What is retention?

Retention refers to a customer continuing to use a business’ product or a service and to pay for the said product or service. It is a key metric for the majority of businesses, especially in SaaS.

Whenever retention becomes the subject, it is possible to hear the sentence “keeping customers is much more easier than acquiring new ones” and it is correct. High performing businesses usually have high retention rates which means the big majority of their customers keep using their products and services and pay them. Businesses with low retention rates can not sustain for long and their profits do not increase as much as those with high retention rates.

The reason why retention is such an important metric is the SaaS businesses’ dependance on subscriptions. Since they charge each month/year with usually affordable prices instead of selling once with a high pricing, they depend on customers to pay at least for a few months to meet their customer acquisition costs and profit. Usually a customer acquisition cost is a few times more than the monthly payment charged so to make it worth, the business needs to retain that customer for a few months.

How to calculate the retention rate?

Whether monthly or annually, retention rate calculation formula is:

total number of retained customers at the end of the period / total number of all customers at the start of the period.

A business that aims to grow at a sustainable and an increasing rate needs to calculate their retention rate regularly and find ways to improve this metric. It costs 7 times more expensive to acquire a new customer than retaining an existing one and in subscription based business models, both add the same amount to the revenue.

Most businesses put much more effort in customer acquisition than retention, whereas effort made for both should be same, if not more for retention. Every business with a consistent high retention rate have always succeeded while crushing revenue goals.

How to increase customer retention rate?

There are various novel ways to improve retention, however the simplest one probably is to conducting a churn analysis and finding why customers stop using the product and to get rid of these frictions.

These various ways are usually based on;

  • Eliminating the reasons for churn: as it was mentioned above, this is the simplest way to improve retention. If a user is not churning the business is retaining them, so removing churn from the equation as much as possible will improve retention directly. Conducting a thorough churn analysis that points out the reasons for churn then getting rid of them will surely minimize churn and improve retention.
  • Improving onboarding: onboarding is where a user decides on the initial purchase and whether they will keep using the product or service. Analyzing onboarding material, removing pain points, and improving the overall experience will ensure that users are satisfied with the value the product offers in the initial period of their journey and guarantee improved retention rates in new users.
  • Improving UX: the value product offers is definitely crucial but the path to this value and the experience of users along this path is much more important regarding retention. Improving the overall user experience and making it pain point and friction free can help reduce churn and increase retention.
  • Interacting with customers on a personal level: there are many ways to interact with existing customers. Whichever method is chosen, trying to establish a bond between the business and the interacted users and successfully managing it can convert regular users into loyal customers of the business who keep buying.
  • Gathering and utilizing feedback: learning what a business is performing well can be utilized to see what’s working and duplicating the working experiences among the product and service can ensure users are satisfied more. On the other hand, learning what’s not working and the mistakes the business is making can ensure those mistakes are removed and will not be repeated.

As it is mentioned above, there are many other ways to see an improvement in retention other than these.

Selman Gokce

Selman Gokce is the Senior Inbound Marketer of UserGuiding. He is highly invested in user onboarding and digital adoption, especially for SaaS, and he writes on these topics for the UserGuiding blog. When he's not writing, you can find him either listening to LOTR soundtracks while cooking or getting angry because he lost in a video game.

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