Top 10 B2B SaaS Retention Metrics You Need To Track
What sets the SaaS business model apart from other types of businesses is its recurring revenues. B2B SaaS companies rely on customers paying them on a monthly or yearly basis to keep the business running.
That also means that, as a SaaS business, your relationship with your customers doesn’t end when they purchase your product.
You keep building rapport and trust with them in order to keep them on board for as long as possible.
That’s why one of the most important concepts in a SaaS business is customer retention. Customer retention is the act of keeping your customer subscribed to your SaaS product.
In this article we will talk about why customer retention is important, the different factors that affect it, and the various retention metrics that you need to track.
Let’s dive right in.
Why Is Customer Retention Important?
The first question you might have is: why is customer retention important?
The answer is simple: recurring revenues.
As we mentioned before, the SaaS business model relies on customers paying on a monthly or yearly basis. If you’re not able to keep your customers subscribed to your product, then your business will quickly run into trouble.
Still, retaining your customers offers a lot more benefits than just keeping the lights on. Here are some of them:
It Is The Key To A SaaS Business’ Growth
For any company, the most important factor for growth is customer acquisition or the ability to gain more customers.
However, for a SaaS business, customer retention is even more important.
Of course, customer acquisition is still important. It’s how you get your customers in the first place, after all.
But remember that a SaaS business lives or dies by its recurring revenue. After you acquire a customer, it’s the recurring revenues that really bring in the big bucks.
What’s more, customer acquisition costs a lot more money. The average cost of acquiring a new customer is 5 to 25 times more than the cost of retaining an existing one.
Therefore, it’s important to focus on both customer acquisition and retention. But if you had to choose one, customer retention should be your number one priority.
B2B Customers Have High CACs And Long Sales Cycles
Since we’re talking about B2B SaaS here, let’s point out something that is especially true for B2B SaaS businesses.
In B2B SaaS, the customers are usually businesses or organizations that have to go through a long and complicated sales process before they decide to purchase your product.
What’s more, the customer acquisition cost (CAC) for a B2B customer is usually much higher than the cost of acquiring one in the B2C market.
Given the amount of time and resources to gain a new B2B customer, you need to keep them for a long time in order to maximize your return on investment (ROI).
It Leads To Positive User Reviews
B2B SaaS companies need to focus on getting user reviews regardless of whether their customers are retained or not.
But if you want to get more 5-star reviews, then customer retention should be a priority.
Retaining your customers means that they are happy. And when they are happy, they can give your SaaS product positive reviews on sites like G2 and Capterra.
These reviews, in turn, will help you build brand awareness.
What’s more, it will serve as social proof. When prospective customers see that your SaaS product is well-loved by your current users, they will be more likely to buy it too.
It Leads To Advocacy And Referrals
When you have a high customer retention rate, it means that you’re doing something right. Your customers are happy with your product and they want to stay subscribed to it.
This leads to two things: advocacy and referrals.
More than just posting reviews, your customers will start advocating for your product to their colleagues. They will talk about how much they love it and how it has helped them in their business.
This word-of-mouth marketing is very powerful and it can help you acquire new customers without spending any money on advertising.
Moreover, your customers will start referring other businesses to your SaaS product. When this happens, the B2B sales cycle becomes a lot shorter because these potential customers already trust your product.
Loyal Customers Means Happy Employees
It’s not just the customers that benefit from customer retention. Your employees will be happy too.
When you have a high customer retention rate, it means that your team is doing a great job. They are providing valuable service to your customers and they are keeping them happy.
This leads to a more positive work environment. Having happy customers can boost your employees’ morale. As a result, they will also be more engaged in their work.
And when your employees are happy, they will start doing a better job. This leads to even more satisfied customers which, in turn, leads to even higher retention rates.
Factors That Affect Customer Retention
Now that we’ve talked about the importance of customer retention, let’s take a look at the factors that affect it.
Product-market fit is the degree to which your product satisfies the needs of your target market
A product with a good product-market fit will be able to retain its customers because the customers will find it valuable.
On the other hand, a product with a poor product-market fit will have a hard time retaining its customers because they will eventually find a better product that meets their needs.
To ensure that you have a solid product-market fit, you need to research your target market. You need to understand their needs, pain points, and goals.
Only then can you develop a product that is truly in demand in your target market.
If you want to retain your customers, you need to make sure that your pricing is aligned with the value that your customers are getting from your product
If your price range is too high, your customers will churn because they will feel like they are not getting their money’s worth. For this reason, they may find more viable options from your competitors.
On the other hand, if your pricing is too low, your customers may be more inclined to stay on. But a low recurring revenue may do more harm to your SaaS business than good.
That’s why it’s important to have a value-based pricing strategy. This means that your prices should be based on the value that your customers are getting from your product.
One way to do this is by conducting a survey.
If you haven’t launched your SaaS product yet, you can send it to your target market. If you already have a pool of paying customers, you might want to send it to people who don’t know about it yet.
In the survey, you may ask something like “How much would you be willing to pay for a software with the following capabilities: (list your SaaS product’s features).”
Their responses will help you come up with a price range that reflects your SaaS product’s perceived value.
Customer onboarding is the process of helping your customers get familiar with your product
It’s important because it can help reduce customer churn.
If you have a smooth onboarding process, your customers will be able to use your product more effectively. As a result, they will get more value from it. And when they get more value from it, they are less likely to churn.
Your customers will only stay with you if they feel that you are providing them with the best possible service. If they feel like they are being ignored or treated poorly, they will churn.
To provide excellent customer support, you need to have a team of knowledgeable and friendly customer support representatives. They should be able to answer your customers’ questions and solve their problems promptly.
They should also be available 24/7 in case your customers need help outside of business hours.
In addition to having an excellent customer support team, you also need to have a robust knowledge base. This should contain articles and tutorials that will help your customers use your product more effectively.
It should also contain FAQs that will help your customers resolve common issues on their own.
Customer Success Service
More than just onboarding your new customers, your customer success team should be proactive in helping all your users achieve their goals.
They should be available to answer any questions that may arise. They should also keep track of your users’ progress and offer assistance when needed.
Your customers will only stay with you if they feel that your product is constantly improving. If they feel like your product is stagnating, they will leave.
To keep your customers engaged, you need to release new features and updates regularly. But you also need to make sure that these features and updates are actually useful to your customers. Otherwise, they will just be a waste of time and money.
That’s why it’s important to get feedback from your customers before releasing any new features or updates.
You can do this by sending out surveys or conducting focus groups.
Get their input on what new features or updates they would like to see in your product. And once you release these new features or updates, make sure to let your customers know about them.
You can do this by sending out emails or in-app messages.
Now, all of the above factors are important if you want to reduce customer churn. But if you can’t track them, you won’t be able to improve them.
But which metrics do you need to track?
Here are the top 10:
Retention Metric #1: Retention Rate
Let’s start with the most obvious one. In fact, we’ve already mentioned it once or twice in this article.
Your retention rate is the percentage of customers who stay with you over a certain period of time, whether it’s a month or a year.
To calculate your retention rate, take the number of customers at the end of a given period and divide it by the number of customers at the beginning of that period.
For example, if you had 100 customers at the beginning of January and 80 customers at the end, your retention rate would be 80%.
Retention Metric #2: Churn Rate
We’ve also mentioned this metric a few times in this article.
There are two kinds of churn: customer churn and revenue churn.
Customer Churn Rate
Your customer churn rate is the opposite of your retention rate. It’s the percentage of customers who leave you over a certain period of time.
To calculate your customer churn rate, take the number of churned customers over a certain period. Then divide it by the total number of customers you had at the beginning of the period.
For example, let’s say you had 100 customers at the beginning of January and there were 20 customers that canceled their subscriptions within the month. That would give you a customer churn rate of 20%.
Revenue Churn Rate
Your revenue churn rate is the percentage of revenue that you lose over a certain period of time due to customer churn.
To calculate your revenue churn rate, take your total recurring revenue at the beginning of a given period and subtract the revenue you lost due to churn. Then, divide that number by your total recurring revenue at the beginning of the period.
For example, imagine you had $1,000 in monthly recurring revenue (MRR) at the beginning of January. Your churn for that month results in a loss of $200 in MRR. Your revenue churn rate would be 20%.
Retention Metric #3: Net Dollar Retention (NDR)
The net dollar retention (NDR) or net revenue retention (NRR) is a metric that measures the amount of revenue you retain from your customers over a certain period of time.
To calculate your NDR, take the total recurring revenue at the end of a given period and subtract the revenue you lost due to churn. Then add your expansion revenue, which is the revenue you gain from upselling and cross-selling.
Divide the resulting number by the total recurring revenue at the beginning of that period, and that’s your net dollar retention.
For example, imagine you had $1,000 in MRR at the beginning of January. Your churn for that month results in a loss of $200 in MRR. But you also gained $500 in expansion revenue from upselling and cross-selling.
Your NDR would be (1,000-200+500)/1,000 = 130%. That means you still managed to grow your recurring revenue by 30% despite the losses due to churn.
Retention Metric #4: Activation Rate
Now if you remember when we talked about the factors that affect customer retention, it’s mostly about providing value to your customer.
From the very start of their subscription or free trial, delivering value to them is the key to converting them into paying customers and retaining them.
But how can you measure how much value you are giving them?
This is where the activation rate comes in.
It’s a customer engagement metric that measures how well you are delivering value to your users.
Your activation rate is the percentage of customers who perform an “activation”, a particular action indicating that you have delivered value to them.
Does that sound vague? Well, it should.
That’s because it’s up to you to specify it. Different SaaS products provide different kinds of value.
For example, a web design tool’s activation could be the user creating their first website.
Or a video conferencing tool’s activation could be the user having their first video call that lasts for more than 10 minutes.
The important thing is to choose an action that is indicative of whether or not your customer got value from your product.
Once you have chosen your activation event, calculate your activation rate by taking the number of users who performed the event and dividing it by the total number of users.
For example, if 100 people started using your web design tool and 50 of them created their first website, then your activation rate would be 50%.
Retention Metric #5: Customer Engagement Score (CES)
This is another useful customer engagement metric that may indicate how well you can retain customers.
Your customer engagement score (CES) is a metric that measures how engaged your customers are with your product. You can find the CES for each of your customers.
One great thing about measuring the CES is that you can measure your customer’s overall engagement in one score rather than looking at multiple data points.
You can calculate it by assigning value to certain events on the customer’s usage and measuring how many times they occur.
Again, pretty vague isn’t it?
Like activation, it’s up to you to define what those events are. That would be the first step toward measuring your customer engagement score.
To find and use your CES, you need to follow three steps:
- Define Your Customer Engagement Events
- Assign Importance Values To Your Events
- Sum Up All Your Event Values
- Segment Customers Based On Their CES And Take Action
Let’s go through them one by one.
Define Your Customer Engagement Events
Customer engagement events are key actions that indicate your customer’s engagement with your product.
For example, let’s say you have a social media marketing solution. You could have the following key events:
Event #1: Scheduling a post
Event #2: Performing a social listening inquiry
Event #3: Generating a social media engagement report
Now think about your SaaS product and what those events might be.
Assign Importance Values To Your Events
When you have identified your key customer engagement events, you’ll need to assign important values to them. Each of these values would indicate each event’s level of importance.
In this step, another thing to consider is how frequently these events occur.
For example, your users could schedule several posts in a day. But when it comes to generating reports, it might only happen once or twice a month.
Sure, scheduling posts may be one of the most important features of social media marketing software. But if you assign a higher value when it happens frequently, that might result in an overly high CES.
With that in mind, you might decide to assign an importance value of 1 to Event #1, a value of 5 to event #2, and a value of 10 to Event #3.
Sum Up All Your Event Values
Now that we’ve gone over how to define customer engagement events and how to assign values to them, it’s time to actually calculate your customer engagement score.
To do that, simply take each event’s value, multiply it by its number of occurrences, and add them all up.
For example, let’s say you have a customer that performs the following events in a month:
Event #1 (scheduling a post): 50 times
Event #2 (performing a social listening inquiry): 10 times
Event #3 (generating a report on social media engagement): 3 times
Then your customer engagement score would be (50 + 10 + 3) = 63.
Segment Customers Based On Their CES And Take Action
Once you have your customer engagement scores, the next step is to segment your customers based on these scores.
From there, you can take action accordingly.
For example, let’s say you have three segments for your CES: low (0 to 40), medium (41 to 80), and high (81 to 100).
For customers in the low segment, you might want to take action to increase their engagement. This could include sending them educational emails or sending your customer success team to help them out.
For customers in the medium segment, you might want to focus on maintaining their engagement levels.
And for customers in the high segment, you might want to try to upsell them or cross-sell them additional products.
The important thing is that you take action based on your customer’s CES. By doing so, you can ensure that your customers are engaged with your product and stick around for the long run.
Retention Metric #6: Average Customer Lifespan
Another important metric to track is your average customer lifespan.
This metric tells you how long, on average, your customers stick around before they churn.
This is an important metric because it can give you insight into how well your product is meeting customer needs.
Calculating this metric is pretty self-explanatory. You simply take how long each of your customers stayed with you and get the average.
For example, let’s say you have three customers that stayed with you for the following lengths of time:
Customer 1: 3 years
Customer 2: 5 years
Customer 3: 10 years
Then your average customer lifespan would be (3 + 5 + 10) / 3 = 6 years.
Of course, in the real world, you would be dealing with a lot more customers. So be ready with a spreadsheet when you’re calculating your average customer lifespan.
While this metric is helpful, it’s also important to look at it in conjunction with other retention metrics. This will give you a more well-rounded view of customer behavior.
Speaking of which…
Retention Metric #7: Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is one of the most important retention metrics to track.
This metric tells you the total amount of revenue that a customer brings in during their time subscribed to your SaaS product.
To calculate your CLV, you need your average customer lifespan and your average revenue per user (ARPU).
We already discussed how to find your average customer lifespan. As for the ARPU, you simply get your total recurring revenue and divide it with the number of customers that you have.
For example, let’s say you have an annual recurring revenue (ARR) of $100,000 from a total of 2000 customers. That gives you an annual ARPU of $100,000/2000 = $500 per customer.
To calculate your CLV, simply multiply your average customer lifetime with your ARPU. With an average customer lifespan of 6 years and an ARPU of $500, you get a CLV of $3,000.
Just note this is just a simple example. In the real world, your CLV will be much higher (hopefully).
It’s also important to note that CLV is not a static number. It changes over time as your business grows. Or shrinks. But hopefully, it grows.
Retention Metric #8: First Call Resolution (FCR) Rate
Remember that one of the key factors that affect customer retention is your customer support performance.
The first call resolution (FCR) rate is a metric that can measure how well your customer support team is addressing your users’ concerns.
This metric tells you what percentage of customer issues are resolved on the first call.
A high FCR rate means that your customers are happy with the support they’re getting. A low FCR rate means that there’s room for improvement.
To calculate your FCR rate, simply take the number of calls that were resolved on the first call and divide it by the total number of calls.
For example, let’s say you received 100 calls in a month and 30 of those calls were resolved on the first call. That gives you an FCR rate of 30%.
It’s important to track your FCR rate over time so you can see if your customer support performance is improving.
Retention Metric #9: Customer Satisfaction (CSAT) Score
The CSAT score is a measure of customer satisfaction. It tells you how satisfied your customers are with the product or service that they’re using.
There are different ways to calculate your CSAT score. But the most common way is to simply ask your customers to rate their level of satisfaction on a scale of 1 to 5 (1 being the lowest and 5 being the highest).
Count how many 4s and 5s you got and get their percentage. That’s your CSAT score.
For example, let’s say you asked 100 customers to rate their satisfaction level and you received the following results:
10 rated 1
20 rated 2
30 rated 3
15 rated 4
15 rated 5
Your CSAT score would be (15 + 15) / 100 = 30%.
It’s important to track your CSAT score over time so you can see if your customers are getting more or less satisfied with your product. A declining CSAT score is a sign that something is wrong and you need to take action.
Retention Metric #10: Net Promoter Score (NPS)
The net promoter score (NPS) is another customer satisfaction metric. But unlike the CSAT score, the NPS score measures how likely your customers are to recommend your product or service to others.
This metric is important because it can give you an early warning sign if your product is starting to lose its appeal.
To start finding your NPS, you first need to ask your customers this question:
“How likely are you to recommend our product or service to a friend or colleague?”
They will then answer on a scale of 1 to 10 (1 being the lowest and 10 being the highest).
Once you have the results, you group them into three categories:
Promoters (9-10): These are your happiest customers. They’re loyal and will keep using your product and recommend it to others.
Passives (7-8): These are customers who are satisfied but could be lured away by a competitor.
Detractors (1-6): These are your unhappy customers. They’re at risk of churning and can damage your brand with negative word-of-mouth.
To calculate your NPS, simply take the percentage of Promoters and subtract the percentage of Detractors.
For example, let’s say you asked 100 customers how likely they are to recommend your product and you received the following results:
20 rated 1 to 6
30 rated 7 to 8
50 rated 9 to 10
Your NPS would be (50-20) / 100 = 30%.
If your NPS is above 30, that would be a good indicator that most of your customers are very happy with your SaaS product.
If it’s around 0 to 30, they are somewhat satisfied. But you need to work on the detractors and see how you can make them happier.
And if your NPS is below zero, then you’ll need to double down on your detractors. Find out what issues they have and work on them as soon as possible.
Final Thoughts About B2B SaaS Retention Metrics
Measuring your customer retention is important in ensuring that your SaaS business is growing. By tracking the right B2B SaaS retention metrics, you can identify issues early on and take corrective action.
But just tracking these metrics is not enough. You need to understand what they mean and how they impact your business. Only then can you take meaningful action that will improve your overall customer retention rate.
If you want more guides and strategies to grow your SaaS business, visit our blog here.