What is customer retention?
Customer retention is any business's or product's ability to retain customers to do business with them again. It is crucial in any SaaS business since it is harder to make new customers than keep existing customers engaged. Customer retention metrics give detailed insight into how a product or company performs while retaining its older customers. It also keeps track of the customer journey which helps in growth and expansion strategies.
Why is tracking retention KPIs important?
Let's consider a SaaS company that provides a project management tool to businesses. They aim to retain as many customers as possible and increase revenue. The company needs to measure the percentage of customers using its software to create an effective customer retention strategy.
Now consider the company is left with 80 customers at the end of its first year (started with 100 customers). Therefore, the company's retention rate is 80%. However, the retention rate drops to 60% the following year, meaning 60 customers continue to use their tool at the end of the second year. There could be a lot of reasons for this decline, such as the product does not offer value, poor customer service, etc.
This example tells how tracking customer retention metrics can allow a SaaS company to use insights about its performance.
SaaS businesses rely on the revenue generated from the subscriptions from their older customers rather than from new customers because of their product's value. Customer retention is imperative in a subscription-based business model. Thus, tracking customer retention rate is the best way for SaaS businesses to determine how loyal customers are to their brands and reduce customer churn.
In addition to revenue growth, customer retention metrics are essential for gauging business stability and growth, customer loyalty, cost savings, and performance evaluation.
14 essential customer retention metrics to track
Let's look at the most critical customer retention KPIs to understand your product's strengths and weaknesses.
1. Customer retention rate (CRR)
- What is CRR?
- Why is CRR important?
- How do you calculate CRR?
The customer retention rate is the percentage of how many users stick with your product after their initial purchase.
CRR is vital because it helps companies determine their products' performance and their business's profitability.
You need the following formula to calculate CRR:
CRR = (A/B)100%
A= The number of loyal customers at the end of a period, i.e., (Number of customers at the end of a specific period - Number of newly acquired customers)
B= Total number of customers at the beginning of that period.
2. Monthly recurring revenue (MRR)
- What is MRR?
- Why is MRR important?
- How do you calculate MRR?
MRR is the metric that offers insights into the monthly revenue generation of a SaaS company. MRR predicts the future revenue of any SaaS business, which can be helpful for any product's or service's performance measures over time. It is widely found in subscription-based models as well for tracking financial growth.
MRR is a valuable metric for SaaS companies as it represents the recurring revenue generated by each subscriber per month. As a result, companies can see how their revenue grows and make informed decisions about their business.
Simply multiply the number of active customers by their average monthly revenue.MRR= No. of active customers * Average monthly revenue per customer
If a SaaS business has 200 active customers and their average monthly subscription cost is $100, their MRR is $20,000 (200 active customers * $100/customer/month).
MRR finds the recurring revenue of the current monthly customers; Therefore, if some more customers are subscribed, the MRR will change accordingly. Assuming the company acquires ten new customers next month that pay $200 per month on average, we will add the new revenue to the old revenue to get the new MRR:
3. Customer lifetime value (CLTV)
- What is CLTV?
- Why is CLTV important?
- How do you calculate CLTV? To calculate customer lifetime value, the formula is as follows:
The customer lifetime value metric tells the expected revenue from a single customer as long as they use the business's product or service. A high CLTV represents the customer's loyalty to the business and even identifies the most crucial customers.
Businesses can use this metric to understand how much the cost of acquiring a customer should be. This metric can also give insights for the business to make strategies as to how the customer acquisition cost should be reduced.
CLTV = Average Revenue per Customer * Average Customer Lifetime
Let's say a company has a software product with an average monthly revenue per customer of 60$. Also, if the average customer lifetime is 24 months, the customer lifetime value CLTV will be $1440 ($60 * 24). It indicates that, on average, $1440 will be generated as revenue from each customer over the lifetime.
4. DAU to MAU rate
- What is the DAU/MAU rate?
- Why is the DAU/MAU rate important? Knowing how much the customers use a product in the SaaS business. It provides information about the product's "stickiness" and finds the value it creates for the users. Any business needs to understand the customer engagement level.
- How do you calculate the DAU/MAU rate? To find the DAU to MAU rate, divide the number of Daily Active Users by the Monthly Active Users.
This essential customer retention metric is known as Daily Active Users to Monthly Active Users rate (DAU to MAU) and helps find how much the customers use a product regularly.
Let's say a company has 400 DAU and 5000 MAU; then the DAU to MAU rate will be 8% ((400/5000) * 100).
5. Repeat purchase rate
- What is the repeat purchase rate?
- Why is the repeat purchase rate important?
- How do you calculate the repeat purchase rate?
The repeat purchase rate is used to find the customers who make repeat purchases from the total of the business's customer base.
This metric is crucial for SaaS businesses to find customers that engage the most with the product and are more likely to purchase the product again.
Simply divide the number of customers who repeat purchases more than once by the total number of customers in the same time frame. Let's say a company has 400 total customers, and from that total, 200 make repeat purchases; then the repeat purchase rate can be calculated as follows: Repeat purchase rate = 200/400 = 0.5100 = 50%
6. Expansion MRR
- What is expansion MRR?
- Why is expansion MRR important?
- How do you calculate expansion MRR?
It measures the product's additional customer revenue via upsells, cross-sells, and add-ons. The additional revenue can be generated by upsells when customers switch from a low to a high-priced plan. Cross-sells also bring in revenue, which means purchasing additional products offered by the same business. Similarly, purchasing add-ons and reactivation can also lead to revenue growth.
Expansion MRR is significant for businesses since increasing the CLTV of already retained customers is much more cost-effective than acquiring new customers. Revenue generated from the existing customers also indicated customer loyalty.
To calculate the expansion MRR, first find the difference between the expansion MRR at the end of the month and the expansion MRR at the beginning of the month. Then divide the above difference by the expansion MRR at the beginning of the month.
Expansion MRR rate(in percentage)= [(Expansion MRR at the end of the month - Expansion MRR at the beginning of the month)/ Expansion MRR at the beginning of month] * 100
If a business has a $300 expansion MRR at the beginning of the month and the expansion MRR at the end of the month is $500, then the expansion MRR can be calculated as:
The expansion MRR rate = [ ( 500 - 300 ) / 300 ] * 100 = 66.7%
7. Customer satisfaction score
- What is the customer satisfaction score?
- Why is the customer satisfaction score important?
- How do you calculate the customer satisfaction score?
The customer satisfaction score measures the customer's satisfaction level with a business's product.
This metric is handy since it gives insights into the offered product's features, user experience, and customer support. Customer satisfaction is always highly prioritized, as it tells the business whether the product impacts the customer. Businesses can use this information for future decision-making and effective product growth.
You can calculate this score with surveys by asking customers to rate their level of satisfaction on a scale. Then, divide the number of happy customers by the total number of customers who took the survey.
8. Net Promoter Score (NPS)
- What is NPS?
- Why is NPS important
- How do you calculate NPS?
To measure customer loyalty, Net Promoter Score is the best metric.
It allows businesses to determine whether the customer will recommend its product or service to others.
It is measured by asking customers to rate whether they are likely to recommend the product to others on a scale of 0-10. The customers who score from 9-10 are called promoters. People who score from 7-8 are known as passives, while the ones who score less than 6 are detractors.
The Net Promoter Score is the difference between the number of promoters' and detractors' percentage values. Let's say the result of a survey revealed the promoters to be 40% of the respondents while 25% people were detractors since they scored below 6. So, the Net Promoter value will be 15%.
9. Customer health score
- What is the customer health score?
- Why is customer health score important?
- How do you calculate the customer health score?
The customer health score allows businesses to identify customer churning by evaluating their well-being and engagement with the product or service.
Using this metric, businesses can get information regarding customer loyalty, whether they will stay with the business or cancel the subscriptions. Tracking this customer retention metric is crucial as it helps to identify customer success or failure patterns.
Several customer data points are combined to calculate this key retention metric, including their feedback, engagement with the product, revenue, etc. Each point is assigned a score and added to get each customer's health score. This data can then help make sound decisions for the future growth of the product by targeting a specific group of customers.
10. Revenue churn rate
- What is the revenue churn rate?
- Why is the revenue churn rate important?
- How do you calculate the revenue churn rate?
In a business, customers often stop using the offered product after some time, known as recurring revenue churn. The revenue churn rate is used to measure the rate of revenue loss due to customers who lose interest in using their product since it is not valuable for them anymore.
By tracking revenue churn, businesses can better understand the financial impact of customer churn on their revenue and make informed decisions to improve customer retention by identifying areas for improvement.
The formula to calculate the revenue churn rate is as follows: (Customer Churning MRR loss / MRR at the beginning of the month) * 100. A business with an MRR of $8000 loses $1200 MRR due to customer churn. Then, the revenue churn rate will be :( 1,200 / 8,000 ) * 100 = 15%
11. Existing Customer Revenue Growth Rate
- What is the Existing Customer Revenue Growth Rate?
- Why is the existing customer revenue growth rate important?
- How do you calculate existing customer revenue growth rate?
It is the rate at which your business generates revenue from customer success.
An upward trend in the customer growth rate suggests that the marketing, sales, and account teams effectively encourage customers to spend more. It also indicates that customers quickly recognize the value of their interaction with the business. On the other hand, a declining customer growth rate should cause concern for the success team.
(MRR at the End of the Month - MRR at the Start of the Month)/MRR at the start of the month)
12. Feature adoption rate
- What is the feature adoption rate?
- Why is the feature adoption rate important?
- How do you calculate the feature adoption rate?
Feature adoption rate helps SaaS businesses get insights into which parts of the product are used most by their customers. There are multiple feature adoption metrics to optimize and promote the feature's usage or even help improve the use of non-frequently used features.
Understanding how different product features perform can help diagnose the parts of the product that are frequently used and even those that are underutilized.
Feature adoption rate is calculated by dividing the number of specific feature users by the total number of users. Assume 5000 people out of 10000 users have used some specific feature. Then the feature adoption rate of that specific feature will be 50% (( 5000 / 10000 ) * 100).
13. Renewal rate
- What is the renewal rate?
- Why is the renewal rate important?
- How do you calculate the renewal rate?
The Renewal rate is the rate at which the customers renew their subscription after their initial contract is expired.
For a business offering its product in a subscription model, it is crucial to know how many customers are re-subscribing to its product. The Renewal rate also indicates the customer-retaining power of a business. Customer satisfaction is also found using the Renewal rate data. A high rate shows the customers are satisfied with the product, and a low value indicates that the product needs to be more valuable for the customer.
The formula to calculate the renewal rate is as follows:
Renewal Rate = (No. of customers renewals contract / Total number of initial contracts )* 100Let's say that initially, there were 200 customers with subscriptions, and 95 of them renewed their subscriptions; the Renewal rate is calculated as follows: Renewal rate = (95 / 200) * 100 = 47.5%.
14. Engagement rate by channel, segment, and cohort
- What is the engagement rate?
- Why is the engagement rate important?
The Engagement rate measures how engaged the users are with the product. The active users who regularly use the product are most likely to stay longer, indicating a high Engagement rate. You can measure the engagement rate via channels, segments, and cohorts.
Customer engagement rate is important as it offers insights into customer loyalty, product experience, brand reputation, and sales.
- Engagement rate by channel
- Engagement rate by segment
- Engagement rate by cohort
It measures the rate of active customers using the product regularly from a specific channel over any defined period. To calculate this KPI, the formula is as follows:
Engagement rate by channel = (Active customers count from the specific channel / total count of customers that channel contains) * 100
It measures the rate of active customers from a specific segment using the product regularly over any defined period. Use the following formula to calculate this KPI:
Engagement rate by segment = (Active customers count from specific segment / total count of customers that segment contains) * 100
It measures the active rate of customers who regularly use the product from a specific cohort over a defined period. To calculate this KPI, the formula is as follows:
Engagement rate by cohort = (Active customers count from specific cohort / total count of customers that cohort contains) * 100
Tracking customer engagement rates can help businesses understand where most customers come from.
15. Customer Growth Rate
The customer growth rate (CGR) measures the increase in the number of customers a business has over time period, such as weeks, months, quarters, or years. It indicates the business's performance and ability to meet market demands through its offerings.
Your customer growth rate is an important metric for allocating your resources in the future. If your customer base grows faster than you can handle, you may find yourself short on resources to service the new customers you currently have on board. If it grows too slowly, your business may not be able to cope with the ever-growing business expenses.
Seven practices to boost customer retention rates
- Personalized onboarding
The best way to retain new customers and have a good loyal customer rate is to give them the experience they need starting from the first impression. Identify the users' needs to enhance the product, especially the onboarding experience.
A positive first impression can keep the customers engaged with the product by pulling them to continue using the product to fulfill their needs - reducing customer churn and increasing customer retention.
You can reduce confusion and frustration by helping the users understand the product quickly and effectively. Personalized onboarding lets you address the customers' needs, foster engagement and build trust in your brand.
2. In-app messaging and email campaigns
Most of the time, customers lose interest or forget why they were excited about the product in the first place. Therefore, keeping in touch with the customer is the step to keep building their interest and curiosity in the product.
Using In-app messaging and email campaigns, the business can reach out to their customers to share new updates and guide them about what new problem the product is solving and why this product is the best for them, which will lead to an increase in customer retention.
The company emails are usually lost in the customer's spam folder. Therefore, In-app messaging is the best way to ensure direct customer conversation.
3. Great customer service
Nothing can beat a product that offers excellent customer service. Offering the customers a smooth experience enhances their interest in the product. However, this is also tricky because many customers leave the product even if they have one bad experience.
Customers are more likely to continue doing business with a company and recommend it to others when they have positive experiences with its customer service. Satisfied customers are less likely to switch to a competitor. In addition, prompt and effective customer service can turn a negative experience into a positive one, increasing customer retention.
4. Better customer retention tools
Using customer retention tools like Usermaven helps businesses plan and build a better customer experience with insights into customer behavior and preferences. These tools increase task flows with automation and streamline communication, as well as keep a record of customer retention data. Such tools also help identify which product is getting you to repeat orders and promote it aggressively to your existing customer base. You can offer targeted incentives to customers at the risk of leaving your product. Tools like Usermaven can help you greatly track the retention metrics you need. With Retention Cohort Analysis and Slipping-away Users Tracking, Usermaven helps you identify when users leave your product to reduce churn.
5. Keep tabs on your churn metrics
Providing customers with an excellent first impression is great, but keeping the customer annual churn rate as low as possible is a long-run process that requires continuous monitoring of the churn metrics. Tracking and analyzing churn can help businesses constantly adjust their product to keep delivering value to end users and keep track of customer retention efforts.
6. Hyper-personalize your communication
A deep understanding of your customer is essential for any business to improve customer retention. Many customer retention tools are available for companies to use, which can provide detailed data about the customer's interest and can be used to tailor your communication with them. These insights allow businesses to get their inactive audience back by using hyper-personalized communication like sending them emails or using social media ads hence making the individual customer feel important.
7. Reward your VIP Customers
In any SaaS business, most revenue is generated from a pool of loyal customers known as VIP customers. Also, investing in new customers is between 5 and 25 times more expensive than retaining existing ones. Therefore, you should put effort into keeping these customers' interest at the peak. You can award these customers special discounts or send personalized notes highlighting their loyalty to the business. Rewarding these VIP customers can improve their satisfaction level.
Customer retention metrics FAQs
1. What are customer retention metrics?
Customer retention metrics are metrics that measure the ability of a business to retain its customers over time. These metrics are used to track customer loyalty and engagement and to identify areas where a business can improve its customer experience. You can use this information to make data-driven decisions that drive growth and success.
2. How do you measure customer retention, and which KPIs track customer retention?
You can measure the customer retention rate using the following formula:
Customer Retention Rate = ((# of customers at end of period - # of new customers during period) / # of customers at start of period) x 100
Consider a business with 100 customers at the start of a quarter and adds 20 new customers over the quarter while losing ten customers during the same period.
The customer retention rate would be calculated as follows: ((100 - 20 + 10) / 100) x 100 = 90%. It means the business retained 90% of its customers during a quarter.
Some of the KPIs used to track customer retention include the following:
- Customer churn rate
- Net promoter score
- Customer lifetime value
- Repeat purchase rate
- Renewal rate