businesses need a steady stream of new customers but you have to balance this with retaining existing customers. Neither is more important than the other, since you need to focus on both to be successful.

Take the first step today!

See how Churn360 can help retain your customers