Customer Retention For SaaS in 2021: The Ultimate Guide
“How can I increase my customer retention?”
Said every product manager and product marketing manager currently working in SaaS ever 🤣🤣🤣!
The super-short answer is:
- Find the best customer retention software that helps you build user engagement and combat churn; and
- Implement as many of the customer retention strategies and tactics outlined in this 2021 Ultimate Guide as you can!
Ok, maybe that’s a little too short… Read on to find out more or check out the TL;DR if you’re in a hurry.
TL;DR
- In SaaS, customer retention is the sum of all activities a business undertakes to keep its users
- Focusing on customer retention — that is, keeping your current customers for longer — can have a disproportionate impact on your revenue compared to new customers acquired.
- The best ways to promote customer retention differ depending on the stage of development your SaaS is at.
- There are many different ways of tracking customer retention rates, each of which can provide you with different insights.
- Our top customer retention strategies would be: provide self-serve support, use secondary onboarding to keep successful customers engaged, carry out in-app exit surveys, collect and act on user feedback — and let them know you’re acting on it, upsell proactively and in context, gamify activities to drive repeat engagement, and A/B test everything!
- Best customer retention software tool to build in-app messaging flows to increase customer retention — Userpilot.
- Best customer retention software tool for tracking analytics: Heap or Mixpanel
- Best customer retention software tool to identify points of friction in the user journey: Hotjar or Fullstory
What is customer retention?
In SaaS, customer retention is the sum of all activities a business undertakes to keep its users and to make its existing customers more profitable.
The results of that work are often expressed and reported in the percentage rate of customers retained over total customers for a given period of time — or “customer retention rate”.
Why is customer retention important?
Winning new customers is exciting, but customer retention is where your SaaS will actually make money.
Consider these stats:
- A classic Bain and Co study found that increasing businesses’ customer retention rate by 5% can increase profitability by as much as 75%
- The costs of keeping an existing customer have been calculated as anywhere between x5 and x25 less than that of winning a new one
- According to Gartner Group, 80% of most companies’ future revenue comes from 20% of customers
- Totango has found that between 75% and 95% of most businesses’ revenues come from upsells and renewals, compared to just 5% to 30% from the original sale
Impressed? Let’s unpack those figures a little more.
Customer retention benefits
If you’re in SaaS, your customer retention strategy is absolutely key to the success of your business. And that’s mostly down to the “As A Service” part of SaaS.
Let’s take a look at some retention benefits.
Increased customer lifetime value
The SaaS model sees your customers paying you a regular subscription to use your app — it’s a “repeat business” if you like, rather than a one-0ff purchase.
The sum total of the money they pay you while they’re a customer is their Life Time Value (LTV).
So for every extra month or year you retain a customer, their LTV goes up: better retention, more valuable customers.
Retaining existing customers is cheaper than acquiring new ones
However, LTV is realized gradually — month by month, in the case illustrated below — while the Customer Acquisition Cost (CAC) is all borne upfront.
The lower graph, from a blog by David Skok, shows that until LTV exceeds CAC, you have unprofitable customers.
If your customer retention rates don’t lead to LTVs that outweigh CAC, you have a very serious problem.
Of course, there are other costs besides acquisition that SaaS companies incur on a per-user basis.
But so long as these are lower than the regular subscription fee (and if they’re not, you’ve got even bigger problems to worry about than retention!), you can just offset them in working out LTV.
But you’ll only incur that CAC once. That’s why retaining customers can be so much cheaper than winning new ones.
Increased profits through account expansion opportunities
The more value you show to your existing users, the more likely they are not only to stick around but also to spend more so as to get even more value.
That’s especially true for collaborative SaaS products — Slack, Figma, Asana, etc — which deliver more value the more users there are within a workspace.
But even for single-player SaaS, you have plenty of customer expansion opportunities: to get users onto higher product tiers; to get them to buy add-ons, and to sell them other products from your range.
The longer you retain a customer the more likely their needs will grow and so will the account expansion opportunities.
Check out this entire blog on customer expansion strategies for more details.
Increased brand loyalty and recommendations
Plus, once you’ve got an engaged customer, you’ve got a big advantage in selling to the people they know.
That’s because the user can act as an advocate on your behalf, showing friends and colleagues the value they’re getting from your app.
Brand loyalty and referrals do part of your marketing job for you — thus bringing down CAC for those connected people.
Plus, it’s easier to build your reputation with an engaged user base: these are the guys you can ask for good reviews on Capterra, G2, etc!
When to focus on customer retention?
In the light of everything we’ve said so far, the answer is: you should always be focusing on trying to retain customers!
But that means different things at different stages in your business’s development.
Early-stage SaaS
At this point, you probably won’t have solid benchmarks for successful customer LTV or a consistent CAC.
So it’s key to start establishing these:
- By making sure that new users go through primary onboarding as quickly as possible
- That they experience value fast (ie that they Activate with a minimal Time To First Value)
- That they come back after their first visit
- And by comparing acquisition campaigns and channels against early churn — to see where “good” and “bad” users are coming from
Growth stage SaaS
Once you’re in the growth stage, you’ll have those benchmarks and you’ll be able to compare different segments and cohorts of users against them.
Now your priority is making sure that users continue to realize value by repeated use of your app:
- By driving new feature adoption, to add sources of value
- Making it easy for teams to onboard new members to their specific use cases
- Looking for opportunities for customer expansion (upsells, cross-sells, etc) that will benefit those users
- Cross-referencing performance against KPIs between segments and cohorts, to hypothesize what the characteristics of your most loyal customers are and of those that you’re losing early — so as to bring in more or the former and improve the experience for the latter
Maturity stage SaaS
At this point, customer retention also needs to focus on keeping hold of your long-term users — the power users whose workflows make regular use of your tool; and the advocates who will refer you to friends and colleagues:
- By collecting customer feedback from these users and incorporating it into product roadmaps
- Providing advanced one-on-one or webinar training sessions
- Adding new features that can provide new ongoing sources of value
How do you measure customer retention?
“What gets measured gets managed,” said management guru Peter Drucker.
And the best customer retention factors to keep track of will depend very much on the specifics of your business.
If you have a high ticket product that quickly recoups CAC, you might be inclined not to worry about customer loyalty. But if it’s also really tough and expensive to win new users, you might have a different perspective!
There is no one customer retention metric that can tell you everything you might need to know. The best KPIs for your business depends very much on your goals (growth, profitability, maximizing average revenue per user, etc) — and it’s almost always going to be sensible to look at a variety of customer retention metrics.
Important customer retention metrics
We’ve written about this in much more depth before, but as this is the Ultimate Guide, we’ll go back over the most important ones here.
Measure Customer Retention Rate
Your customer retention rate is the percentage of users you manage to keep over a given period of time. It matters because it gives insight into how users feel about renewing their subscription to your service.
We’ve already looked at this metric at the beginning of the blog, but here it is again:
That is:
Customer Retention Rate (%) = ( # paid users at end of time period/ # paid users at start of time period) x 100
Measure customer churn rate
Customer churn rate is the inverse of retention rate. It looks at the percentage of customers lost over a period.
Once you understand how many customers are giving up on your app, you can start devising strategies for making sure they experience more value, faster that will stop them churning.
Knowing when customers are leaving is the first step to understanding why.
Customer Churn Rate (%) = (# paid users lost during time period / # paid users at start of time period) x 100
Measure customer lifetime value (LTV)
This is another metric we’ve already talked about. It’s critically important because it shows:
- If your marketing activities are unviable (when CAC exceeds LTV)
- What the potential profitability of your business might be
Life Time Value = Average Revenue Per User (ARPU) / Churn Rate
Measure customer health score
Customer health score — or customer engagement score — is a more complex metric than those we’ve looked at so far.
It aims to provide a measure of how engaged a customer is with your product (how “healthy” a customer is) by applying a weighting to various actions and operations carried out in your app within a certain time frame, and adding them all together.
The higher a customer’s health score, the less likely they should be to churn — because the weightings you apply will be geared towards highlighting actions that generate value and progress users along the customer journey.
By keeping track of customer health scores (usually by segment or cohort), you can get a sense of how to make sure your users realize the value and stick around for a long time.
Customer Health Score = Total Action Value 1 +Total Action Value 2 + Total Action Value 3 + etc
Where Total Action Value = Action Impact (weighting) x Action Frequency within time period.
Customer retention strategies
In this section, we’ll outline seven tactics that should definitely play a part in your efforts to improve customer retention. In the next section, we’ll look at some successful real-world applications of those activities.
Improve customer retention with self-service support
81% of software users would prefer to try and solve their own problems before reaching out for help. So don’t force them to ask when they don’t want to!
Self-service support — help centers, contextual onboarding experiences, FAQ and training documents, interactive walkthroughs, etc — helps users to solve problems themselves.
And that not only saves you money on a support team (self-service support is totally scalable as your customer base grows) — it also allows you to help customers use your app in the most efficient ways possible, minimizing time to value and directing them towards new use cases and features.
Take a look at this survey from Hiver. Self-service support ticks all the most important boxes.
One of the best ways to provide self-service support is to bundle it all up into a resource center like the one below:
Want to build one without coding? Get a Userpilot Demo and see how.
Retain existing customers with secondary onboarding
Primary onboarding is the process of getting brand new users to the point where they get value from your app (Activation). Secondary onboarding is all about upskilling active users so that they get more and more value over time.
Onboarding users progressively is an important part of providing a good customer experience.
In the bad old days of SaaS, new users would be forced to sit through comprehensive Product Tours, demonstrating every facet of an app, before they were able to start using it.
That’s not only annoying, but it’s also counter-productive.
By showing everything an app can do to a user who has no idea how to get started, Product Tours slow down Time To First Value.
Clever product managers, therefore, break onboarding down into “need to know” chunks and provide it as and when it’s needed.
This can be done reactively (in a resource that a user can refer to when they’re ready) or proactively (by tracking behavioral cues in-app and triggering contextual experiences, like in the Postfity example below).
In-app messaging is extremely powerful for secondary onboarding, as it allows you to solve problems it looks like they’re experiencing and to point them to features and solutions that are likely to benefit them.
And that’s why it’s so important to identify the use cases a new user is looking to solve when they first arrive — like Loom does in the example below:
The key to secondary onboarding is to never stop driving new value to users so that they become ever-more invested in your product.
Reduce customer churn with exit surveys
Exit surveys have two parts to play in your customer retention formula.
- They help you get a sense of the difficulties experienced by unhappy users, which increases your company’s ability to address them in the future.
- They give you a final opportunity to encourage customers to change their minds and stay!
In the past, these were often sent out by email — but today’s SaaS companies are seeing significant advantages from putting them in-app:
- Completion rates are much higher, which means you get better data. Once somebody has decided to cancel and shut down your app for the last time, they’re far less likely to offer you feedback than if you ask them during the cancellation flow.
- As well as getting more responses, you’ll get more authentic responses — because the feedback will be immediate rather than retrospective.
- You can offer incentives to stay or alternatives to cancellation before the workflow is completed — such as the example used by MailChimp below.
Even if a later email changes some people’s minds, you’ll lose a few who can’t be bothered to go through the sign-up process all over again.
Run customer satisfaction surveys and close the feedback loop
But you don’t only want to find out why customers are leaving.
It’s just as important for your customer success team to find out why users are sticking around, what they’re getting value from and what they like.
One of the best ways to do this is with NPS (Net Promoter Score) surveys.
We’ve written extensively on NPS, CSAT, CES, and Product Market Fit surveys before. In a nutshell, they ask users to say how positive or negative they are about your product (or some aspect of it) on a numerical scale.
And just as with exit surveys, the best place and time to show these surveys to users is in-app, in context.
For example, using UserPilot you can add targeted micro surveys to your app, causing an NPS box to pop upon completion of a task or at a specific frequency for desired user segments. This gives you instant feedback while the task is fresh in the user’s mind.
But when you collect customer feedback, it’s only as valuable as what you do with it. So:
Be prepared to act upon the responses you receive. Categorize and analyze the data your users provide to see what improvements would benefit them and build those into your product roadmap.
UserPilot helps you collate survey responses, like this:
Want to track and analyze user feedback? Book a demo call with our team and get started!
Let your best customers know that you’re listening to them. Don’t just take their feedback on board: make sure they know it, and those customer relationships will deepen.
Personalized emails can be helpful here (to acknowledge a complaint or to thank a power user for getting involved), as a one-to-one way to promote customer loyalty.
Offer valuable upsells proactively and contextually
Don’t miss opportunities to upsell and cross-sell to your existing users.
Once again, this is best done in-app — when a user’s actions indicate a need for something else you have to offer:
Offer trials to premium features
Use in-app modals to alert a user if it looks like they’re trying to use a premium feature they don’t have access to. Offer a time-limited free trial to get them hooked on it!
This is a great way to convert freemium accounts into paying customers and increase retention but also to showcase the value of upgrading to a higher account that gives the user access to additional features.
Upsell modals when the user reaches the account limits
If your product is usage-based, adding an upgrade button when the user approaches the account limits is a great way to be contextual and remove upgrade friction.
Drive continuous value through repeated engagement using gamification
Gamification will only help increase customer retention rates if your product is providing value.
But if it is already doing that, making your app fun to use can really leverage this trend for keeping customers engaged.
That can be as simple as showing a checklist of steps towards the completion of a goal — playing on psychological principles that prove people hate leaving jobs unfinished and love ticking off the last point on a list.
Then give the user a shout-out when they complete it!
Alternatively, you can implement a complex points system or loyalty program that allows repeat users to earn benefits or discounts.
The key is to provide something that gives users a good feeling when they engage with your app and allows them to feel a sense of progress.
Adding new gamification elements throughout the user journey will encourage customers to explore new sources of value can be a great way to increase retention.
Run A/B tests and make data-informed decisions
When it comes to making improvements to your product, don’t just follow your gut. Follow the data.
Use A/B testing to put different variants of new features, UIs or workflows to the test. Then deploy the version that gets the best results!
This should be hard-baked into your whole approach to product development.
So, for example, when you add a new onboarding experience, test two versions against matching customer segments.
This will ensure you are not implementing suboptimal improvements, when you could have given more value to more customers with a slight change.
Customer retention strategy examples in practice
If you do all of these things, then your customer success team will crush churn rates and your retention program will be a rip-snorting success!
But don’t just take our word for it. Take a look at how these SaaS companies have been increasing customer retention with them.
Customer retention strategy example #1 — Kommunicate in-app checklists
Kommunicate had a problem. Outgoing customers were asking for a feature that already existed, but which they hadn’t been able to find.
So, they implemented in-app checklists to drive users to adopt that feature — and then provided secondary onboarding through interactive walkthroughs to get customers using other features as well.
The result: 86% of Kommunicate users completed the chat widget customization goal.
That led to a 3% uplift in feature usage.
‘It’s a substantial increase for us as well — even if it’s just 5% increase — it then translates into a 2–3% increase in revenue, which has a substantial impact on our MRR’, said Parth Shrivastava.
Customer retention strategy example #2 — Miro in-app guides
Making the most of the online whiteboard collaboration tool Miro is not simple.
But they’ve done a great job in providing loads on in-app training and support resources, including:
- Behavioral triggers that launch contextual in-app experiences
- A wide variety of different training resources, including tutorials, webinars, and complete courses
- Integration of live customer support functionality into the resource center widget
This way, Miro is catering to the needs of many different customer segments and user preferences in one, consistent, easily-accessed location.
Customer retention strategy example #3 — Kontentino in-app gamification
The best examples of customer retention programs don’t have to be as comprehensive as Miro’s.
Social media management tool Kontentino used Userpilot to gamify aspects of their primary onboarding — resulting in a 10% uplift in new customer activation within one month.
When a customer successfully links their first account to the app, they are rewarded with this funny and personal GIF. Little things like this can go a long way!
Customer retention strategy example #4 — Loom’s contextual upsell
Timing is everything — especially when it comes to upselling.
Video platform Loom gets this right, offering a premium feature that removes “filler words” (the ums and ahs we all come out with on camera!) as soon as a user finishes a recording.
Not only that, Loom provides a microvideo of what might look and sound like and a chance for users to try the tool out for themselves.
Customer retention tools you should have in your stack
All SaaS businesses are different. They pursue different goals, their customers have different needs and they have very different cost and revenue structures.
Choosing the best software tools is very much a matter of deciding what’s best for you, but to get you started, your stack should include at least one tool from the following categories.
For tracking of KPIs across your product:
- Heap
- Mixpanel
Customer experience tools to understand points of friction:
- Fullstory
- Hotjar
Code-free in-app retention flows:
- Userpilot
Collection and organization of customer feedback:
- Hotjar
- Satismeter
- Userpilot
Conclusion
If your SaaS business is based on a subscription model, then you need to care about not just how many new customers you win, but also on how the number of customers you keep — and how much money those customers spend.
That means you need to care about customer retention.
As we’ve shown in this Ultimate Guide, there are loads of different metrics, goals, strategies, tactics, and tools you can use to ensure that your products and services are sticky, engaging, and provide long-term value to users.
If you’re looking to improve customer retention with in-app messaging tactics as we described here, get a Userpilot demo and get started.
