Leveraging customer churn and retention leads to higher customer lifetime value. That's because retained customers spend 67% more than new customer, according to a 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.
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?
- Core Retention
- Proxy Retention
- Customer-Centric Metrics
- Customer Churn
- Voluntary Customer Churn
- Involuntary Customer Churn
- User Activity Metrics
- Monthly Recurring Revenue Churn
- New Business MRR
- Expansion MRR
- Contraction MRR
- Churned MRR (MRR Churn)
- Gross Revenue Churn
- Net Revenue Churn
- Customer Lifetime Value
- Cumulative Cohort Revenue
Churn and retention metrics can be looked at from two different directions. You can examine it in terms of the percentage of customers who have unsubscribed from your service. Or you can look at from the other side, examining retention, or how long a customer stays with one of your services on average.
Core retention simply measures the total number of users who are still with you after a certain period of time has passed. So, you might ask yourself the question, “Out of the new customers we onboarded three months ago, how many are still subscribed today? What about six months ago? A year ago?”
The longer someone stays subscribed to one of your products, the more likely they are to continue subscribing. This is especially the case for subscription services marketed to other businesses. After all, once these businesses have found a solution that meets their needs, they’re likely to stick with it unless a competitor offers a clearly superior alternative.
By dividing your customer base into different cohorts and examining how core retention is impacted, you can discover a great deal of valuable information that can help you refine your offerings and market them more effectively.
Leveraging the power of Core Retention
For example, you may discover that everyone who is signing up with your service through a particular Facebook ad stays with your service noticeably longer than others.
If that’s the case, it would be wise to put more money into that ad. Or you may want to examine what sets it apart from others. Is the copy unique? Is the featured image particularly striking? Does the call-to-action stand apart?
This kind of research may also reveal something unexpected, like a demographic trend that’s due to the social media platform you’re using to advertise. Perhaps the reason that your Facebook ad is performing better than other marketing efforts is because of the kinds of people who populate it.
While most people think of voluntary churn rates as the golden churn metric, the reality is that core retention metrics can be just as valuable, if not moreso. After all, they give you insight into why people are staying rather than leaving. And if you do more of the things keeping people subscribed, you’ll automatically reduce churn.
While proxy retention is similar to core retention in that it focuses on the customers you’re keeping rather than losing, it’s focused on actions that subscribers take rather than the bare fact that they’re still subscribing.
Take HBO Max or another video streaming platform for example. They don’t just want subscribers. They want subscribers who consistently watch content on their platform. If someone is watching fifteen to twenty hours of their content every month, it’s highly unlikely that they’ll churn unless something drastic happens.
By staying aware of proxy retention, you’ll be able to note trends that point toward churn before it happens. Then, you can develop strategies to mitigate it. You may even be able to win back churned customers by pinpointing the reasons they left to begin with and following up with effective messaging.
Leveraging the power of Proxy Retention
If you’re going to use proxy retention metrics to your advantage, you’ll need to decide what should be measured. Every business will differ when it comes to the specifics here, but you might get a hint at what you should be looking for by asking yourself questions like:
- What are the actions that my users have available to them via my platform? Are they consuming content? Downloading files? Using an app?
- Which actions are my users regularly performing on my platform?
- What’s the average level of activity that I’m seeing in each area of my business?
After you’ve identified your customers’ key actions, you should monitor them, noting when they begin to move in particular directions. Then, put follow-up messages in place to remind your users of your business’s great features, share upcoming additions, and more.
If you can use proxy and core retention metrics to your advantage, you won’t need to win back churned customers as often since they’ll be less likely to leave.
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)
= 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.
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.
Customer Lifetime Value (LTV)
While customer lifetime value isn’t the silver bullet many business owners seem to think, it is a valuable metric nonetheless. Customer lifetime value attempts to put a price tag on your average customer, letting you know exactly what they’re worth to your business.
So, how do you calculate customer lifetime value?
LTV = Average revenue per user / MRR churn or customer churn
Once you’ve calculated your LTV, you can compare it to your customer acquisition cost (CAC) to see whether you’re marketing efforts are truly paying off. If they aren’t, you have a handful of ways to boost LTV.
How to Increase LTV
One of the easiest ways to increase LTV is to cultivate upsells and cross-sells. Research has shown that you’re 60-70% more likely to sell to a current customer when compared to new customers. So, send out some marketing e-mails targeting your current customers and letting them know about the additional benefits they might enjoy from a higher tier of service.
In addition to upselling, you can increase LTV by developing and offering new products. This can be especially effective if you create new services that complement your current offerings. For example, an SEO platform could offer a marketing service that works synergistically with the payment platform. If the small business already knows and trusts the SaaS provider, they’ll be more likely to purchase a related service. This is exactly what Semrush has done.
Cumulative Cohort Revenue (CCR)
In the past, many businesses have focused almost exclusively on the lifetime value of customers (LTV). They assume that as long as their LTV is moderately higher than their customer acquisition cost (CAC), then success can’t be far off. But churn and retention aren’t that simple.
There’s a better way to calculate the relative health of your business: cumulative cohort revenue (CCR).
CCR is the total revenue you’ve brought in over a period of time from a particular group of customers that began subscribing to your services at the same time.
For example, you may want to determine your CCR over a twelve month period. Here’s how you’d do it:
1 Year CCR = CCR for cohort in question at the end of the year / Total amount spent on sales and marketing during the cohort’s first month
By calculating your CCR, you’ll get far better insight into the impact churn and retention are having on your business. This will give you the actual amount of return you’re getting on that initial marketing investment.
In addition, you can compare cohorts across time in order to see how the health of your business is changing.
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.