So you have created your B2B SaaS product and launched your company successfully.
You already have your customer acquisition channels in place and have begun to use them to generate leads. You have spent quality time creating B2B SaaS marketing content to nurture these leads. Your prospects have moved down your sales funnel and are interested in your software. Some have even purchased it already.
You have spent a lot of time, effort, and money to acquire customers for your SaaS company. What’s next after this?
I’ll answer that for you.
Customer acquisition is just the first step to a profitable partnership between your company and its customers. In the present SaaS market, companies are not only concerned with growing fast anymore. They’re more interested in keeping the customers they already have because it has been established that retaining customers is a cost-effective strategy for encouraging continual growth and sustainable success.
What is SaaS Customer Retention?
Customer retention simply means getting a customer to engage with your services and/or products so much that they become long-term users. The engagement of long-term users with your company increases their lifetime value (LTV) as they become more likely to bring in more customers through word-of-mouth promotion/referrals.
The ability to scale your SaaS company depends majorly on your ability to retain existing customers for a long time. Existing customers impact a company’s revenue significantly more than new customers do. This is because they require lower costs to be effectively maintained and, because they trust the company, they will spend more money on their purchases.
If you don’t try to retain your existing customers, there’s a very good chance that you’ll incur a loss as you acquire more customers. If your customers ‘leak out’ before completing enough payment rounds to be at equilibrium with your customer acquisition costs, your growth efforts will prove unproductive.
Why is Customer Retention So Important, Anyway?
Here’s a little illustration to help you understand just how important customer retention is for a SaaS company.
Imagine your SaaS company was a plastic bucket. Customer churn causes your bucket to have holes through which existing customers and recurring revenue leak out. Now, while it is very important to obtain more customers to fill the bucket (customer acquisition), it is even more important to plug the leaky holes. Your effort to plug these holes is known as customer retention.
The formula to calculate customer retention rate is as follows:
Customer retention rate = (X number of customer at end of time ÷ Y number of customers at start of time) x 100
For example, you have 500 customers on February 1st. By August 31st, about 350 customers are still paying for your SaaS product. According to the formula, this is a 70% customer retention rate.
Note that you shouldn’t include new customers in your customer retention rate measurement. The point of measuring this rate is to know the number of people who keep renewing their subscriptions and/or contracts. The cost of customer acquisition is high in the SaaS industry. If you want to make profits, you have to make sure that your users renew their payments at least three times.
It has been estimated that if a SaaS company loses 2–3% of its customers every month, they need to grow by 27–47% each year to maintain the same revenue.
If a strong customer retention strategy isn’t implemented, the average SaaS business will lose 20% of its customers every year. This customer churn can get as high as 80%.
Customer churn has the power to destroy any business. A 2018 study conducted by CallMiner found that customer churn costs companies about $136 billion each year. That’s a lot of money!
To fully understand just how devastating customer churn can be for a business, let’s use hard numbers for a second.
Say, your SaaS company’s average contract value is $40,000. This means that if your company loses 10 customers each year valued at $40,000 each to customer churn, your company will lose $400,000 annually.
That’s not all. In addition to the annual cost of recurring revenue, your company might still lose renewal income or upsell deals. The probability of upselling to an existing customer is 65% approx., while the probability of convincing a new lead to buy is only 13%. This means that for every user lost to customer churn, your SaaS company loses out on a 65% chance of a new upsell (or cross-sell) opportunity.
Let’s say your organization has an expansion revenue goal of 25%. If you churn $400,000 in recurring revenue, you will also lose $100,000 in expansion revenue.
When customer churn happens, your marketing not only has to spend time and resources to bring in new customers, they also have to focus their attention on re-attracting the customers that the company has lost.
Say, it costs approximately $25,000 to acquire a new customer (customer acquisition cost). To re-attract all 10 lost customers, your company will have to spend about $250,000 every year. That’s a quarter of a million dollar spent trying to re-acquire customers your company already had but let slip away.
Now, the true impact of customer churn on your SaaS company is:
$400,000 loss of recurring revenue + $100,000 loss of expansion revenue + $250,000 CAC to acquire lost customers = $750,000 true cost of customer churn
Unfortunately, this blow is intensified when your ideal customers are business because they will most likely replace your product with one of your competitors’. About 61% of customers take their business to a competitor when they end a business relationship. If your SaaS company relies on long-term subscriptions or customer loyalty to make profit, this can be pretty devastating.
Do you now see why retaining existing customers is the bottom-line for successful companies?
One misconception about a good customer retention strategy is that it is a defense mechanism for SaaS companies. No, it is not. A second-rate customer retention strategy will stop your clients from leaving, but an exceptional strategy will stimulate your customer base, reinforce customer loyalty and encourage clients to recommend your products to everyone they know.
A stellar customer retention strategy requires constant recapitulation to keep up with a fluid SaaS market. For a customer retention strategy to be successful, there has to be cross-functional and cross-departmental cooperation between the product, sales and marketing teams, and customer support.
Keep in mind that retention management is not an overnight process; it takes time and effort. This is because both the risks and the rewards are very great. InsightSquared has estimated that reducing customer churn by just 5% can increase profits by 25–95%.
This article will explore some of the essential techniques a SaaS company needs to improve their customer retention rate.
Let’s dive in!
Optimize the onboarding process
Poor onboarding is the number 1 leading cause of customer churn, followed by weak customer relationships and poor customer service (which will be addressed below). Providing a great onboarding experience for customers is the first step to crafting a customer retention strategy. Your main goal should be to keep things simple and effortless for your customers by explaining in clear terms how exactly they should use your product. It is also important that you highlight the value of your product from the get-go. Don’t forget that the value of your product will vary from one customer to another.
It is also important to focus on segmenting your customers into different customer groups. This way, you can make the onboarding process relevant and personalized to the customers. You can do this by focusing on the features that will provide the most value to your customers.
Then, you have to make your customers understand these value-providing features; this will help them reach their goals faster. When explaining, try not to sugarcoat anything. Be transparent and give clear guidelines on your product. Tell your customers what your product does, how they can use it easily, and how to get the most value for their money.
Once a customer decides to purchase your product, you have to make sure they are using the software to solve a problem. If the onboarding process is successful, there is a good chance that the customer will stay. If it is not successful, the customer might make a cancellation.
Below are some good post-onboarding practices your SaaS company can implement:
- After your customer is onboarded, it is good practice to forge a relationship with them. Reach out to them, give them your contact info and offer support. This makes the customer know that they are important to your organization and that there is a competent customer support team they can go to once they face a challenge.
- Try to measure customer interaction through user experience. Make use of tools that show how customers interact with and use your software. If customers do not use it much, it may mean that they don’t find value in your product or service or that their needs have changed. When you identify what is lacking in your product, work on rectifying it. This helps increase customer usage and interaction, which, in turn, increases your retention rate.
- Make sure to engage a paying customer within one day (business) of purchase. Early engagement leads to a successful onboarding process. The chance of retaining a customer reduces the longer your company takes to reach out to them. According to a study conducted by Esteban Kolsky, 11% of customer churn can be avoided if a company reaches out to their customers early. He also estimated that 67% of customer churn would not happen if a business resolves their customers’ issues during their first interaction.
- Follow-up with your customers by offering additional training resources or personalized services.
The onboarding process is usually the determining factor of purchase for many customers. It is always a good idea to create an onboarding email sequence that will help customers understand the full value of your software without wasting their time.
Talk to your existing customers to find out what is and isn’t relevant to customers during the onboarding process. Ask them what information they wished they’d known immediately they were introduced to the platform. Ask them what they found out early on that helped them recognize the value of the product.
If you don’t yet have any existing customers to ask, you can ask the sales team what questions your prospects are asking about the platform. Questions that many people have asked are usually worth answering in your onboarding email sequence.
It is also a good idea to crack a few jokes in your emails. Humor goes a long way in keeping customers. Not everything has to be boring.
Deliver top-notch customer support
Great customer service is everything when running a SaaS company. Poor customer service causes businesses to lose a lot of profit. In a 2018 report from NewVoiceMedia, it was estimated that U.S. companies lost about $75 billion due to poor customer service.
The expectations of customers are, quite simply, insatiable. In fact, a RightNow study shows that only 1% of customers feel that their customer service expectations are always met.
People generally tend to remember bad memories and forget the good ones. A Zendesk study estimates that 82% of customers bail on a business transaction because of bad customer service and only 4% of customers will actually inform a company that they are dissatisfied with their customer service. 96% of dissatisfied customers just leave a bad review on social media platforms or search engines, an action that can stain a company’s pristine reputation.
In the worst case scenario, a dissatisfied customer will feel that your SaaS company treats them like crap, and because of this, they’ll take their business elsewhere. Elsewhere, meaning your competition. For every negative interaction a customer has in a company, there’s always another business that swears to be better at customer service. A customer taking their business to a competitor can cause churn rates to skyrocket.
It has been proven that 58% of customers are willing to spend more money with businesses that provide stellar customer service. You, as a SaaS business owner, know that there are other competitors that have inherently better features than your company — better deals, larger discounts, and even better products/services. To prevent losing your customers to your competitors, it is imperative that you aim to float above the water and stay several steps ahead of them.
Kolsky has estimated that 85% of customer churn caused by bad customer service could have been prevented. The best way to reduce customer churn rates with customer service is to be proactive. Try to identify patterns that suggest that customers are having a challenge with your product. If an unplanned outage occurs, try to inform your customers what went wrong and how you’re working to fix it and make sure it never happens again.
Train your customer service team to be friendly and polite to customers. RightNow says that 73% of customers will spend money on a company’s product(s) if their customer service representatives are friendly. Implement systems that can help customers solve their problems should they encounter them. Be prepared for the worst and know how to communicate with your customers should anything go wrong.
Good customer support teams know not to stop customer interaction after the customer’s problem has been solved. A few weeks after a problem has been solved, your customer service representatives should try and find out if there is anything the customer might need help with again. Going the extra mile after a problem has been solved helps the customer realize that they are a top priority to your business.
Good customer service increases the likelihood of selling and upselling your products and services to customers. Zendesk estimated that about 52% of customers spent more money on a company’s product after having a positive customer support experience. If customers can see that your customer support team is making an effort to give them a pleasant experience, not only will they be inclined to buy from you, they’ll also spread awareness about your company’s product.
While it is impossible to prevent all customer churn from happening, ensuring that your customer service is exceptional goes a long way towards retaining your customers.
Optimize your pricing
Many SaaS products, especially subscription-based ones, launch with prices that are way too cheap for the amount of value they can provide.
It is easy to understand why SaaS business owners underprice their products though. Some reasons are:
- Many companies have no idea how to price their products. These companies take guesses as to what the optimal price point of their product should be rather than using metrics and reports collected from their customers. This causes them to leave money on the table.
- A lot of SaaS companies also have no idea how to construct their pricing tiers. Many companies think that more pricing levels will equal more signups and conversions. This, however, is not the case at all. Data shows that too few or too many pricing tiers can discourage potential customers from subscribing to your product.
- A substantial percentage of SaaS companies also get their pricing wrong by relying on discounts too heavily. Thing is, discounts are a great tool to retain customers, but using it in the wrong way can cause a massive amount of revenue loss. Long-term discounting has been proven to reduce SaaS LTV by more than 30%, and discounted customers are more likely to devalue your product than those who pay full price.
In truth, optimizing your pricing based on customer value can have a huge positive effect on your company’s sales/marketing, retention, and profitability. It is one of the best ways to increase your monthly recurring revenue (MRR).The goal with the value-based pricing model is to find out how much money your ideal customer is willing to pay for your product, and charge them exactly that amount.
Figuring out what each of your ideal customers is willing to pay takes effort and research. You can also make use of some good pricing optimization tools on the market to make the process easier and faster.
To get the optimal price point for your product, you have to collect some vital customer information. This information includes things like:
- Demographic data
- Customer survey data
- Historic sales data
- Subscription lifetime value (LTV)
- Customer churn data
- Operating costs
- Inventories, etc.
With this info, you can better optimize all your product prices to maximize profitability and customer retention. Here are few guidelines to help:
The base price (or starting price) of your product is very important because it helps potential customers know if your product is worth their investment. Therefore, it is imperative that you optimize your base prices to match the reference point of demand for your product (before discounts or promos). This works well for SaaS products that remain steady over time.
Discounts are a touch-and-go topic in SaaS pricing optimization strategy.
On one hand, offering discounts on your product can be a cost-effective way to acquire new customers. Reports show that customers gotten through freemium deals cost about half the money used to acquire customers who pay full price.
On the other hand, however, discounts can decrease your SaaS lifetime value by more than 30%, and customers who get discounts have more than 2x the churn rate of those who pay full price.
The question now is: How can you navigate discounts so that you retain customers without spending too much money or decreasing the perceived value of your product?
The answer lies in the discount schemes you choose to implement. Here are two very popular ones:
- Time-based discounts
This is probably the most popular one, and it involves offering discounts on purchases made to cover a long period of time.
Say, you run a website hosting company. Your base price is $5/month. If deducted from the customer’s bank account every month, your product will cost $60 at the end of the year. However, if the money to be deducted from their bank account covers a 12-month period, it will cost $48. That’s a 20% discount for one year.
If your customer decides to purchase your starting plan for two years at once, your product should cost $120 bi-annually based on your base price. However, since the purchase covers two years at once, it will cost $78. This is a 35% discount for two years.
As the length of time increases, the discount also increases progressively. This encourages customers to make more purchases because the next discount level can be easily obtained.
- Limited discounts
This one involves attaching deadlines or expiration dates to huge discounts. Discounts, on their own, encourage customers to purchase subscriptions, but deadlines make them do it fast. Putting limits on your discounts create a sense of urgency that customers will find a hard time resisting.
For instance, a SaaS subscription business offers their potential customers a 50% discount that will expire by midnight. This is a once-in-a-lifetime deal; it will never happen again. Ever!
This announcement is hard to ignore, especially when fortified with compelling calls to action like: Buy it NOW before it’s GONE, 50% off before MIDNIGHT, Redeem NOW, etc.
The company can also add that the deal is available only to the first 1,000 people that sign-up, or that it is limited in quantity/will be discontinued.
The point here is that scarcity and limitation are strategies that are effective at persuading prospects to become paying customers.
Contrary to popular opinion, reducing your prices does NOT, in many cases, cause customers to buy more. Discounts do, when used right. If anything, raising your prices — sensibly — will encourage more sign-ups because they increase the perceived value of your product in the eyes of customers.
Increasing your prices also allows you to allocate the resources needed to give your customers amazing experience, which will increase the chances of them remaining loyal to your company.
Use customer feedback to improve your product
Reducing the customer churn rates at your SaaS company begins when you actively listen to what your customers have to say about your product and their experience. It is very easy to get defensive when customers constructively criticize your products and services, but their feedback is priceless if your goal is to retain customers. It’s the Holy Grail of your business; treat it as such.
Many companies — approximately 80% of them — think that they offer exceptional products and services, but only 8% of customers believe that their experience was great. That’s a massive disparity.
According to a report by Oracle, 89% of customers switch to a competing business after having a negative experience with a company. That goes to show how big an impact customer service has on customer churn and business revenue.
This is why it is very important to know what your customers think of your business at all times. Do they feel appreciated enough? Do they feel a personal connection with your business? Engaging with your users can provide you with invaluable info that can help you retain customers. The best way to get this information is to simply ask them.
Here’s a way you can do that.
Place all your customers/leads into specific customer segments such as New Customers, Most Active Customers, Inactive Customers, Prospects, etc. Send these customers quick surveys to identify the parts of your business that are satisfactory and those to improve on. These surveys should be optimized based on the position of these customers in your sales funnel(s)/categories.
Ask questions like the following:
- On a scale of 1–10, how would you rate our customer service?
- Why did you give that number?
- Did our product/service meet your expectations?
- What area of our product would you like us to improve on?
- Do you feel that our product gave you a good value for your money?
Ask necessary questions and take your customers’ answers to heart. Pass down the feedback to the sales and marketing teams, and close the feedback loop by informing the company about the current opinion of your users. Use this feedback to restructure your processes to provide better customer service. Let your customers know and see that their opinions matter and that you’re using it to make sure they feel satisfied. This gives them ample reason to stick around.
Market optimized content to your customers
Content marketing, in SaaS, is essentially a kind of inbound marketing that involves planning, creating, publishing, distributing and sharing relevant information and promotional content to your business’ customers. This content serves to create awareness, enhance visibility, attract more traffic, and increase sales, customer engagements and loyalty.
From social media, email marketing, and blogging to SEO, paid ads and affiliate marketing, content is the focal point of all types of marketing. Engaging your customers with the right kind of content can reduce customer churn rates significantly by keeping your existing customers better informed and educated about your product(s) or service(s).
For SaaS companies, content should target and influence both prospects and existing customers without being forceful or intrusive. Depending on where they are in your sales funnel(s), the content should educate, inform, and instruct leads on how best to use the product.
You, as a SaaS business owner, should create and send out effective content for the purposes of customer acquisition and customer retention. This content should be sent out to your audience in multiple forms by using the wide range of digital marketing channels available on the market today e.g. social media platforms, emails, SEO, adverts, etc.
Your content should be created and refined to accomplish the following goals:
This is the first step in customer acquisition: attracting traffic. You can either attract traffic for informational or promotional purposes.
Informational content provides potential customers with information about your product, its features, pricing plans, and benefits, while promotional content involves advertising material that creates awareness of the existence of your SaaS company.
Turn traffic to leads
The next step is to influence your traffic by creating content that further enhances their understanding of your product. This content should double down on the info provided in the content used to attract them (above point). It should highlight the problems users face, the impact of these problems and the solutions your product can provide to get rid of the problems.
When customers find a company that answers their queries, they are more likely to revisit and learn more. When they do that, they move up the buyer chain from ‘traffic’ to ‘leads’.
Convert leads to customers
At this stage, you expose your leads to personalized content (content-based customer engagement/interaction) to increase the chances of converting them into paying customers.
This personalized content can take many forms: eBooks, informational content (blog posts), promotional content, discounted offers, incentives/freebies, FAQs, and other media available.
Boost customer retention
This is the crux of this section.
When your leads become paying customers, don’t stop engaging with them. In fact, interact with them more — and consistently too! Get ahead of your competitors by personalizing your customers’ experiences, promoting new or special features, offering training and additional resources, etc.
Schedule your email marketing campaigns and other types of channel marketing. Make your content drip consistent; don’t leave your customers waiting for too long with haphazard, sporadic content. If you decide to publish two new blog posts a week, stick to that. Want to send them four emails a month? Great! Don’t deviate from that.
Commit to a steady content strategy. This shows your customers that you’ll always have their backs and provide them with valuable content that will help them solve their problems.
Consistent, relevant content is one of the best ways to gain the loyalty of your customers and increase your SaaS customer retention rates.
Track your customer acquisition cost and lifetime value data
After executing your customer retention strategies, it is very important to find out if they’re working. The best way to know for sure is to track the data. The most important customer retention metrics you should pay attention to are your Customer Acquisition Cost (CAC) and Lifetime Value (LTV).
Let’s take a look at customer acquisition cost first.
Customer acquisition cost is essentially the total sum of the amount of money your company spends to acquire a new customer and bring them to the point of sale. This includes the time spent by your sales representatives, and your marketing/advertising expenses.
Why is CAC important?
Customer Acquisition Cost is important because, over time, it will tell you if it’s getting easier or more difficult to acquire new customers. This data will enable you to study trends to see when acquiring customers would cost less than usual, and if there are particular periods when customer acquisition costs more than usual.
With this data, you can optimize your customer acquisition strategies and determine the overall strength of your SaaS company. If your CAC is high, it most likely means that your sales and marketing efforts aren’t very effective. If your CAC is low, however, that means that your current practices are working.
There are many things that go into acquiring a new customer: tons of marketing campaigns, multiple sales teams/departments, a wide range of revenue channels, etc. However, the formula to calculate CAC is pretty straightforward.
It looks like this:
Customer Acquisition Cost (CAC) = Sales and marketing expenses ÷ Number of new customers
Therefore, if your sales and marketing team’s efforts cost $3,000 per month (including advertising costs) and you acquire 300 new customers every month, your CAC is $10 per customer. Easy peasy!
Note: The lower your CAC is, the better. If your CAC is much lower than your customer revenue, you can try scaling upwards.
Calculating your customer acquisition cost can tell you so much about how your business is operating. For example, if your CAC is $200 but your average sale is $80, your business is teetering; you have to reduce your acquisition costs. If your CAC is $200 and your customer retention cost is $40, then you should focus on retention. Similarly, if your CAC is $200 and your customer retention cost is $250, you should focus more on customer acquisition.
Another important metric — probably the most important one — many experts advise SaaS business owners to focus on is Customer Lifetime Value (CLTV or LTV, for short). Customer lifetime value simply refers to the overall value that customer acquisition provided your business.
Why is LTV important?
It’s simple. Without LTV, you might know how much money it took to acquire each customer, but you won’t know how much those customers are actually worth. LTV provides immediate insights into the areas of your business that need improvement. It also provides insights into the path your business will take in the long run.
LTV also has a major effect on how you determine and explain CAC to your investors. It prevents your investors from thinking that you spend too much money on customers that aren’t worth much. The formula to calculate LTV is a bit more complicated than the one used to calculate CAC.
If there is no expansion revenue for the customers, the equation would look something like this:
LTV = Average Customer Revenue (ACR) × Customer Lifetime
If you need to get an even better picture of your LTV, include your gross margin percentage in the equation. This is how it would look:
LTV = (Average Customer Revenue (ACR) × Gross margin %) ÷ Customer churn rate
It is not enough to just know the values for your CAC and LTV. The defining thing is the ratio between both of them i.e. the LTV: CAC ratio. This ratio measures your expenses when acquiring a customer to the lifetime value of the customer acquired.
The ideal LTV:CAC ratio for startups and backers is 3:1 (your customer’s lifetime value should be three times more than the money spent to acquire them).
On one hand, a ratio that is close to 1, for the LTV, e.g. 1.5:1 means that you need to cut down on CAC expenses. In this case, you have some hardcore customer acquisition problem. You are spending way too much money to acquire customers that churn like crazy. If this is part of your strategy — say, you want to enter a competitive market — it’s okay. But if not, then a small ratio is bad for business.
On the flip side, if the ratio is too large — say 5:1 — that means you could spend even more money to acquire more business. A large number is a good thing provided your business is growing.
Calculating your LTV:CAC ratio is simple. The equation looks like this:
LTV:CAC = LTV (in dollars) ÷ CAC (in dollars)
Retain your customers better
Customer retention in SaaS simply involves considering the problems your current users face and solving them. The truth is that people will always be ready to give you all their coins if you understand their struggles and help alleviate them. If you can understand and help your customers better, you can get them to stay longer.
I’m not trying to say you should ignore customer acquisition or put it in the backseat. Of course not! Every business, especially subscription-reliant SaaS businesses, needs a steady stream of new customers. However, without a solid plan in place to keep those customers, customer churn will burn merciless holes into your bucket through which your customers and your recurring revenue will leak out.
Invest in a customer retention strategy today and you’ll never regret it.
What is your favorite customer retention strategy? Did I miss out on one you practice? Well, feel free to leave me a comment below. I’ll respond.