It’s amazing when you consider that most businesses focus their attention on customer acquisition rather than retention – 44% on acquisition compared to only 18% on retention. While winning new customers might be great news for CEOs and shareholders, sensible SaaS businesses know it’s worth investing their efforts into customer retention.
SaaS businesses rely on a subscription model for their livelihood. Selling software once for an on-premise installation is no longer the model for most software businesses, and instead their customers are paying for monthly or annual access to Software as a Service.
It makes sense then that SaaS companies must cultivate loyal and satisfied customers who can be convinced to remain customers for the long-term. If you need persuading, then read on for the top 8 benefits of customer retention.
What is Customer Retention?
Customer retention is the ability of a business to keep a customer over a particular period of time. It is closely related to churn rate as churn is merely the inverse of customer retention. The better your customer retention rate, the more likely your business is to be successful with loyal and satisfied customers.
Customer retention is particularly critical for SaaS businesses that operate on the subscription model. They’ll want to keep track of metrics like Customer Lifetime Value (CLV), which is important for overall revenue.
The more customers you retain over time, the fewer customers are lost to churn. Customer retention means your product is successful and customers find value in using your software. When you increase customer retention, you know your business is on the path towards growth.
The Top 8 Benefits of Customer Retention
1. It’s cheaper to retain customers than acquire them
82% of companies agree that retention is cheaper than acquisition. When you’re attracting new customers into the business, you have to spend thousands of dollars on marketing campaigns and sales teams to engage them. Existing customers, on the other hand, don’t require nearly that much effort.
As long as you have a high-performing customer success team to manage your software customers, you can comfortably collect your subscription fee all with very little effort on your part. That’s not to say customer retention is easy, but these customers are already open to messages from your business.
2. Returning customers are more profitable
The probability of selling to an existing customer is between 60% and 70%, while the probability of selling to a new customer is between 5% and 20%. This means that existing customers you have retained for a long time already trust your business, and will be open to cross-sells and upsells.
New customers are required to take a leap of faith before they can be convinced to sign up to your software. They will make smaller purchases than loyal customers, when you consider that 65% of a company’s business comes from existing customers. The customers you retain are a valuable source of revenue.
3. Propels sustainable business growth
It’s a well-known fact that a 5% increase in customer retention can increase profits between 25% and 95%. If you don’t cultivate your relationships with your existing customers then you are leaving money on the table, and your business will suffer as a result.
It’s in your company’s best interests to reduce customer churn and convince customers to keep paying their subscription fee. If customers are leaving your business in droves then you will struggle to grow sustainably. And it takes a relatively small increase in customer retention to increase profits substantially.
4. Loyal customers will spread the word about your business
Word-of-mouth marketing results in five times more sales than paid ads, and the vast majority of these referrals come from your existing loyal customers. Long-term customers feel positive about your brand and are willing to spread the word about their good experiences.
Best of all, word-of-mouth referrals don’t cost you a penny and are a valuable source of customer acquisition. Loyal customers drive your business in a virtuous circle and are worth their weight in gold, if you take the time to cultivate strong relationships with them.
5. You can gather in-depth feedback from these customers
Existing customers who enjoy using your service will be willing to become a useful source of feedback for your business. Even less than satisfied customers can offer you insight into how your product or service can be improved. The fact is, new customers are rarely in a position to provide feedback, since they just don’t have the required experience with your business.
Research shows that only 1 in 26 customers will tell a business about their negative experience. That’s a huge percentage of customers that will simply churn without saying anything. If you can proactively invite feedback before churn happens you can significantly improve customer retention overall.
6. They will forgive lapses in service
Loyal customers who have been retained by your business are much more likely to forgive lapses in service. If your business makes a mistake, customers who have benefited from consistent customer service will allow your business to make up for it, instead of churning and spreading bad reviews about your business. 69% of customers say that good customer service influences their loyalty, and when you retain existing customers you’ll have a chance to do just that.
Mistakes are inevitable, but if you mess up with new customers they are likely to think of turning to your competitors. They have no loyalty to your brand because they lack a store of positive past experiences that can make up for the single negative one.
7. Reduces customer churn
The more customers you can retain for your business, the lower the churn rate is of customers defecting to the competition. Churn for SaaS is the direct opposite of customer retention, and spells doom for your business.
When customers cancel their subscription to your SaaS company, it might be because you’ve offered poor service, the product has bugs, or they might have found a better offer from your competitor. When you invest in customer retention, you can reduce the number of customers who decide to stop doing business with you.
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8. Lowers the cost of customer acquisition
Acquiring new customers costs a lot of money, is resource-intensive, and requires a lot of time and effort. If that customer simply churns after several weeks of being nurtured as a lead, you’ve wasted all your time, resources, money and effort. Customer retention means you can lower your Customer Acquisition Cost (CAC) because they bring in more revenue over their lifetime.
Especially when you consider that existing customers are a valuable source of referrals, this can dramatically reduce your CAC and free up your budget to focus on other activities.
Even though retaining existing customers may not be seen as exciting as acquiring new customers, there are many major benefits to cultivating customer loyalty and satisfaction. Not only does it enhance your business’s reputation and generate positive reviews, it’s also a driver of revenue. Loyal customers are a source of important feedback that can help you develop your product in the right direction.
Focusing your efforts on customer retention strategies is essential for SaaS companies that want to experience short-term and long-term success. Don’t neglect your existing customers in favor of chasing after leads who are likely to be much more effort for your business.
Customer retention FAQs
How do you calculate customer retention?
The formula for calculating customer retention rate: [(# Customers at End of Period — # Customers Acquired During Period) / # Customers at Start of Period] x 100.
What is a good rate of customer retention?
Customer retention rate of over 35% is considered good for SaaS, but is likely to vary significantly for different products.
How do you improve customer retention?
There are many ways to improve customer retention, including enhancing your quality of customer service, offering a superior product, and streamlining your onboarding process.