Retention Rate Formula (How To Calculate Retention Rate)

The SaaS retention rate formula will help you to accurately measure customer retention.

Churn
May 31, 2021

The SaaS retention rate formula will help you to accurately measure customer retention.

While customer churn is never a good thing, it’s also impossible to avoid. Those running SaaS businesses will know that having at least some degree of churn is inevitable. To prevent churn from getting out of control, you must utilize the SaaS retention rate formula to track customer retention. This gives you time to make interventions and take steps to reduce churn.

When it comes to managing churn, you need to take a proactive approach. As a SaaS founder, it is easy to take a reactive approach and respond to events after they have happened. Failing to address customer retention in a timely manner could create problems further down the line. This demands your attention and shouldn’t be placed on the back burner.

There will always be customers that cancel their subscriptions at the end of the month. The key question is, how much churn is too much? Once you’ve worked out how to calculate retention rate, you can use this data to see whether you’re above or below target. The target churn rate will depend on what you consider to be both acceptable and sustainable.

In this guide, we will be exploring the following questions:

  • How do you calculate customer retention rate?
  • What is the retention ratio formula?
  • Why does SaaS customer retention matter?
  • What is an acceptable customer retention rate?
  • How can you reduce SaaS churn?
  • Why is customer feedback important?

After reading this guide, if you have any further questions about the retention rate formula, please feel free to contact us. At Raaft, we always embrace any opportunity to speak with founders about potential retention opportunities. If you’ve been looking for ways to capture in-depth cancellation insights, you should talk with us today. Churn down, retention up!

How To Calculate Retention Rate (Easy Formula)

Let’s talk about how to calculate retention rate. While there are potentially many ways to measure and calculate customer retention, we believe one stands out from the crowd as the most effective. Jeff Haden, a prolific entrepreneur and successful investor, recommends the following formula as an easy way to calculate the customer retention rate for your product:

Retention Rate = ((CE-CN) / CS)) X 100 

CE = This is the number of customers at the end of the period

CN = This is the number of new customers acquired during the period

CS = This is the number of customers at the start of the period

Don’t panic! You don’t need to be a numbers person to get this right. All you have to do is locate a few essential numbers and plug them straight in. It couldn’t be easier.

To provide you with some clarity, let’s run through an example of this formula in action:

Your business begins the month with 100 customers. Unfortunately, you lose 10 customers. However, you later gain 40 customers. By the end of the period, you have 130 customers.

((130-40) / 100)) X 100 = 90. The retention rate for this month was 90%.

Retention Rate Meaning - How Does It Compare To Churn Rate?

It should be noted that the customer retention rate is always complementary to the rate of attrition, otherwise known as the churn rate. These two metrics show us how successful your business is at inspiring retention and keeping customers engaged. A 90% retention rate would result in a 10% attrition rate. We believe you should run these calculations monthly.

Why Does SaaS Customer Retention Matter?

Ultimately, customer retention is a great way for all parties to measure the sustainability of your business. If you have a high customer retention rate and low churn rate, this indicates to investors that your SaaS product is able to engage and retain customers for some time. A high growth rate is only going to be looked upon favorably by potential investors.

These are key metrics for investors because they tell a story about your business. If you have a business suffering from high levels of churn, this raises questions about its sustainability. With a high customer retention rate, as you attract new customers, investors can feel assured that growth will compound over time and the customer base will continue to expand.

What Is An Acceptable Customer Retention Rate?

If we assume a software product has 200 customers, a 5% annual churn rate would result in the loss of 10 customers. While this is not ideal, it should be relatively easy to compensate for this with new customer acquisition. Compared against a 5% monthly churn rate, the same startup would lose up to 92 customers by the end of the year, making growth challenging.

How Can You Reduce SaaS Churn?

To successfully reduce churn and drive customer retention, you need to take a closer look at the customer journey. How can you inspire greater levels of engagement among users? If you want to see a customer stay onboard, the product must be effectively solving a problem they are faced with. From the moment they onboard, you must help them to solve this.

For a SaaS company to manage and monitor churn, it must have access to real-time analytics. This is key to understanding exactly why customers are choosing to leave. Alongside real-time analytics, we also believe customer feedback plays a powerful role in gaining cancellation insights. If you aren’t meeting customer needs, you must find out why.

Why Is Customer Feedback Important?

Customer feedback will help you to understand why people are choosing to cancel their subscriptions. If you don’t have this information, you will not be able to make meaningful improvements to your product. While it’s important to make general tweaks to your product over time, these need to be targeted tweaks made to increase the value proposition.

With the support of Raaft, you can collect customer feedback to reduce your churn. You are also able to automatically extend offers to customers in your retention flow. These offers can be tied directly to their motivations for leaving, This can add a level of customization to the retention flow. It’s never been easier for a customer to tell you why they are leaving.


Ready to reduce your SaaS churn and drive customer retention? Try Raaft for free today!

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