Explore what you need to build and implement a solid retention strategy for your SaaS business. Reduce churn, foster relationships with loyal customers, and drive growth with visibility over the metrics that matter.
Successful SaaS businesses implement growth strategies across customer acquisition, retention, and expansion.This is to say, they learn how to:
This guide is all about part two of that journey, retention.
Buckle up, we’re taking you through everything you need to build and implement a successful (and compliant) retention strategy, including:
SaaS retention is a measure of how well your business retains customers (or subscribers) over a period of time. You can measure retention in different ways, looking at the percentage of customers you keep versus those who churn or by looking at the growth or contraction of your recurring revenue.
There are a number of other SaaS metrics that provide leading indicators about the health of your retention strategy and subscription revenue, including customer and revenue churn, payback period, and customer lifetime value (CLV).
Retaining customers is crucial for SaaS businesses. Not only does it indicate the value your customers are getting from your product and whether they’re happy with the service you provide – successfully retaining customers can supercharge your growth. Here’s why:
It costs five times more to acquire a new customer than it does to retain an existing one, or so the saying goes “i”. While this particular statistic has become somewhat of a SaaS urban myth, 70% of companies do recognize that it’s cheaper to retain customers than it is to acquire them.
Increasing retention also helps you keep those acquisition costs in check. Acquiring customers costs money, and if you lose them just after they join you, it’s unlikely you’ll see the return on that investment. The best way to track this is by using the Customer Lifetime Value (CLV) to Customer Acquisition Cost (CAC) ratio. Here, a ratio of 1:1 would mean that you break even because the customer pays you exactly the same amount that you paid to acquire them. The benchmark for this ratio is 3:1 - where over their time as a paying customer, a user pays you three times more than it cost to acquire them. 💸💸💸
Did you know?
According to ProfitWell research, SaaS businesses with the highest CLV to CAC ratio generate 20-30% of their monthly revenue from existing customers.
Retaining and growing your existing customer accounts is key for sustainable and long term SaaS growth. The kind of growth that ultimately leads a business to become profitable.
In fact, research shows that increasing customer retention rates by 5% can increase profits by 25-95%.
If you look at some of the most successful SaaS businesses to IPO in recent years, retention was core to their achievement. We know this from looking at the Net Revenue Retention rate of those businesses - some just shy of 160%! For context, an NRR of over 100%, means that a business continues to grow even without acquiring any new customers.
Retaining customers is key to unlocking the third step on the SaaS growth journey, expansion revenue (which can actually drive retention even more in the long run).
Firstly, you can keep adding value for your loyal customer base and encourage them to upgrade or pay for access to additional products, features, or services. For example paying extra for Netflix so you can watch that murder documentary on one device, while your partner catches up with their favorite sitcom on another. Or, persuading your manager to add more seats to a tool like Miro so you can collaborate more effectively (and maybe even avoid yet another zoom meeting).
Knowing that you have a set of loyal customers who aren’t going anywhere also gives you the stability and steady recurring revenue needed to pursue new avenues for growth, like serving new customer segments, or expanding into a new market.
Did you know?
Research by Profitwell found that customers who have at least one add-on have a 20-50% higher CLV than those that don’t.
The power of retention isn’t new, yet only 40% of companies have an equal focus on both customer acquisition and retention. So, let’s look at what exactly you can do to build a solid retention strategy.
Involuntary churn is when a customer churns without intending to. This can happen if their payment fails and it leads to subscription cancellation. In these situations, the customer didn’t fall out of love with your product, or intentionally stop paying their subscription fee – but you still risk losing them completely.
In fact, involuntary churn accounts for 20%-40% of SaaS churn. That’s an astonishing number, and bear in mind that these are customers (and revenue) lost every month that don’t actually want to stop using your product.
It can be a silent assassin for SaaS businesses. But it’s also avoidable if you take the time to understand the churn in your business and find out:
From here, you can put measures in place to reduce or - even better - prevent it.
Payments fail for a number of reasons, from insufficient funds to incorrect payment details to fraud.
Firstly, different payment methods are more likely to fail than others. Payments that are taken from a direct source of funds, like a digital wallet or bank account are far less likely to fail than credit card payments. At Paddle we see payments made by credit card have twice the proportion of failed payments than those that run through PayPal.
The most common reasons for card payment failure are:
So, now we know a bit about why payments fail, we can look at how to stop them from becoming a problem. The tactics for which come down to two things:
For more on how to reduce involuntary churn, check out our guide.
Your subscription experience needs to support your business goals and meet the needs of your customers.
For the business this means:
For your customers it means:
Creating a winning subscription experience that ticks these boxes starts with a deep understanding of how your customers want to pay for and interact with your product.
Once you understand what your customers want from your subscription experience, you can start to think about how you can use subscription management to prevent churn and increase retention.
Here’s what some of those tactics might look like:
Here’s our Subscription Senior Product Manager, Rebecca with more on using subscription management to reduce churn and increase retention.
Founded in 2017, Kaleido is now a global SaaS company with customers in over 180 countries. In 2021, it was acquired by the graphic design platform, Canva.
Along its rapid growth journey, Kaleido implemented new features and optimized processes that helped increase retention and reduce involuntary churn by 38%. Here’s what they did:
Even if your product is great and your customers love using it, a lack of customer support if something goes wrong will quickly turn an advocate into an ex-customer.
Rather than wait for something to go wrong, you should concentrate on building lasting relationships with customers throughout the entire customer lifecycle. This way, you give yourself the opportunity to reinforce the value of your product at different points and help your customers get the most out of it. Regular communication and feedback from your customers also give you the chance to spot and resolve any problems early on – before they lead to churn.
Here are some ways to foster lasting relationships with your customers:
Managing customer retention effectively is a complex challenge that adapts and changes as your business grows. You should view your retention strategy as a developing process that will change over time.
Speak to your current customers and find out what they like about your product, and what they don’t. What other features would they like to see? Is there something that would help them get even more value from it?
You should also ask departing customers for feedback to find out what happened, what features were missing, and what solution they plan on using instead. This gives you the best chance of addressing the problem - and once you have, you can target these customers with win-back campaigns that remind them how great you are. 👌
Retaining more customers means capturing more recurring revenue, which is great! But extra revenue and larger transaction volumes actually mean more than just more money in the pot at the end of the year.
It means more (and different types) of data to manage. It can also mean that your business is more likely to breach sales tax thresholds, with customers from different regions, with different financial regulations.
All of which is easier to manage if you plan ahead. So, here are some things to think about.
Firstly, how will this extra cash and additional transaction volume impact your sales tax liabilities with jurisdictions around the world?
Sales tax on software is dependent on where your customers are based, not just where your business has a physical presence - so it’s important to understand the regulations everywhere you operate before your business surpasses any threshold for sales tax.
Once you know where you’re liable, you’ll need to register with the sales tax authority in each jurisdiction, before filing and remitting sales tax payments accordingly.
Check out our Sales Tax Agony Index 🌶 for more on the different regulations around the world.
If you have customers from different markets, you also need to consider the local financial compliance regulations. Examples include PSD2 in Europe or 3DSecure -the requirements for which can even change by region.
Here’s our Senior Payments Product Manager, Quinisha Anderson with more.
There are a number of SaaS metrics that will help you measure the success of your retention strategy.
Choosing the right metrics will depend on how you’re trying to improve retention. You see, some businesses might be trying to address a churn problem, where others are focused on adding value to increase retention and customer lifetime value. Yes, there’s crossover but understanding what you’re trying to achieve is key. Your overall business’ goals, your company stage, the industry you’re in and the customers you serve should also help inform which metrics will be the most useful.
Here’s some to consider:
Once you know which metrics to track, you need to make sure that your revenue infrastructure is set up to give you that information. For this, your user and revenue data need to be connected - which means integrating all of the potential sources.
Some businesses build this in-house through their own reporting systems, others use the reporting functionality in their payments and billing tools, while others employ another tool, specifically designed for reporting and analytics.
To reduce churn and increase retention effectively, your revenue infrastructure needs to strike the balance between flexible subscriber experience and efficient business processes that help you take action before it’s too late.
For this, you’ll need a number of systems working seamlessly together, including:
This is your revenue infrastructure. And broadly speaking, there are three main ways to building one for your business:
To help you understand what exactly is required to build a robust revenue infrastructure, we’ve put together this guide - complete with checklist.
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Learn how we can help you run and grow your software business with Paddle. Get in touch with the Paddle team today.
Paddle has been an integral part of our enterprise journey, providing support with billing and licensing deals that has helped increase our global revenue growth.
Sandra Tandowsky VP of Operations