Learn how to properly track these important SaaS Metrics and better understand what they mean for your business.
If you’re in the SaaS industry, you probably hear the terms gross retention, net retention, and logo retention every day. In every healthy SaaS business where customers pay a subscription regularly, you want to be able to track their churn rates and have a clear picture of your revenue.
Not only that, but if you wish to work with investors at some point, one of the first things they consider is your Growth Revenue Retention (GRR) and your Net Revenue Retention (NRR). These will determine how well you retain customers and thus the revenue they bring to your business in the long run.
We’ll use the quote by Alex Schulz to give you the big picture: “Retention is the single most important thing for growth.” In other words, if you don’t provide excellent products that customers would be happy to pay for on a steady basis, your business won’t survive.
At ChurnKey, we value retention as a critical parameter to a healthy growing SaaS business. That’s why we help you retain more customers with customized offboarding experiences.
In this guide, you’ll learn:
Revenue retention allows you to keep track of your revenue on a monthly or yearly basis. High revenue retention rates indicate that your business is healthy and driving growth from existing customers while acquiring new ones.
Picture this: you’re a SaaS business that wants to track its yearly revenue. If you manage to retain all your current customers, but they’ve downgraded to lower packages, your revenue will be affected. That’s why it’s essential that you track the churn and retention on a steady basis.
Revenue retention is further divided into 2 categories: growth retention revenue (GRR) and net retention revenue (NRR). To measure GRR and NRR, it’s important first to calculate your monthly (MRR) or annual (ARR) recurring revenue.
To do that, you just have to multiply your monthly prices with the customers that purchased your services. So, for example, if your software costs 10$ per month and 500 people purchased it, your MRR will be $5,000. Easy, right?
Understanding how revenue retention works will have a massive impact on handling finances and customers long term. In particular, by tracking revenue retention, you’ll be able to:
Put simply, net revenue retention includes upsells, downsells, and revenue losses within the current base of customers. NRR is like a macro metric for SaaS businesses that focuses on getting the most out of existing customers, as they spend 67% more than new customers. So the question is: how to calculate net revenue retention?
Net revenue retention is calculated by the MRR of the start of the month (plus expansion) minus the churn and contractions, divided by the MRR of the start of the month. The NRR formula, if done correctly, will provide results ranging between 60% (bad) to 150% (excellent).
NRR = (MRR at the start of the month + expansion - churn - contractions) / MRR at the start of the month
So, let’s say that your business’s recurring revenue (MRR) for December is $100,000, and by the end of the month, your revenue increased by $8,000 (expansion) to $108,000. Your SaaS business exits December with a $5,000 churn due to expired contracts. If you apply the net retention formula, you’ll find that your net revenue retention rate for December is 103%.
NRR in business finance is an important metric as it indicates what revenue a business would generate if it didn’t acquire new customers. However, it’s not a safe metric when tracking churn rates because you may be losing customers but still generating a growing revenue from up-sells, cross-sells, product updates, or price increases.
Gross revenue focuses more on retention by excluding expansion. So it basically eliminates additional revenue from up-sells, cross-sells, or price increases.
To calculate gross dollar retention, you apply the same formula we described on net retention; only now you exclude expansion. In the gross retention vs. net retention battle, gross retention rates can never exceed 100% and are always equal or lower than net retention rates.
GRR = (MRR at the start of the month - churn - contractions) / MRR at the start of the month
So, for example, a SaaS business generates 100.000$ in revenue in December. By the end of the month, it has a 5.000$ gross churn due to contract expirations. By following the gross retention formula above, the gross retention rate will be 95%.
GRR should not be confused with logo revenue retention. Unlike gross revenue retention, logo retention focuses on customer count, not customer revenue.
Logo retention, also known as customer retention, is measured by the number of customers a SaaS business lost over a period of time divided by the number of customers at the start of this specific period.
Customer retention rate = 1 - (# of customers lost in the period/ # of customers lost at the start of the period)
So, let’s say your business entered December with 100 customers and exited with 6 churned customers. Your business has a 96% customer retention rate.
Customer retention allows you to focus more on customer and product experience. However, due to its limited financial tracking of customers, logo retention is often misleading on the revenue impact of churned customers and their overall quality.
That’s why it’s often used in combination with net retention to give a holistic approach to customer dynamics. Churnkey offers you a competitive advantage in preventing customers from quitting their subscription while providing insights on their churn.
As mentioned before, logo churn focuses on how many customers canceled their subscriptions over a period of time, while revenue churn calculates how much revenue was lost by those customers that canceled or didn’t renew their subscriptions.
While you want to avoid both numbers being high, you also want to consider the following scenario. Let’s say that you decide to raise your prices on your subscription plans, and you lose customers - therefore, your logo churn is high. If you look only at your logo churn, you’ll probably think your pricing strategy is wrong. However, if you calculate your revenue churn and your revenue generated by the remaining customers is higher, then you’ll realize that your overall strategy is correct.
In conclusion, you want to keep an eye on both metrics and avoid making the mistake of focusing solely on one. They’ll both provide you with the data for effective decision-making.
Ok, now you understand the importance of calculating revenue retention, and you’re ready to implement it on your SaaS business. However, there is still one problem: how will you optimize your retention rates?
At the end of the day, we want to highlight that it all comes down to satisfied customers. Customers need to be heard, appreciated, upgraded, and above all, satisfied with the product. So, without further ado, to optimize your revenue retention rates, you need to:
You always need to be one step ahead, tracking customers’ usage and software engagement, to provide immediate solutions to their needs before they appear. No one likes losing big customers. That’s why you need to follow or create the trends to encourage product adoption.
Data, data, data! They are your best ally and indicator of success. They help you
identify the best times to release new products, expansion opportunities, and customer satisfaction levels. They will take you by the hand to approach new and existing clients and offer frequency and quality.
Customer loyalty isn’t given; it’s earned. You built it through actual customer relationships, value, and outstanding experiences. Their satisfaction should be your number one priority, whether you invest in it with your revenue (5%-15% of it ideally) or establish customer success teams inside your business.
First impressions count, we all know that! Not only do they help with revenue generation, but also with eliminating customer churn along the ride. So you want to invest in a fantastic user experience and, of course, create a problem-solving product for your clients’ needs.
As we said before, nobody cares about impressions and fluff if the product is terrible. A great product experience speaks for itself and makes the sales and marketing teams work much easier. Provide quality solutions to your customers’ problems, and they will reward you with sales.
You might want to consider offering alternatives to churned customers to avoid cancelations and revenue churn. For example, a small discount or a plan downgrade suggestion might lose you some revenue, but it will save you the 100% cancelation. You might want to consider adopting these tactics for gaining new customers as well, or at least limiting them to large existing customers that are promising for your business. Use Churnkey to provide dynamic offers specifically for preventing churn.
Loyal customers are constantly trained to expect something more. So, don’t disappoint them! Instead, make sure to do everything in your power to please them. From plan upgrades to gifts and bonuses, those gestures will keep them happy for a while.
Having the perfect customers is not always the case. In fact, it’s usually quite the opposite. It might be odd, but customers don’t necessarily know what they’re buying, and your software might not be the solution to their problem. So to avoid irrelevant purchases and customer churn, try to be as transparent as possible about what you’re offering and who’s ideal for.
Expansion not only helps you reduce your churn but also generates more revenue from existing customers. Invest in add-ons, up-sells, cross-sells, price increases, and product updates, and then market your solutions effectively to your clients. You’ll find out that prevention is not the only way to cancel out the effects of churn.
As a general rule of thumb, focusing on doubling your strength is far better than working on your weaknesses. If your business can’t support, for example, a customer success team, focus instead on expansion tactics to boost your revenue retention. Think creatively, and don’t limit your business. The solutions are endless!
And there you have it! Your ultimate guide on retention and ways to optimize it.
You’re now ready to eliminate your churn and focus on customers and revenue!
Ready to step up your retention game? We got you! At Churnkey, we care about your growth, and we help you retain more than 30% of your customers with offboarding experiences. Get started now for free!