Indicators to improve customer retention in SaaS
A few years ago, we were working with a SaaS startup that, on the surface, seemed to be growing rapidly . Its customer base was increasing month by month, acquisition rates were impressive, and gross revenue was on an upward curve. However, when we dug deeper into the data, we discovered a problem: while new customers were arriving, many others were quietly leaving. The growth was illusory; its retention rate was not keeping up.
In a market where acquiring new customers can cost up to five times more than retaining current ones ( Harvard Business Review ), customer retention has become a critical metric . It’s not about keeping current customers, but about maximizing their value over time and turning them into brand ambassadors. This is where customer retention metrics in SaaS come into play – metrics designed to identify opportunities for improvement, reduce churn, and strengthen long-term relationships.
In this article, we explain what customer retention metrics are in SaaS and how to use them to foster sustainable growth.
What are customer retention metrics in SaaS?
Customer retention metrics are metrics that assess a company’s ability to retain its customers over time . In SaaS, where business models are typically based on recurring subscriptions, these metrics are critical to measuring the health of the customer relationship and predicting future growth.
1. Why retention is important in SaaS
The recurring revenue model in SaaS is directly dependent on customer loyalty. According to a study by ProfitWell , a 5% improvement in customer retention in SaaS can increase profits by 25% to 95% . This is because retaining customers also creates opportunities for upselling and cross-selling.
On the other hand, low retention can lead to high churn, a problem that affects revenue and the company’s reputation. Dissatisfied customers leave, but they may also share negative experiences, which affects the acquisition of new customers.
2. Types of retention indicators
There are different types of retention metrics, and each provides a unique perspective on how customers engage with our product or service. The most common ones include:
- Customer Retention Rate (CRR): Measures the percentage of customers who remain active over a specific period.
- Gross Revenue Retention (GRR): Evaluates the revenue retained from current customers, excluding the impact of upselling growth.
- Net Revenue Retention (NRR): Considers both retained revenue and growth generated by additional sales.
3. Retention as a growth strategy
As Frederick Reichheld , creator of the Net Promoter Score, points out, “Loyal customers stay longer and therefore generate greater value.” In SaaS, retention metrics help us measure current success and serve as a compass for designing loyalty strategies , improving customer experience and optimizing the product.
Key Retention Metrics: Gross Revenue Retention and Net Revenue Retention
In SaaS, two metrics stand out for their ability to assess retention from different angles: Gross Revenue Retention and Net Revenue Retention. Understanding and using these metrics can transform the way we manage the customer lifecycle.
1. Gross Revenue Retention
As we said, GRR measures the percentage of revenue retained from existing customers, excluding the impact of new sales. In other words, it evaluates how much revenue we have managed to retain without considering upselling or cross-selling.