Retention Metrics to Reduce Churn and Win Back Customers

Leveraging customer churn and retention leads to higher customer lifetime value. That's because retained customers spend 67% more than new customers according to the Bain & Company study, often refer their friends to your platform, and, especially for B2B companies, are more willing to pay a premium than switch to a competitor.

Scott Hurff

Scott Hurff

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The right retention strategy is key to growing your SaaS and increasing its valuation. In fact, according to a study by global management consulting firm Bain & Company, a 5% increase in customer retention can boost your profits between 25% and 95%. 

However, to retain customers, you must have the right insights to build loyal relationships with them:

  • When do they churn?
  • How quickly do they churn?
  • Why do formerly loyal customers leave your SaaS?

The answers to all these elements and more will shape your customer retention strategies, and to answer them you will need to utilize retention metrics. Understanding these retention metrics is critical for long-term business planning and growth.

Why is It Important to Understand Retention Metrics?

Leveraging customer churn and retention leads to higher customer lifetime value. That's because retained customers spend 67% more than new customers according to the Bain & Company study, often refer their friends to your platform, and, especially for B2B companies, are more willing to pay a premium than switch to a competitor.

Retention metrics give you insight into who your customers are and what they need most. 

Without this information, how can you effectively manage your marketing campaigns, customer journey, customer experience feature development, and sales processes?

What Are the Key Customer Retention Metrics We Will Look At?

Customer-Centric Metrics

  • Customer Churn

    • Voluntary Customer Churn
    • Involuntary Customer Churn
  • User Activity Metrics

Revenue-Centric Metrics

  • Monthly Recurring Revenue Churn 

    • New Business MRR

    • Expansion MRR

    • Contraction MRR

    • Churned MRR (MRR Churn)

      • Gross Revenue Churn
      • Net Revenue Churn 

Customer-Centric Metrics

Customer Churn

Customer churn is the percentage of users who unsubscribe during a given period. It can be calculated using the following equation:

Customer churn =

(Users at the beginning of time period - users at the end of time period) 
———————————————————————
users at the beginning of time period  

Here's an example: (1000-900)
———————————————————————
1000
=  10% customer churn

This metric serves as the best indicator of the health of the business, current and potential growth. It can also be used to calculate the average customer lifetime value. In addition, segmenting customer churn by subscription level can indicate how well priced your service is.

Customer Churn can be further broken into:

  • Involuntary Customer Churn
  • Voluntary Customer Churn

Involuntary Customer Churn is the percentage of users whose subscriptions have been terminated due to payment failure. For example their accounts are cancelled due to unsuccessful repeat credit card charges. 

Involuntary churn =

number of involuntarily churned users in time period 
———————————————————————————
total number of churned users in time period

Why is the calculation of Involuntary Customer Churn useful? This metric can be an indication of a faulty payment process. It's best to look at this metric in terms of how high or low your product's touch is.

Voluntary Customer Churn is the percentage of users who leave of their own free will.

Voluntary churn =

Number of voluntarily churned users in time period
  ———————————————————————
total number of churned users in time period

Why is the calculation of Voluntary Customer Churn useful? This metric tells you how many customers decide to leave your SaaS. It's important to survey customers when they leave to find out the reasoning behind their decision. 

With Churnkey, you not only have the ability to survey customers when they leave, but you can also offer them incentives to stay based on their answers to your questions.

How to Reduce Your Customer Churn Metric

Your first step is to find out why your customers are churning. The Churnkey Audit will give you the answers you need at this critical customer touchpoint. With this information, you can adjust your approach:

  • Encourage your customers to pause their subscription instead of canceling. 
  • Create an annual subscription plan. The more customers commit to your SaaS solution, the more time you have to prove your value proposition. 
  • Get serious about creating a customer retention strategy, here's our advice on reducing churn.

It's important to know when your customers will churn, and this is where measuring user activity comes in.

User Activity Metrics

Churn is often preceded by a drop in user activity. Therefore, user activity metrics give you insight into churn prediction; which of your users are using your SaaS regularly and who may be about to churn.

You can take the measure of Daily, Weekly or Monthly Active Users. Which you choose depends on your product or service.

For example, if your SaaS value proposition is to deliver daily usage, such as a workflow organizer or team communication platform, you should look at Daily Active Users.

Setting an activity benchmark for your users will alert you when they're disengaged, and will flag when you need to act quickly to prevent them from churning.

How to to Increase Your User Activity Metrics

The key to increasing user activity is customer engagement:

  • Announce features and improvements or share parts of your product roadmap.
  • Make sure you have the right marketing channels that encourage ongoing engagement with your users. 
  • Write better copy. Copy acts as a salesperson, customer service agents, and support team members. It's important to write in a way that keeps your customer involved.

Revenue-Centric Metrics

Monthly Recurring Revenue (MRR) 

MRR is your total monthly revenue derived from recurring subscriptions. The metric combines both annual and monthly subscriptions. MRR can be calculated as the total recurring revenue generated by your existing customers. 

You can divide MRR into four types:

  • New MRR: MRR gained through the acquisition of new customers.
  • Expansion MRR: MRR gained from users upgrading their subscription.
  • Contraction MRR: MRR lost due to users downgrading their subscriptions.
  • Churned MRR (MMR Churn Rate). MRR that is lost when users cancel subscriptions. Let's take a closer look at MRR churn below.

Monthly Recurring Revenue Churn 

While customer churn focuses on the number of users who leave your SaaS within a given time period, MRR churn focuses on how much MRR has been lost due to cancelled or lost subscriptions, resulting from both voluntary and involuntary customer churn.

For most SaaS companies, this number will differ from customer churn if you offer subscriptions at different price points, e.g., free, standard, premium. 

MRR churn serves as the primary metric for SaaS product development because it measures the total erosion of recurring revenue.

MRR Churn =

(MRR at beginning of month - MRR at end of month) - MRR in upgrades that month
  ———————————————————————
MRR at beginning of month

Gross MRR churn is the percentage of revenue lost from users who have churned (MRR churn) and users who have downgraded their subscription (Contraction MRR). This metric evaluates the total MRR loss.

Gross MRR Churn =

(MRR Churn + Contraction MRR)
———————————————————————
Total MRR at start of billing period 

Net MRR Churn is the percentage of revenue lost from MRR Churn and Contraction MRR minus the MRR gained by users upgrading their subscriptions (Expansion MRR). This metric evaluates the relative MRR loss.

Net MRR Churn =

(MRR Churn + Contraction MRR) - Expansion MRR
———————————————————————
Total MRR at start of billing period 

How to Reduce Your MRR Churn Metric

Similar to Customer Churn, your MRR churn metric should impact your retention strategy:

  • Reduce Involuntary Churn: Implement a card dunning solution to implement smart payment processing methods. 
  • Reduce subscription cancellations: Again, it helps to find out why customers are churning and keep them from doing so. Did they have a bad customer service experience? Did they not find your new features useful? Was your price point too high? Answer all of these questions with Churnkey
  • Increase customer engagement. Statistics show that customers who are fully engaged are 23% more likely to experience profitability, revenue, and relationship growth.

Diagnose the Source of Your Churn and Win Back Customers

Retaining customers is the best way to expand your SaaS, but you can’t improve what you don’t measure. 

Building a retention strategy can be a daunting task. Using the right metrics to diagnose where retention issues are coming from will ensure your strategy is effective. 

Let Churnkey’s team of experienced SaaS operators perform a free audit to pinpoint where you should start to reduce churn so you can take action and learn how you compare to your competitors.

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