What’s more, a successful retention strategy not only helps you retain customers. It also paves the way for you to increase revenue through cross-sells, up-sells, upgrades, and referral marketing too—which, in my experience of working in SaaS for 10+ years, is often the reality of how most SaaS businesses are growing.
If you’re feeling overwhelmed with customer retention, let me start you off with some hopeful advice from our VP of Education, Cary Self.
“The biggest misconception about customer churn is that there is nothing your team can do to prevent it. NOT TRUE! Once you know how to discover churn, then you can identify the reasons behind it. We tell our customers all the time, start somewhere. One small action is better than no action and it will begin to retain customers, allowing you to focus on the next action.”
In this guide to SaaS B2B customer retention, we discuss how to measure retention in SaaS, identify the reasons for churn, what benchmarks are important, and how to implement a revenue-led retention strategy.
The Importance of Customer Retention in B2B SaaS
Let’s start with why. Your brand’s ability to retain customers (and keep them happy) has a direct impact on your bottom line by impacting:
Revenue. SaaS Capital’s 2022 survey revealed that your growth rate (discussed in the next section) as a B2B SaaS brand is positively and exponentially correlated with net revenue retention.
Customer acquisition costs. If you retain more customers, it follows that you need to acquire fewer new customers to achieve growth. This helps keep your acquisition costs down.
Customer satisfaction. Satisfied customers stay loyal to your brand and are more willing to buy again and try new offerings.
In B2B SaaS specifically, retention is crucial because most customers only spend a small percentage—5-15%—of their lifetime value upfront. Thus, if your customers start churning, you risk losing the larger part of their lifetime value.
Let’s focus on one example from our own customer, Wajax. Here is a company that specializes in industrial parts and engineered repair services. You would think they have very little competition, so why bother worrying about churn? Because the same action you take to prevent churn, will also generate growth.
When we started working with them to measure the voice of customer, they took their first year of their program just to measure and understand what was important to their customers. The second year, they applied all their learnings to help reduce churn and encourage growth. So much so, that their promoters spend two times as much… not bad for a 150 year old company.
5 Ways to Measure Retention for Your B2B SaaS Business
B2B SaaS businesses rely on several metrics to measure customer retention, with each metric offering different insights. But before we explore them, there are two important nuances of SaaS customer retention you need to know to make sure your measurements—and analysis—are correct:
New customer churn vs. mature customer churn. For most businesses, new customer churn rates will be higher than the churn rates of mature customers. So, when measuring churn, consider segmenting customers based on how long they’ve been with you. This will give you the most accurate results.
Reference time—i.e. the period over which you measure and report customer retention. The most common reference time is the calendar month. A shorter reporting period, such as weekly, may not show meaningful trends, and a longer span, such as annually, can significantly complicate the math. Measuring on a monthly basis provides a good balance.
With these points in mind, let’s explore five of the most important metrics for measuring retention.
1. Customer Retention Rate
Customer retention rate is the standard metric for retention, and you can calculate it with the formula:
Here, Cs is the number of customers at the start of the period, and Ce is the number at the end. This formula excludes newly acquired customers. If you need to factor new customers in, check out our guide to learn how to calculate new customer retention rates.
2. Net Revenue Retention
Net revenue retention (NRR) is a fundamental retention metric in B2B SaaS that helps businesses relate retention to revenue.
In B2B SaaS, not all customers and accounts are worth the same. Rather, SaaS solutions typically come with various pricing tiers and plans. So, a large enterprise with 150 users will contribute more to your NRR than a solo entrepreneur.
As mentioned in the previous section, the most common reference time is the calendar month. You can calculate your net NRR over a calendar month with the formula:
MRR (at the month’s start) + expansion MRR – churn MRR – contraction MRR
MRR (at the month’s start)
Where,
MRR is your monthly recurring revenue.
Expansion MRR is the additional monthly recurring revenue generated compared to the previous month, from your existing customers. It excludes revenue from new customers. So, expansion MRR could increase if some current customers upgrade to more expensive plans.
Churn MRR is the amount of MRR lost due to cancellations.
Contraction MRR is the amount of MRR lost due to downgrades.
NRR can be greater than 100%—an indication that your expansion MRR is greater than your churn MRR and contraction MRR. That’s exactly what SaaS brands should strive for, because an NRR greater than 100% shows your retention efforts are successful.
While NRR is a valuable customer retention metric in B2B SaaS, it’s important not to look at this metric in isolation. This is because measuring NRR does not necessarily reveal the full picture of retention.
For example, consider a situation where a customer downgrades their plan after a month. NRR would indicate that this is a loss. But, in reality, the customer may have overestimated their needs when initially signing up for the higher plan.
So, in this situation, downgrading could have potentially prevented churn by delivering a more feasible plan for the customers’ needs.
3. Gross Revenue Retention
Unlike NRR, gross revenue retention (GRR) only includes the revenue that you retain over a given time period. So it includes revenue losses due to cancellations and downgrades, but not expansion MRR.
Thus, you can calculate GRR over one calendar month with the formula:
MRR (at the month’s start) – churn MRR – contraction MRR
MRR (at the month’s start)
A low GRR indicates that your brand is suffering from high cancellations and/or downgrades, indicating that your SaaS business is not currently sustainable. We’ll discuss what constitutes a ‘healthy’ GRR below.
4. Growth Rate
Growth rate is a metric used to measure the change in a given metric over a specified period. For example, you can measure MRR growth over one month using the formula:
MRR (at the month’s start) – MRR (at the month’s end)
MRR (at the month’s start)
As we mentioned above, research has revealed a strong and exponential correlation between NRR and revenue growth rate.
5. Usage Retention and Loss of Signal
Usage retention indicates how much consistent value your customers are experiencing from your SaaS solution. It’s the percentage of existing customers (either from signups or upgrades) who are still experiencing value after a specified time period.
You can measure user retention by looking out for value signals. As the name indicates, these are signals that your customers are getting value from your offering. The simplest indicator is that users are logging in, but specific signals can prove more useful. You should try to identify a few value signals—specific to your product—that indicate users are deriving considerable value.
At CustomerGauge, we call a decline in usage an absence or loss of signal and it's the most common in passive (7-8 NPS) customers. A loss of signal occurs when customers stop using your SaaS platform routinely, and no longer open support tickets or respond to your surveys.
How to Benchmark Your SaaS Retention Metrics
The purpose of measuring your customer retention is to analyze how well your business is doing, and take necessary action to fight churn. You can assess how good your numbers are by consulting industry benchmarks.
CustomerGauge’s report has the world’s most comprehensive B2B experience benchmarks, revealing retention rates and Net Promoter Scores by industry. We found that the computer software industry has a retention rate of 86%.
You can also consult SaaS Capital’s report, which surveyed more than 1,500 private B2B SaaS companies, for benchmarks of B2B SaaS customer retention metrics. Some of their most important findings are:
GRR is a “table stakes” benchmark. For B2B SaaS brands to have a chance at competing with their peers, their GRR must be at least 80%. The research also revealed that there’s no correlation between GRR and growth rate for GRR above 80%.
Median Net Retention is 102%, across all SaaS businesses.
Median Gross Retention is 91%, across all SaaS businesses.
Median NRR is 102% across the whole survey, but businesses should target the 110% benchmark to align with the median growth rate benchmark of 40%.
Moreover, the report also highlighted the importance of benchmarking by annual contract value (ACV). This is because B2B SaaS brands that share a similar selling price typically have the most similarities.
5 B2B SaaS Customer Retention Strategies to Fight Churn
Once you’ve measured, analyzed, and benchmarked your retention rates, it’s time to put steps in place to improve. Here are five data-driven strategies to help you boost your customer retention.
1. Lead with NPS Surveys
One of the most effective ways B2B SaaS businesses can increase retention is by building their customer experience program around Net Promoter Score surveys.
A customer experience program is a structured system used to engage clients, request feedback, and take relevant action. And NPS surveys are the most effective tools for collecting feedback. Harvard Business Review’s research revealed that NPS score is the strongest predictor of future revenue.
Moreover, NPS surveys are short and concise, making them easy for your customers to complete. The surveys are based on the simple question that measures customer loyalty:
On a scale of 0-10, how likely are you to recommend our brand/product/service to a friend or colleague?
Depending on their response, each customer is categorized as a:
Promoter (scoring 9-10). Promoters are your most loyal customers that have the highest chance of retention (and they’re likely to become brand ambassadors and advocates).
Passives (7-8). These are neutral customers that aren’t pressing churn risks, but they aren’t particularly enthusiastic about your brand, either. Your customer experience program should aim to nurture passives into promoters.
Detractors (0-6). These customers are high churn risks and may spread negative word of mouth. Your customer experience program should prioritize catering to these customers.
Subtracting the percentage of detractors from the percentage of promoters reveals your NPS score, from -100 and 100. You can see how successful your customer experience program is by consulting our NPS benchmarks report.
As we discussed before, it’s crucial to determine why and when your customers churn. NPS surveys can help you out here by collecting feedback directly from the source—your customers.
2. Collect Feedback from the Right People
In B2B SaaS, your accounts may consist of multiple people. This means your clients will each have a different customer journey with various decision-makers, from tech teams to C-level executives. Thus, it’s important to collect feedback from different people to gain comprehensive insights and anticipate churn.
If you offer different pricing tiers with dedicated team plans, you can segment your accounts and specifically identify ones with multiple users. You can then target each team member with NPS surveys to collect feedback.
Learn more: Don’t be another churn statistics, survey enough of the right people.
3. Close the Loop—Quickly
Closing the loop is the process of responding to customer feedback and taking relevant action based on it. Closing the loop is essential to fight churn. CustomerGauge research revealed that companies who don't close the loop increase their churn by at least 2.1% annually.
By ‘relevant action’, we don’t just mean taking steps to resolve the customer’s complaint or improve their experience (although this is crucial, too). It’s also important to inform customers of the action you’ve taken—and quickly. Our research found that closing the loop within 48 hours can increase customer retention by 12%, so swift action evidently helps you fight churn.
4. Keep a Close Eye on Your SaaS Product Usage
Customers that are at risk of churning won’t necessarily inform you. Don’t expect them to send you an email stating that they’re losing confidence and are about to churn. And while NPS surveys can help you identify detractors—who are most likely to churn—surveys won’t reveal insights into customers who chose not to give feedback.
That’s why we stress the importance of an absence of signal as a vital churn indicator. If customers aren’t using your platform or opening customer support tickets, they might be churn risks. Thus, it’s crucial to track usage—namely, by analyzing how customers are using your product—and consistently monitor for declines in usage.
What qualifies as a ‘decline in usage’ depends on your SaaS. Not all platforms require regular use, and some customers may use your platform less regularly by design. For example, a customer that uses an email marketing solution to send a monthly newsletter will use the platform less than a customer that uses the platform for frequent email campaigns.
This is why it’s crucial to consult customer data and understand how different customer segments use your platform specifically. You can then strategically identify value signals and anticipate churn.
5. Build a Complete Picture of Retention with Why and When Customers Churn
While collecting customer feedback is crucial to understanding why customers churn, churn analytics help you elaborate on what you’ve learned by digging deeper into:
When customers churn
Which customers churn
How your customer churn is influenced by other factors, such as customer experience
Historical churn data helps you take action to proactively prevent churn by identifying patterns and predicting churn. In our experience, combining historical churn data with NPS surveys helps companies better understand why a customer is ending their relationship. These insights can help your customers’ pain points, so you can take relevant action to prevent churn from happening in future.
When trying to predict churn, it's useful to segment your customers based on:
Likelihood of a customer or account churning
The revenue value of a customer or account
Segmentation helps you identify which customers are at risk of churning—and which accounts you can’t afford to lose—so you can take preventative action. You can leverage your NPS and historic churn data to estimate churn likelihood—or you can use CustomerGauge to do it for you. Our Account Experience dashboard offers predictive churn analytics:
Where the segments are:
Safe customers, with a small churn likelihood.
Gray-zone customers. You lack sufficient information about these customers to estimate their churn likelihood.
At-risk customers, with a high churn likelihood. You need to focus your retention efforts on these customers.
How the Account Experience Framework Improves Customer Retention
At CustomerGauge, we designed our own voice of customer methodology specifically for B2B brands: the Account Experience (AX) framework.
We found that existing frameworks were not equipped to handle the complexities of B2B customer journeys. That’s why we designed AX, to combine the power of the Net Promoter System with the lifecycle sales and marketing techniques that drive strong customer relationships, fast improvements in CX, and subsequent revenue growth.
You’ll have to download the full book above to truly dive into this subject, but let’s start with the first part of the AX framework: Measure, Act, and Grow.
Here’s more on how each stage ultimately helps you improve retention.
1. Measure
Any successful customer retention methodology begins with measurement, and the AX framework is no different. For B2B SaaS brands that leverage NPS surveys, measurement entails reinforcing NPS with other crucial metrics, such as NRR, expansion MRR, and growth rate, outlined above.
2. Act
The second stage in Account Experience involves taking action through three steps: analyzing customer retention, closing the loop, and setting goals for future progress. When taking relevant action, it’s important to:
Be thorough in your customer retention analysis. As we discussed earlier, B2B SaaS retention metrics, like NRR, don’t always reveal the full picture. When performing retention analysis, be sure to consider multiple key metrics and explore their implications.
Close the loop at every level. It’s important to address issues that could be affecting your customer experience and to close the loop at every level. This includes:
Closing the loop at the frontline. Customer service or customer success teams can determine the root cause of your retention problems, resolve issues, and encourage referrals.
At the management level. Middle management can analyze the performance of your experience program and implement the best practices for improvement.
At the executive level. The C-suite and senior executives can identify strategic problems, structural issues, and investment needs.
Set retention goals. Our research revealed that businesses that set customer experience goals grow twice as fast as those that don’t. You can determine retention goals by analyzing your existing metrics and comparing them to industry benchmarks.
3. Monetize & Grow
Ultimately, your customer retention strategies should lead to meaningful growth. That’s what separates our Account Experience framework from other methodologies. AX helps you get more out of your experience program by linking retention to revenue growth.
Our Account Experience methodology encourages B2B brands to venture beyond simply retaining customers and move towards increasing long-term revenue through upselling, reselling, and referrals. Your most loyal customers—your NPS promoters—are also those most likely to advocate for and purchase from your brand.
However, it’s important to only make recommendations that can genuinely benefit your customers. Don’t push them into upgrading to a higher plan if they don’t need the additional features and limits.
NPS surveys can identify which customers are most likely to recommend your service, but it’s your job to encourage users to act. You can leverage incentives (such as rewards or affiliate programs) to motivate promoters to refer your brand.
Final advice for B2B SaaS leaders driving customer retention
We asked CustomerGauge’s VP of Education, Cary Self, for three tips for someone building a retention strategy. Here’s what he said.
Get your team involved! Just like Account Experience, a retention strategy has to have everyone in the customer journey involved. Communication of the program, sharing of results, and education of why it is important is vital to the program’s success. How many times has a department or person just gone extinct because no one knew what they were doing? Too often!
Do Not Delay! If you are waiting for perfection in your program or all your data to be clean… you have missed the point of a retention program. We are all losing customers because it is not perfect! Or even close. We all have flaws and opportunities to improve. The purpose of the program is not to wait until everything is fixed to maintain, it is to identify what our customers are not happy with and improve.
Show Me the Money!!! I cannot say this enough, if you are not tying your program to what your leadership and investors think is the single most important number, you are going to lack support. Revenue is what all companies use to measure their success and your program should be able to quickly show what impact it has on the bottom line. This was a hard lesson for me to learn, just doing it because it is the right thing to do is not enough. You will not only be able to gain support for your program, but you will be able to have a seat at the table when it comes to the future of your company.
What great points, thank you Cary!
Implement a Customer-Centric Retention Program with CustomerGauge
CustomerGauge’s SaaS customer retention tool helps B2B SaaS companies reduce churn, drive revenue, and leverage referral marketing to grow their customer base. Gartner ranked us as #1 for B2B experience for a reason—we deliver results. Book a demo now to get started.
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