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The subscription model of B2B SaaS businesses means that customers are paying for services on a monthly or annual basis. In this context, customer retention directly impacts your bottom line.
When more customers stick with your services for longer, it leads to higher recurring revenue and customer lifetime value.
But in the case of SaaS businesses, achieving and holding a good retention rate goes beyond simply counting how many customers stay with you over a period of time. Measuring your retention rate based solely on customer retention gives you only a limited view of how your business is really performing.
For a more accurate and comprehensive understanding of your retention rate, you also need to consider revenue. By calculating the retention rate with revenue in mind, you can gain a more holistic view of how your business is truly performing.
In this article, we’ll talk about the three types of retention rates for SaaS businesses, how to calculate them, and how to interpret them.
SaaS Retention Rate: Understanding the Different Metrics
For SaaS, there are three retention metrics you need to calculate:
Logo retention rate (measures customer retention)
Gross retention rate (measures revenue retention)
Net retention rate (measures revenue retention and expansion).
If you’re thinking of using only one of these three retention rates, don’t. All three of them are relevant, and you shouldn’t skip any. Taking into account all three retention metrics will give you a more comprehensive view of your current situation and future growth.
That’s because the SaaS business model is intricate and can't be simply evaluated by looking at the number of loyal customers or recurring revenue.
To get a complete view of how your SaaS business is performing, you need to calculate each of these retention metrics and evaluate them as a whole. Looking at only one of them will give you an inaccurate and misleading picture of your business’s real situation.
So, let’s now define each of the three retention metrics in more detail.
SaaS Logo Retention Rate (Customer Retention Rate)
The logo retention rate is a way to gauge how well your business keeps customers coming back.
Of the three retention metrics, it’s the only one that focuses on the number of returning customers rather than the revenue. In essence, it shows you how many of last year's customers are still with you today.
For SaaS businesses, the logo retention rate measures the percentage of customers who renewed their subscriptions out of all the customers who were up for renewal in a specific time period.
SaaS Gross Retention Rate (GRR)
The gross retention rate measures how well your company retains revenue. Also called gross dollar rate, it determines the revenue retained from recurring customers over a specific period of time.
The particularity of the gross retention rate is that it does take into account downsells in sales but doesn't take into account any compensating upsells.
So, basically, the gross retention rate shows how good a company is at making customers stick with what they initially bought.
But it’s a pretty harsh metric as it only considers the worst-case scenario of customers downgrading and leaves out the best-case scenario of customers upgrading. That’s why it'll never be more than 100%.
SaaS Net Retention Rate (NRR)
Think of the net retention rate as the optimistic cousin of the gloomy gross retention rate.
The net retention rate is very similar to the gross retention rate in that they both measure how well the company retains revenue.
But the main difference between them is that the net retention rate, unlike the gross retention rate, takes into account both downsells and upsells. And if those upsells are more than enough to compensate for downsells and even churn, then the value of the net retention rate will go above 100%.
Ultimately, the net retention rate shows how much the company can make from its existing customer base, regardless of how many new customers they’re acquiring.
What's a Good Retention Rate for B2B SaaS [+2023 Benchmarks]
When it comes to the average SaaS retention rates, it depends on various factors, such as the industry, the size of the company, their annual recurring revenue (ARR), their annual contract value (ACV), and other factors.
The report by SaaS Capital outlines all the averages considering all these different factors. I won’t get into each of these benchmarks, but here are some of the conclusions from this report.
Gross retention rate:
The average gross retention rate for all SaaS companies in 2023 is 91%.
If a company's ACV is below $25k, they should aim for a gross retention rate of 90%.
Companies with higher ACV should set a benchmark of 93% for their gross retention rate.
Net retention rate:
The average net retention rate for all SaaS companies in 2023 is 102%, which is the same as the previous year.
To achieve a median growth rate of 34%, companies should aim for a net retention rate of at least 100%.
As for logo retention rates... well, every industry has a different benchmark. And even within the same industry, these averages can still vary depending on the company's size and business model.
But, according to this report by ChartMogul, the best-in-class SaaS businesses have a customer retention rate of around 85-87%, regardless of their size or industry.
Each of these retention rates has its own average value. So, just because one rate is lower than another, doesn't mean it's automatically performing poorly. In other words, if one rate is lower than another but still higher than its own average, it’s actually performing well.
How to Calculate the Retention Rate for SaaS
The formulas for calculating your B2B SaaS retention rates may seem intimidating at first, but once you dive into them, they’re actually not that scary (unless you never liked math).
If you’ve been keeping track of other relevant metrics, such as customer churn or lost revenue, calculating your retention rates will actually be quite easy.
I’ve broken the formulas down below.
Formula for logo retention rate
To calculate your logo retention rate, begin by grouping your customers based on when they first signed up. For example, take the number of customers you had in a particular month last year.
Then, determine what percentage of those customers are still with you in the same month of the following year.
To do that, start with 1 (representing 100%) and subtract the result of dividing the number of customers who left during the year by the total number of customers you had in the first month of that year.
This will give you the percentage of customers who stayed with you — aka your logo retention rate.
Gross retention rate formula
This one is a bit complex, so we’ll need to break it down into steps.
Step 1: Add up the revenue you lost from customers who churned and from the downsells in month 1 of year 2.
Step 2: Divide that sum by your ARR from month 1 in year 1.
Step 3: Subtract the result of that division from 1 (representing 100%).
Step 4: Et voilà, that’s your gross revenue retention rate.
Net retention rate formula
This one is even more complex, so we’ll also need to break it down into steps.
Step 1: Add up the revenue you lost from customers who churned and from the downsells in month 1 of year 2.
Step 2: Subtract from this sum the revenue you gained from upsells during month 1 in year 2.
Step 3: Divide that sum by your ARR from month 1 in year 1.
Step 4: Subtract the result of that division from 1 (representing 100%).
Step 5: Ta-da! You’ve got your net revenue retention rate.
What Your B2B SaaS Retention Rates Say about Your Business
Ok, Kristin, but what does it all mean?
Great question! Calculating your SaaS retention rates is one thing. But knowing what those calculations tell you about your business’s health is another.
Let me explain the three most common scenarios for SaaS businesses and what they mean for your business.
A high logo retention but low gross retention
A high logo retention rate means you have no trouble retaining customers. Yet, a low gross retention rate means you have trouble retaining revenue from those initial subscriptions. While customers do, indeed, stay with you, they keep on downgrading their subscription plans, so your revenue decreases.
That’s not a great position to be in as a SaaS business, as it can mean one of three things:
Your customers don’t think your service is worth the money they initially paid.
Your customers don’t need all the features they initially signed up for.
Your customers don’t actually need your product and use it sporadically, so they keep their subscription at the lowest possible price.
So, how do you fix it?
In essence, by making your customers see the full value of your product. This means:
Making sure all the features of your product contribute to solving the customer’s problem effectively. No one wants to pay for features they don’t need.
Making sure your customers get to experience all paid features when they first subscribe so that they can see the full potential of your product.
Educating your customers on how to use your product to its fullest potential. You can do that via helpful blog articles, a resource library, an FAQ section, free onboarding training, and excellent customer support.
A high or moderate net retention rate but low logo/gross retention rate
This scenario means you’re great at upselling your product to some of your customers, but you fail to retain others. Some of your customers are either canceling their subscriptions altogether or downgrading their plans.
So, even if your upsells compensate for the customer and revenue churn rates, there’s still a retention problem you need to address.
This situation most likely means that your targeting is too wide. Some of the customers you’re targeting may not actually need your product or find it too expensive for their needs.
The solution is to see whether you can narrow your marketing efforts to the particular segment of your target audience that keeps upgrading their subscriptions. These are the customers that find your product extremely useful.
A high gross retention rate but a low net retention rate
A high gross retention rate is a good thing - it means that your existing customers are happy with your product and continue to renew their subscriptions. But, a low net retention rate means that few customers choose to upgrade their plans.
More specifically, it means that the money you earn from customers upgrading their plans is not enough to make up for the money you lose from downgrades or cancellations.
The result? Limited growth and unsteady ARR.
The source of this issue likely lies in your price strategy, or your team’s inability to sell upsells to existing customers.
Or, maybe, your customers just don’t see the value in upselling, which you can fix by using the land-and-expand strategy: create a lower version of your product at a lower price point to attract more customers and then upsell to those customers.
You can also try:
Using the three-tiered pricing model, aka creating 3 versions of your product at different price points.
Adding more features to your product that you can upsell to customers.
Incentivize your sales reps to sell more upsells.
Take a fresh look at your product and your add-on features. How can you improve your features so that customers are willing to pay more?
See Your SaaS Retention Rates as a Whole
Each retention rate is important for your SaaS business:
The logo retention rate indicates how well you are retaining customers.
The gross retention rate proves your ability to retain revenue from initial subscriptions.
The net retention rate shows the growth potential within your existing customer base.
But looking at each of these rates separately would be pointless.
It would only give you one piece of the puzzle and an inaccurate view of your business’s performance. It might trick you into thinking you’re doing better than you actually are, which means ignoring issues that will — sooner or later — hurt your growth.
Together, the logo, gross, and net retention rates give you a real picture of how well your business is doing. And if it isn’t, they indicate the areas that need to be fixed.
I'm a content and on-page SEO specialist here at ScaleCrush. I love when a blog post becomes more than a marketing piece, but an original source of information. This probably comes from my background in journalism.
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