According to 2021 research from McKinsey, top-performing, fast-growing SaaS companies earn median net retention rates of 120% or more—and they grow at a rate of 20% annually without adding a single new customer.
According to 2021 research from McKinsey, top-performing, fast-growing SaaS companies earn median net retention rates of 120% or more—and they grow at a rate of 20% annually without adding a single new customer. Your customer retention rate (CRR) is a measure of how loyal your customers are. It’s hard data that reflects the quality and usefulness of your product. A high rate is a sign that your product offers value, and it could point to high growth potential for your company.
Your CRR is an indicator of your product’s success: Calculate it regularly, and you’ll be able to see changes before they become problematic trends. You’ll also get a clear picture of how your product updates influence customer retention.
To measure your CRR, you’ll need to know four key metrics:
Once you have that information, follow this formula to calculate your CRR:
((Total customers - New customers) / Previous total customers) x 100
Written another way, it’s ((E-N) / S) x 100 = CRR, where:
As for the time frame you'd like to examine, the time frame you’d like to examine, you can calculate your CRR over the past month or quarter, or you can focus on a specific period of time that coincides with a significant product update or another major milestone.
For example, imagine you’d like to calculate your CRR over a one-month period. At the start of the month, you had 1,000 existing customers (S). At the end, that number dropped to 850 (E). During that one-month span, you gained 50 new customers (N). Following the formula, you would get a CRR of 80% for that given period:
((850 - 50) / 1000 x 100 = 80
Your customer churn rate is the inverse of your CRR. If your retention rate for a given period of time was 80%, your churn rate was 20%. As you track your retention rate, keep an eye on the customers who churn as well. Consider asking why they’ve churned—feedback from former customers can help you pinpoint the problems that are preventing you from retaining more of your current customers. As a SaaS company, it’s also important to be clear about precisely when churn has occurred. If a subscriber opts out of a renewal, they’re still a customer until their current subscription period expires.
Your ideal CRR depends on your industry. However, as a general rule, 35% to 84% is considered a good retention rate. In SaaS specifically, 35% and higher over an eight-week time period is a great goal to aim for—even though that rate is lower than other industry benchmarks. According to a 2018 customer experience report that examined average annual retention:
Aside from industry, many other factors influence external benchmarks. Companies with higher customer acquisition costs (CAC) typically need better retention rates. Your overall market size matters too. Businesses operating in smaller markets need to earn higher retention rates since there are fewer customers to replace those who have churned.
When figuring out your CRR benchmark, take your sales model, industry, CAC, and market size into account. If you have access to your competitors’ rates, that can help you set an accurate number.
You can also set internal benchmarks based on how your rates compare internally, month over month or quarter by quarter. Internal benchmarking can help you establish retention trends so you can examine how those coincide with product updates, a new marketing strategy, or other company initiatives.
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