The more, the merrier—a saying that doesn’t just apply to your holiday party, but also to SaaS companies. Everyone is always looking to attract more customers, but how do you actually keep them? Today, we’re looking at customer retention, why it’s important, and how you can go about improving it.

What is Customer Retention

Customer retention strategy is the collection of activities that a company engages in to increase the number of repeat customers and ensure that existing customers remain loyal. The goal is that first-time customers have a positive relationship with your company so they don’t become detractors. Instead, they continue to renew subscriptions and maximize their lifetime value throughout their customer journey.

Why does Customer Retention Matter

Paying attention to customer retention allows you to track how loyal your customers are, identify any potential red flags that pop up along the customer journey, and turn customers into product evangelists. Retention is also a great way to maximize profitability and increase the ROI of customers.

It’s 5-25% more expensive to acquire a new customer than retain existing customers. Furthermore, increasing your customer retention rate by even 5% can increase your company’s overall revenue between 25-95%. Those retained customers are also more likely to remain loyal to your company, meaning they buy more and at a higher frequency than new customers that are just learning the value of your product. Plus, customers that have formed a long-term relationship with your company and understand the inherent value of your product are going to be better advocates singing your praise, referring new customers to your product.

So how do you determine what your company’s retention rate is to start reaping these benefits? More below!

How do you Calculate Retention Rate

Customer retention rate is the percentage of customer retained over a specific period of time.

The basic formula for retention rate:

(Number of Customers at End of Period — Number of Customers Acquired During Period) / Customers at Start of Period] x 100

First thing you have to do is determine the period of time you’re interested in understanding. It could be a month, quarter, or for the entire year.

Let’s start with an easy example. Say you’re interested in finding out your retention rate for the last year. In January you started with 50 customers, over the course of the year you added another 15 customers, and by the end of December you had 60 customers. Your customer retention rate for that year would be 90%— [(60-15)/50]x100. This means that 90% of the customers you had and acquired over the year remained with your company.

You can also compare retention rates across different time frames to help determine the success of new retention strategies. For instance, say your retention rate for the first quarter of the year was 75% and then your team decided to implement a new onboarding strategy for Q2. All other things being equal in the company, if your retention rate for Q2 was 83%, you could say the onboarding strategy had a positive impact on customer retention.

Although, pinning down the exact impact different company efforts have on customers isn’t such a straightforward measure, it’s still important to try so that you can track your retention and validate the success of different strategies.

What’s a good retention rate?

This depends on a number of factors, including your industry, company maturity, and sales cycles. Obviously, the best case scenario is that you retain 100% of the customers that sign your contract. That won’t always be the case though. It’s important to understand industry guidelines and benchmarks to ensure that your company remains competitive in the market.

Average customer retention rates by industry:

  • Retail: 63%
  • Banking: 75%
  • Telecom: 78%
  • IT: 81%
  • Insurance: 83%
  • Professional services: 84%
  • Media: 84%

Industry benchmarks give you a starting place to understand where you fall in the market. From there, it’s good to track and compare your metrics to your own past performance. This way you can see where your company is falling short and where you’re having clear indications of success.

5 Kinds of Customer Retention Analytics

A data-driven retention strategy can have a massive impact if used properly. However, due to the complexity of diagnostics, many companies don’t always take full advantage of their customer data. In fact, McKinsey found that executive teams that make extensive use of customer data analytics across all business decisions see a 126% profit improvement over companies that don’t. Let’s take a look at five common customer retention analytics that companies use to track and understand how their customers are moving through the customer journey.

Predictive Analytics

This is the most commonly used analytic. Predictive analytics helps you predict how your customers are going to behave in a future, specific situation. The behavior in question could include churn reduction or renewal risk. Although the model is never 100% accurate, using data pulled from past customer behavior and market trends allows the predictive model to be helpful for understanding likely outcomes that your team can proactively prepare for.

Prescriptive Analytics

Prescriptive analytics is one step past predictive analytics. Where the predictive model only outlines potential behavioral outcomes, the prescriptive model prescribes, or recommends, a course of action based on that predicted customer behavior.

Descriptive Analytics

Where prescriptive analysis looks to the future of customer behavior, descriptive analytics focuses on understanding customers’ past trends and behavior patterns. Historical data is compared and contrasted in order to understand what behaviors are most common for a segment of your customers. This type of analysis is often used when comparing customer behavior month-to-month or year-to-year to uncover long-term trends.

Outcome (Consumption) Analytics

The type of analysis is focused on understanding how your customers consume, or use, your product and what affect this has on your company outcomes. The outcomes you could be trying to optimize could include sales efforts, marketing expenses, or improving customer engagement. The general idea is that you narrow your focus to a set of behavior that may be unusual, like a certain industry purchasing software outside of normal renewal patterns, and then digging in to learn that the industry has new laws. So you can take the learnings from that specific industry information to adapt sales and marketing tactics to increase buying potential for that group of customers.

Diagnostic Analytics

Diagnostic analysis revolves around the why of customer behavior. This could include looking into the why behind usage trends, churn analysis, or even customer health analysis. For instance, why do customers purchase one product over another, or why did one segment of customers churn? Once you run a diagnostic analysis to help determine causal relationships for past behaviors and outcomes, you can better address future behavior.

How do you Improve Customer Retention

For the most part, maintaining and improving customer retention falls under the jurisdiction of Customer Success Managers (CSMs). Their main goal is to provide support for customers as they transition from the sales pipeline (prospects) to the support pipeline (active users). They’re typically responsible for maintaining customer loyalty, upselling existing customers to new features within the product, fostering long-term relationships with their customers, and ensuring that their customers are achieving the goals they were looking to achieve when purchasing your product.

Tall order, right? And it all feeds directly into customers being happy enough with your product to be retained. So what are some strategies CSMs can do to help foster that retentions?

Set customer expectations

When looking at retention rates, customer success teams are your company’s main drivers of loyalty. They’re the one on the front lines, solving key problems and empathizing with customers to ensure they feel valued and happy with your product, rather than frustrated and more likely to churn. It’s important for CSMs to be proactive with their communications to customers to set and manage expectations so they have a positive experience and are more likely to keep using your product over a long period of time.

Map out the customer journey

A customer journey map is a visual representation of the customer experience with your product. It covers all the different touchpoints customers have with your product with the goal of outlining customer motivations, key interactions along their journey, and areas of existing and potential product friction. By understanding these events, teams can better address current issues and make product improvements for a smoother customer experience. The happier customers are with your product experience, the more loyal and likely they are to be advocates for your company.

Collect customer feedback

With the market for SaaS products more competitive than ever, your prospects and customers have many alternatives to using your software. One of the most effective strategies is to constantly improve your customers’ experience by making the most of the user feedback that they provide. After all, they’re the ones using your product every day.

In addition to making your product better, responding to your users’ feedback will keep those users more engaged. By showing them that you listen to their input and that your product is a living, constantly improving thing, they’ll feel like a valued collaborator and want to stick with you to help your company grow.

Conclusion

While your customer retention rate isn’t likely to drastically improve over night, you can put clear strategies in place to elevate your product over time. Understanding the experience customers have with your product, setting expectations, and removing friction points are all ways to improve the relationship your customers have with your product. By keeping customers happy and engaged with your product, you’re increasing the likelihood that they will remain loyal and become a champion for your company. The dedication and hard work you put in for your customers will pay off in the long-run.