You’ve definitely seen the statistics that show it costs more money to acquire a new customer than it does to keep a current one. The phrase has morphed into an industry platitude as ubiquitous as “an apple a day…”.
Interesting? Sure. But not nearly so illuminating as these next stats.
The average SaaS business allocates about 57% of their budget to acquiring new customers, but the number drops significantly when it comes to retaining their current customer base—only about 5-10% of the budget goes toward that, according to Profitwell.
Acquisition will always be a hugely important focus for SaaS businesses. No argument there. But when it comes to retention, maybe it’s time to start spending like you mean it.
Increase customer LTV and boost recurring revenue with the right retention strategy
There's another stat out there worth paying attention to as well: increasing your rate of retention by just 5% can amplify your profits by 25-95%.
A little change for a lot of return.
Acquiring new customers is an excellent way to boost your recurring revenue in the short term, but keeping customers happy and growing can have a much higher—and more cost effective—impact on your business's growth over time.
After all, a happy customer’s willingness to stick around, upgrade, and explore new features will ultimately contribute the most to their overall lifetime value (LTV).
As HubSpot co-founder Dharmesh Shah says, “Customer support is not an expense to be minimized, but an opportunity to be maximized.”
In the world of SaaS, only about 5-30% of revenue comes from an initial sale, with around 70% coming as a direct result of renewals and upsells. And keep in mind, it takes 11 months on average for SaaS businesses just to recoup their customer acquisition cost (CAC).
An aggressive acquisition-based strategy may look good on paper, but you may not even cover your expenses if these new customers are churning out too quickly.
Monitor your NRR and offset your churn
SaaS businesses wanting to understand the health of their current retention and monetization strategies may look to net recurring revenue (NRR) as a relevant metric. Because this metric includes the cumulative effect that things like downgrades, upgrades, and churn have on your revenue relative to MRR, it’s a great way to understand the financial impact of your retention strategy.
- The formula for calculating NRR is:
MRR + expansion revenue – contraction revenue – churned revenue / MRR
If the figure that emerges from this equation is above 100%, that indicates your business is doing a good job retaining customers and can grow even without adding any new ones. And when you’re bringing in more revenue from your existing customers than you’re losing from cancellations or downgrades, you’ve obviously achieved that coveted negative churn.
A NRR below 100% means the opposite. In this case, your business is losing money without customer acquisitions. Enterprise-level SaaS businesses typically desire an NRR of 125% or higher.
Get tactical about SaaS retention
It’s easy to chalk churn up to a product-led decision. Customers look for the solution that suits them best, and then they use it. If and when it no longer fits their needs, they stop.
While this assumption has a strong ring of truth to it, it’s only one part of the picture.
There are a host of reasons why customers leave a SaaS solution, many of which can be addressed by putting more resources into tactical retention strategies. And small or big, every effort counts.
Consider account-based marketing platform Terminus. This SaaS business was able to raise its NRR 30% by focusing more on retention. How? The business maximized its retention by making the customer experience central to every part of its operation. This included:
- investing more in existing customers than in acquisitions
- assigning 3-4 staff members to each customer to improve their interactions with the product, and
- auditing its customers’ needs and adjusting their product accordingly.
Not every business is able to be quite so comprehensive as Terminus when it comes to their retention strategy. Nevertheless, there are countless tactics and techniques that have the potential to produce significant results.
Here are a few good places to start.
- Review your customer service and your customer experience: Over 40% of customers say they’ll leave a SaaS business over poor customer service. On the flip side, 52% of customers say they’ve spent more money with a brand directly following a positive interaction.
Putting more effort into customer service and your customers' overall experience can have a huge impact on both retention and, eventually, upsells.
As Aaron Levie, co-founder of Box says, “The first 20 years of the web were won by those that built the best infrastructure. Now it’s won by those that build the best experiences.”
- Consider your average contract length: SaaS businesses with month-to-month contracts feature a churn rate of over 16%, while contracts lasting for two years or more can cut that churn rate in half. Customer loyalty contributes to this statistic, with loyal customers being the most likely to opt for longer contract lengths. But it’s not the only factor: longer contracts require less decision-making by the customer.
For example, businesses that push toward annual contracts ask customers to make only one purchasing decision a year, while month-to-month users are continually re-evaluating their relationship with the product.
It’s also worth noting short-term users often don’t have the opportunity to experience the full value of the product. Half of all paying customers log into their software once a month—or not at all. Incentivizing customers to select longer contracts keeps them around long enough to prove the full value of your product.
- Pay more attention to payment failures: This is a biggie. Between 20-40% of churn occurs simply because of credit card failure—an issue that can often be resolved by following up with customers.
To that end, very simple, low-maintenance dunning tweaks like automating credit card retries and communications can have a potentially enormous impact on retention.
Operating with the assumption that customers churn mostly because of the product itself can be dangerous because it justifies retention complacency. Most SaaS businesses are constantly developing their products, making small updates regularly, and larger updates on an almost annual basis. While this is great, it should only serve as one dimension of a multifaceted retention strategy.
By focusing solely on the product, SaaS businesses risk losing the opportunity to reduce their churn rate through more tactical tweaks to customer service or other operations that could have a serious impact.
Click here for some of the biggest lessons SaaS leaders say they've learned about churn.
Retention efforts add up and pay off
Acquisition at the neglect of retention and monetization is a little like buying a car and then never maintaining it. Sure, SaaS businesses always need to be bringing new customers into the fold. But what happens next will have a huge impact on long-term recurring revenue.
No matter how much attention you pay to keeping your customers happy, some will still leave. Fact. But it’s relatively easy to start taking a tactical approach toward mitigating quite a few potential churn factors.
Even the smallest efforts add up, and small changes have the potential to yield big results.