Retention rate is one of the most important metrics when it comes to running a successful B2B software as a service (SaaS) business. A high retention rate means you’re getting repeat customers and keeping them loyal over the long term, which is essential for any profitable SaaS business. If you want to ensure your B2B SaaS business has a strong retention rate, there are certain steps you should take. Read on for a complete guide to B2B SaaS retention rate.
What is B2B SaaS Retention Rate?
B2B SaaS retention rate refers to the percentage of customers or clients of a business-to-business (B2B) software-as-a-service (SaaS) company who continue to use the company’s software over a given period of time, typically a year.
Retention rate is an important metric for B2B SaaS companies as it reflects the loyalty and satisfaction of their customers, as well as the effectiveness of their products and services. A high retention rate is indicative of a healthy business that can rely on a steady stream of revenue from loyal customers. On the other hand, a low retention rate may indicate issues with product-market fit, customer support, or pricing, among other factors.
B2B SaaS companies typically aim for a retention rate of at least 90% or higher. However, retention rates can vary widely depending on the industry, product, and customer base.
The Importance of Customer Retention in B2B SaaS
The importance of customer retention in B2B SaaS lies in its direct impact on the brand’s profitability.
- Customer retention impacts revenue, as demonstrated by SaaS Capital’s 2022 survey, which shows that net revenue retention is positively correlated with the growth rate of a B2B SaaS brand.
- Predictable Revenue: B2B SaaS companies rely on a predictable revenue stream to sustain their business. Retaining customers ensures a consistent source of revenue that can be forecasted and relied upon.
- Cost-Effective: It is more cost-effective to retain existing customers than to acquire new ones. According to the Harvard Business Review, acquiring a new customer can cost up to five times more than retaining an existing one. By focusing on customer retention, B2B SaaS companies can reduce their customer acquisition costs and increase their profitability.
- Increased Customer Lifetime Value: Retaining customers for a longer period of time can increase their lifetime value, which is the total amount of revenue a customer generates for the company over their lifetime. Higher customer lifetime value can lead to increased profitability for the company.
- Word-of-Mouth Marketing: Satisfied customers are more likely to refer their colleagues and friends to the company’s services. Word-of-mouth marketing is a powerful tool that can help B2B SaaS companies acquire new customers and expand their customer base.
- Competitive Advantage: Retaining customers can give B2B SaaS companies a competitive advantage in the marketplace. A high customer retention rate is a sign of a satisfied customer base, which can help companies differentiate themselves from their competitors and attract new customers.
Retention is of utmost importance in the B2B SaaS industry as customers typically spend only a small portion, ranging from 5% to 15%, of their lifetime value initially. This underscores the significance of retaining them, as losing these customers would mean losing the majority of their potential lifetime value.
Key concepts
Here are some key concepts you should know:
Retention vs. Churn
Retention rates and churn rates are closely related and can be seen as two sides of the same coin, as they both indicate the effectiveness of retaining customers. Essentially, they are inverse measures of each other. For instance, if the retention rate is 80%, then the churn rate would be 20%.
Both metrics are valuable in evaluating customer retention, and which one to use depends on the specific context and what information is being emphasized. While retention rate measures the percentage of customers who remain loyal to the company, churn rate measures the percentage of customers who discontinue their subscription.
Cancellation ≠ Churn (yet)
When a customer asks to cancel their subscription at the end of the current billing cycle, it is not immediately classified as churn until the subscription actually ends. For example, suppose a customer, like ACME Corp, upgraded to a yearly plan in January 2022 and canceled it in March 2022. In that case, the customer is still regarded as active until January 2023 because the plan was paid for and will remain valid for the entire year.
It’s important to note that a new customer cannot be classified as churn within the first month of subscribing. Additionally, customers who take advantage of a “free cancellation within X days” policy should not be categorized as churn since they never actually became customers (even though it’s still crucial to monitor such behavior).
B2B SaaS Retention Benchmarks
While there is no universal benchmark for what constitutes a “good” retention rate in the SaaS industry, the most important thing is to ensure that your retention rate exceeds your churn rate, which in turn enables consistent cash flow. It is important not to settle for mediocre retention rates, as any remaining percentage points not accounted for in retention equate to churn. Even a churn rate of just a few percent can have negative effects on your company’s growth over time. Therefore, it’s crucial to focus on retaining as many users as possible to sustain long-term success.
However, here are some general benchmarks to consider:
User retention rate
User retention refers to the percentage of individuals who continue to actively use your product and derive value from it. This includes paying not only customers but also those who are using your product for free or on a trial basis. Essentially, user retention measures the loyalty of your user base and the ability of your product to satisfy their needs and keep them engaged over time.
To calculate the user retention rate, you need to divide the number of active users during a specific period, such as October, by the number of users in the previous period, which is usually September. This formula helps you determine how many users are still using your service over time and is expressed as a percentage. In summary, the user retention rate formula is the ratio of active users in a given period to the number of users in the previous period.
Monthly recurring revenue (MRR)
For SaaS businesses, Monthly Recurring Revenue (MRR) is vital to their financial health as it is a key metric for measuring the stability of their revenue stream. MRR is essentially the predictable and recurring revenue that a business can expect to earn every month from its customers. As such, it is the backbone of a SaaS company’s financial stability and growth potential.
The formula used to calculate Monthly Recurring Revenue (MRR) is as follows:
Customer Retention Rate
Customer retention refers to the percentage of paying customers who continue to maintain active subscriptions for your service relative to the total number of customers in the previous period. The formula for calculating the customer retention rate is as follows:
It’s important to note that these benchmarks can vary based on the specific industry and target audience. It’s also important to continually measure and track retention metrics to identify trends and opportunities for improvement.
Ways to Measure Retention for Your B2B SaaS Business
- Churn Rate: The churn rate is the percentage of customers who cancel their subscriptions in a given period. By measuring your churn rate, you can track how many customers are leaving your business and take action to reduce it.
- Net Revenue Retention (NRR): NRR measures how much revenue your business retains from your existing customer base over a period of time. It takes into account both revenues lost from cancellations and revenue gained from upsells and expansions.
- Customer Lifetime Value (CLTV): CLTV measures the total value a customer brings to your business over their entire lifetime as a customer. By understanding your CLTV, you can better allocate resources to customer retention efforts.
- Monthly Recurring Revenue (MRR) Expansion Rate: The MRR expansion rate measures how much additional revenue you are generating from existing customers through upsells, expansions, and upgrades. It is an indication of how much value you are delivering to your customers.
- Repeat Purchase Rate (RPR): RPR measures the percentage of customers who make a repeat purchase after their initial purchase. This metric is especially important for businesses that sell products or services on a subscription basis.
- User Engagement Metrics: User engagement metrics, such as daily active users (DAU), weekly active users (WAU), and monthly active users (MAU), help you understand how frequently customers are using your product or service. By measuring user engagement, you can identify opportunities to improve the customer experience and increase retention.
6 Steps for Improving B2B SaaS Retention Rate
Improving the B2B SaaS retention rate can be challenging, but it is essential to ensure long-term success for any business. Here are some steps to follow to improve the B2B SaaS retention rate:
Focus on customer success
Focusing on customer success is critical for improving B2B SaaS retention rates. It involves ensuring that your customers are achieving their desired outcomes by using your product. To achieve this, you must first understand your customer’s pain points and challenges.
One way to identify your customers’ pain points is to conduct surveys or interviews to gather feedback on their experience with your product. This will help you to understand how your product is currently meeting their needs and where there are areas for improvement.
Once you have identified your customers’ pain points, you can work on providing effective solutions to address these challenges. This could involve making changes to your product’s features, providing additional resources or training, or improving your customer support to providing better guidance and assistance.
To ensure that your customers are getting the value they expect, it’s essential to set clear expectations from the outset. This means being transparent about your product’s capabilities, limitations, and expected outcomes. You can do this through product demos, documentation, or by setting up a trial period where customers can test your product before committing to a purchase.
By focusing on customer success, you can build a loyal customer base that sees the value in your product and is more likely to stay with you in the long term. This will not only improve retention rates but also help to drive business growth, as satisfied customers are more likely to recommend your product to others.
Provide excellent customer service
Providing excellent customer service is a critical component of improving B2B SaaS retention rates. It involves ensuring that your customers have a positive experience when they interact with your customer support team. Here are some ways to do that:
- Respond promptly: One of the essential aspects of providing excellent customer service is responding promptly to customer queries and concerns. This means having a support system in place that allows customers to reach out to your team easily, whether through email, phone, or chat.
- Make sure that your customer support is well-trained: You need to make sure that your customer support team is well-trained to handle customer issues effectively. This means providing them with the knowledge and resources they need to troubleshoot customer issues and provide solutions quickly. It also means equipping them with the soft skills needed to communicate effectively with customers, empathize with their concerns, and provide a positive customer experience.
- Track customer satisfaction level: It is essential to monitor customer satisfaction levels and gather feedback on the customer experience. This can be done through surveys or by using customer support analytics tools that track customer interactions and sentiment. By gathering feedback, you can identify areas where your customer support team is excelling and areas where there is room for improvement.
By providing excellent customer service, you can build a reputation as a customer-centric business that values its customers’ needs and concerns. This will not only improve retention rates but also help to attract new customers, as satisfied customers are more likely to recommend your product to others.
Offer training and resources.
Offering training and resources is an essential component of improving B2B SaaS retention rates. By providing your customers with the tools they need to use your product effectively, you can help them to achieve their desired outcomes and become more engaged with your product.
One effective way to offer training and resources is through an online learning portal or academy. This can provide customers with a centralized location to access a range of resources, including video tutorials, user guides, webinars, and other training materials. An online learning portal can also be customized to meet the specific needs and preferences of each customer, helping to ensure that they are getting the most value out of your product.
Offer personalized experiences
Offering personalized experiences to your B2B SaaS customers can help to improve customer satisfaction and retention rates. Personalization involves tailoring your product or service to meet the specific needs and preferences of each individual customer.
Most Underrated Retention Metric
Here are some methods to provide personalized experiences to your customers:
- Gather data on customer behavior and usage patterns: Gathering data on customer behavior and usage patterns can be done through analytics tools that track customer interactions with your product or service. By analyzing this data, you can identify patterns and trends that can inform how you can personalize the customer experience.
- Provide customized onboarding or training programs: This can help to ensure that customers are getting the most value out of your product or service by teaching them how to use it effectively. By tailoring the onboarding process to meet each customer’s specific needs and preferences, you can help them to achieve their desired outcomes and improve their satisfaction with your product.
- Customized customer support: This can involve assigning dedicated account managers to each customer or providing personalized support through chat or phone. By providing personalized support, you can demonstrate that you value each customer’s business and are committed to helping them succeed.
Collect feedback
Collecting feedback from your B2B SaaS customers is critical to improving retention rates. Regularly soliciting feedback helps you understand your customer’s pain points, identify areas for improvement, and tailor your product and service to meet their needs. Here are some methods to provide personalized experiences to your customers:
- Conduct Surveys: Surveys can be conducted through email or within your product, asking questions about your customers’ experiences, product features, and overall satisfaction. You can use the data collected from these surveys to identify areas where customers may be struggling or dissatisfied with your product and use this feedback to make necessary changes and improvements.
- Leverage customer service interactions: Your customer support team can gather valuable feedback during customer interactions, whether through phone calls, chats, or email conversations. Encourage your team to listen actively and record customer feedback, and use this information to identify areas where you can improve customer support.
- User analytics: Analyzing data on customer usage patterns can provide insight into how customers are interacting with your product and help you identify areas where they may be struggling or encountering roadblocks. This data can help you improve the usability of your product and tailor features to better meet customers’ needs.
Continually Optimize Software Design
Continuously optimizing your software design is a crucial element of improving B2B SaaS retention rates. Software design optimization involves identifying and addressing areas where your product may be falling short in terms of user experience, performance, and functionality.
One way to optimize your software design is to conduct regular usability testing. Usability testing involves asking users to perform specific tasks within your product while observing their actions and collecting feedback. This type of testing can help identify pain points and areas where users are struggling, enabling you to make improvements to your product’s design and functionality.
Another approach to optimizing your software design is to gather data on user behavior and use this information to improve the product’s design. User behavior data can be collected using tools such as heat maps, which can help you identify areas where users are spending the most time or encountering the most issues. This data can be used to make design improvements that improve user engagement and experience.
Additionally, you can continually optimize your software design by staying up to date with the latest trends and technologies. This means regularly monitoring industry developments and staying abreast of new tools and techniques that can help you improve your product.
Final thoughts
While it is true that customer churn is an inevitable part of the SaaS business model, it is important to strive for high retention rates. A desirable outcome is when a customer remains with a company for a significant period of time, mutually benefiting from the relationship. Eventually, the customer may choose to move on to other ventures, but with the knowledge that they would not have achieved the same level of success without the company’s product. This highlights the significance of retention rates as they can help companies achieve this desired outcome.
FAQs
What is the retention rate for a B2B company?
B2B companies tend to achieve high customer retention rates, typically falling within the range of 76% to 81%. The reason behind this can be attributed to the fact that B2B brands place a significant emphasis on cultivating enduring relationships with their customers, which involves investing considerable time and resources.
What is unbound retention in B2B SaaS?
Unbound retention, also known as rolling retention, is a measure of customer retention that tracks the percentage of users who continue to use a product or service over time. Unlike traditional retention rates that measure customer loyalty over a specific period, such as a month or a year, unbound retention is calculated by tracking the percentage of users who return to the product or service on a rolling basis, such as daily, weekly, or monthly.
