Building customer loyalty, retaining a customer base, and increasing revenue from existing customers are critical success factors for Saas companies. Indeed, it’s not a secret that raising the loyalty of existing clients is often much cheaper than attracting new users.
Wondering which retention strategies work best for SaaS companies? In this blog post, we will share the most successful strategies for customer retention.
But first, let’s explain the importance of customer retention in the SaaS business model.
Why customer retention is important
Customer churn is painful for any business, and SaaS companies are not an exception. Any customer who chooses not to renew their software subscription is cutting revenue for the company. The so-called “leaky bucket” effect on revenue growth is a major concern for SaaS companies as they have to acquire more customers just to stay afloat.
Therefore, customer retention becomes crucial for financial success, and numerous studies speak in favor of its importance.
A few mistakes are enough to lose a customer forever
As a 2017 Customer Service Barometer study found, 33% of American customers consider switching to another company right after the first negative experience. With the second negative experience, this figure rises to 60%.
Moreover, disappointed customers are likely to share their bad experiences with about 15 people they know.
Attracting new customers is more expensive than retaining the existing ones
In the SaaS world, the cost per acquisition is constantly increasing. In the last five years, it has grown by over 50%. As a study by the KBCM Technology Group shows, in 2019, the median cost of attracting new customers in the SaaS industry was $1.34 for every dollar of revenue in the first year of working with a client.
As we can see, companies need to retain their customer base for a long time to stay profitable.
The ROI of the existing customer exceeds the ROI of the new customer
Customer churn is directly related to the company's profitability, and a decrease in churn is guaranteed to lead to an increase in profits. According to Bain & Company research, a 5% increase in customer retention could translate into at least a 25% increase in profits.
Customer loyalty is beneficial for business
As to customer loyalty, studies show that 60% of loyal customers buy more often from their preferred companies, and 50% buy the product only from such companies. Aren’t these good reasons to increase customer retention and loyalty? And here’s the good news: there are AI-powered customer success management platforms like Userlot that allow SaaS companies to manage customer retention on the fly.
How to measure customer retention
To understand how effectively a company is retaining customers, you may want to track metrics such as Lifetime Value (LTV), Churn Rate, Customer Retention Rate (CRR), and Net Revenue Retention (NRR).
Let’s take a closer look at these metrics.
Lifetime Value
Lifetime Value illustrates the profit that a customer brings to the company for the entire period of cooperation. It helps to assess how effective the methods of attracting and retaining customers are.
Keeping track of this metric is useful when working on increasing the company's profitability and improving marketing strategies.
Here's are the basic formulas for calculating Lifetime Value for SaaS companies:
LTV = average revenue per monthly recurring user (ARPU) * Customer lifetime
Or
LTV = ARPU / Churn
So, the higher the churn is, the lower the LTV will be.
Churn Rate
The next metric to track is churn rate which represents the rate at which users stop being customers.
Here is the formula to calculate Churn Rate:
(The number of customers at the beginning of a given period - The number of customers at the end of that period) / The number of customers at the beginning of that period * 100
Customer Retention Rate
Customer Retention Rate refers to a company's ability to build long-term relationships with current customers. To calculate this metric, the following formula is used:
(The number of customers at the end of a given period - The number of new customers acquired over that period) / The number of customers at the beginning of that period * 100
The higher this metric value is, the more effective the methods of working with clients are. For a SaaS business model, CRR above 16% is considered okay. And if the CRR exceeds 35%, you can rest assured that your company's customer acquisition and retention are organized at a high level.
Net Revenue Retention
Together with the customer retention rate, SaaS businesses often measure the Net Revenue Retention rate. As the metrics name suggests, it illustrates income retention, i.e. provides insight into the “quality” of leaving customers in terms of monthly payments.
Net Revenue Retention is measured as follows:
NRR = (MRR of the last month + Upgrades MRR - Downgrades MRR - Churn MRR) / MRR of the last month * 100%
Let’s explain the rest of the formula components:
- MRR (monthly recurring revenue) - revenue from customers in monthly terms
- Upgrades MRR = increase in MRR from customer upgrades
- Downgrades MRR = MRR reduction due to customers who downgraded
- Churn MRR = MRR reduction due to churn
If you have identified that customer retention metrics at your company are far from being ideal, don’t give up! There are certain ways to fix this.
Now, let’s discover the most successful SaaS strategies for customer retention.
Strategies to increase retention and reduce churn
Strategies aimed at retaining existing customers can be divided into four main categories:
- Communication with customers
- Product development
- User experience and engagement
- Marketing
Let's figure out how strategies from each category work.
Communication
Set up an interaction schedule
Regular interaction with your customers is key to keeping them engaged. Even if your customers are completely happy, it is still worth interacting with them all the time so they don't feel forgotten. Besides, for SaaS companies, regular communication with customers not only increases retention but also creates opportunities for up-selling and cross-selling.
Applying smart customer success management tools makes it way easier to follow the customer lifecycle stages and adjust communication following the defined interaction schedule. Userlot and other tools provide a comprehensive visualization of customer segments and lifecycle stages users are on.
Collect feedback at each lifecycle stage
Feedback collection is important for your success at each stage of a customer lifecycle. So, whenever a prospect or a client comes to you with complaints, do not be upset or annoyed. Think of this as a valuable insight into what needs to be improved in your product.
In addition, don’t forget to gather feedback from customers who have just stopped using your product. The insights obtained from exit surveys will help you identify the common causes of customer churn and prevent such situations in the future.
Provide high-quality service
Friendly communication, the ability to quickly sort out difficult issues, and outstanding customer care lay the foundation for a high level of customer loyalty. Promptness of support also matters, so it is worth providing options like an online chat. Be sure to test the level of service and check the quality of provided support.
Be present across multiple channels
Allow your customers to get in touch with you through various channels convenient for them - service desk, instant messengers, social networks. When customers can choose to contact you while staying on Twitter or Facebook, this becomes an additional benefit.
Product development
Enhance the product based on customer feedback
Showing your users that you are constantly improving the product to create a better experience for them is another effective way to reduce churn. So, encourage customers to provide their reviews about the product, and don’t forget to transfer this feedback to the development team.
Doing cust dev from time to time is a good practice. When making important product-related decisions, ask your customers’ opinion on that. Perhaps they are not satisfied with some features or have ideas for improvement. As a motivation to participate, offer a discount or a gift for completing the questionnaire.
Make interaction simple
The simplicity of interaction with your product also plays an important role in customer retention. So, pay special attention to the common procedures like authorisation, password recovery, and payment.
Here are some proven practices:
- Authorization through social networks, mail, or through the password sent to the phone; Auto filling of standard form fields
- Password recovery simplification
- One-click payment
The simpler the interaction with your product is, the better.
Embed gamification
The introduction of game elements is a proven way to motivate customers to stay with your product for a long time. Gamification can turn routine activities into a series of engaging tasks, and providing users with additional benefits and opportunities in a playful way can have a great impact on customer retention. There are plenty of gamification mechanics to consider. For example, having performed certain actions within an app, a user can unlock extra product features.
User experience and engagement
Monitor customer activity and engagement data
Keeping track of customer activity data is another way to strengthen your customer retention strategy. To achieve this, be sure to define whether your users actually perform high-value actions. If you notice downwards trends in these data, that might be a time to use proactive communication. Depending on the situation, you can ask if any help using any product features is needed, or provide friendly suggestions on more great product features to try.
Don’t be scared by the necessity to track user activity. With customer experience tools, you can easily set the key goals and milestones to be reached by yards and monitor their achievement through an informative dashboard.
Keep track of customer churn signals
Customer churn doesn’t happen out of a sudden. There are certain churn signals, and by keeping an eye on them, you can solve many issues in time, without having to wait for your customers to leave.
Here are some signals to watch out for:
- Customers haven't visited your platform for a long time
- They search your site for cancellation information
- They are less engaged or use your product less
Once you notice such signals, don’t hesitate to reach out to users to see how your company can help. In many cases, a simple follow-up call or an email may be enough to get them back.Again, today’s software tools can greatly assist you with tracking churn signals. Many of them, including Userlot, can send you an alert whenever customer health seems to be at risk.
Educate customers
If your customer starts using your product without knowing how to use it, that might be a solid reason for frustration and churn. This is why learning by onboarding is at the heart of customer retention in SaaS business. Provide customers with video tutorials and send them welcome emails to keep them engaged. Show them how to get the most out of your product. In turn, they will reward you with their loyalty.
Marketing
Set realistic expectations from the start
The most common reason for customer churn is not meeting their expectations. This happens when companies make big promises and ultimately fail to deliver them. To improve customer retention, it is very important to set realistic expectations from the first interaction. Don't promise consumers more than they'll get. On the contrary, sometimes it is better to be modest in the beginning and exceed customer expectations in the end.
Highlight the product value
Wherever your customers are in their lifecycle, be sure to emphasize the value you provide to them. This can be done using regular communication tools such as email campaigns, blog posts, and social media. In addition, you can create training materials, videos, and webinars.
Talk about the benefits of your product, how to use it, and how to deal with the typical problems your users might face. This will increase the customer loyalty and serve as a powerful incentive to stay with you.
Use upselling and cross-selling
Upselling and cross-selling are strategies that not only reduce customer churn but also open up opportunities to increase the company's revenue. To achieve this, be sure to tell your customers about more advanced plans you have, and about additional services. Ideally, the recipients of such offers should be determined based on the analysis of user interaction with the product to ensure maximum relevance. As mentioned above, it’s no issue with the right software tools in place.
Offer discounts and promotions
The opportunity to save money or receive gifts is a powerful incentive for customers. Therefore, special offers and discounts work well for churn reduction. In addition, providing an incentive to expand the amount of service consumed is an effective way to increase the average order value.
Implement a referral program
Referral programs are a way to increase the number of new customers and increase the loyalty of existing ones. Loyal customers become supporters of your company and actively recommend their friends to use your services. So, why not introduce a referral program to them? Active referrers can be rewarded in many ways - being given a special offer, getting exclusive access to useful content and events, or being provided with additional discounts.
Final notes
As we can see, successful customer acquisition does not guarantee their loyalty for many years. Therefore, it is important for companies to constantly work to retain customers. Customers leave for a variety of reasons, and in most cases, you can prevent it.
Lots of customer retention management activities can be successfully automated using powerful AI-based software solutions. Using these tools greatly simplifies day-to-day operations and inevitably leads to better interaction with customers.
