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Karel van der Poel
Karel van der Poel
Founder Mirror42

Mirror42
Founder

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How to measure customer retention?

Posted almost 4 years ago

If you are a running a business, you know how important it is to retain customers. It is very often cheaper to retain an existing customer then to acquire a new one.

In this article I will share my experience of retaining customers as a software as a service (SaaS) company. The lessons learned can be applied to any company, not only to SaaS vendors.

A brief explanation: SaaS means web-applications that you can use as a business without having to buy licenses and install anything yourself.

For SaaS businesses, retaining customers is 100% different then for “traditional software license” business.

With traditional on-premise software there is a natural switching barrier for customers. Once customers made an upfront investment in licenses, hardware, management resources, signed a long term contract and integrated other applications it has become hard and costly to switch.

But in the SaaS world, these switching almost do not exist! Customers do not have to make huge upfront investment in licenses, but pay as they go. Customers don’t sign a multi-year contracts and the integrations are often build with published web-services and generic APIs rather then proprietary code.

As a result, SAAS vendors have to focus more on retaining customers and have 2 great instruments: innovation and service.
These instrument can give SaaS vendors a real competitive edge over on-premise customers.

  • SaaS vendors have direct access to your application. This puts them in a position to offer faster and better service.
  • SaaS vendors can can upgrade all their customers to the latest release multiple times a year while it takes an on-premise vendor multiple years to upgrade all their customers to a new release.

Since retention is so important, how do you measure it properly?
At first sight: the formula looks simple: Compare the number of customers that did not renew their contract versus the ones that did over any period of time.

But what if you have multiple products or multiple editions of the same product with different prices?

At Mirror42 we have 4 versions of our KPI Dashboard product: Small, Medium, Large and a Partner Edition. All optimized for different customer profiles.
We learned that +-80% of the people that sign-up for a small edition either upgrade to a higher plan or cancel in the first 6 months after signup.

We also learned that our retention of large editions is higher then medium and higher then small. The large editions also have a higher price point so this is great.

As a result, If we calculate overall customer retention for this product with the formula above, then you could draw the wrong conclusion that having the small edition is a bad thing, since it brings the overall retention down.

Another example: If you have 10 customers with 8 paying 100 USD and 2 paying 1000 USD, then you are more likely to have the following targets: retain the high value customers and upgrade 4 out of 8 small customers to high value customers. If you manage to do this your might lose 4 customers and only have a retention of 60% but your revenue has tripled.

There are even examples where vendors who market high retention rates include retaining free-plans in their calculation! (We retain 99.8% of all KPI Library members!)

Conclusions:

  • Retention should also be calculated with retained dollars
    rather then % of retained customers.
  • Retention can not be looked at in isolation. You might justify a drop in retention if your avg revenue per customer goes up or if you are introducing a “loss leader” product.
  • You need to understand which customers you are not retaining, why you are not retaining them and when they are leaving (after 3 months or 16 months) in order to truly understand your company retention.
  • Customer retention is a numbers game: If you have 50 customers and 1 leaves it is by default a 2% drop in retention. So focus on retention after you have solid lead acquisition and lead to customer conversion.

Comments (1)

DAN MARINO
DAN MARINO
Source 1Purchasing

Great article

Posted almost 4 years ago | permalink

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