Mastering customer retention is crucial for the long-term success of SaaS businesses. While customer acquisition often takes center stage, it’s the retention of these customers that drives sustainable growth and profitability. Retention directly impacts key business metrics and overall market positioning, especially in today's economic climate.
But why is retention so crucial?
As highlighted in the webinar by Vincent Gouedard, CEO and Co-Founder at Fincome, and Nicolas Garmy, Co-Founder at Skalin, the current market dynamics have intensified the importance of retention and upselling. The economic challenges since mid-2022 have made it more difficult for SaaS businesses to achieve new business growth, making expanding existing customer accounts a critical lever for sustained growth.
In this article, we’ll delve into industry expert key insights, covering the importance of retention, the financial impact of churn, and strategies for improving retention and upselling in SaaS.
Navigating current SaaS market trends
Economic impact on SaaS businesses
Vincent began by outlining the current market context, highlighting how the economic downturn since mid-2022 has significantly impacted new business growth across the SaaS industry.
He pointed out that the growth in new business (NewBiz) has slowed down considerably, especially for companies in the mid-market segment with ARR between $5 M and $50 M. As a result, the importance of retention and upsell strategies has increased, with expansion within existing accounts becoming a vital growth lever.
The rise of expansion as a growth driver
The webinar emphasized that with new business opportunities being limited, SaaS companies must now rely more on expansion—through upsells and cross-sells within their existing customer base—to drive growth.
As highlighted in the webinar, for companies with ARR between $5 M and $50 M, expansion now accounts for up to 44% of growth, making it an indispensable strategy.
Moreover, data shows that upselling becomes increasingly critical as a company’s ARR grows. For companies with more than €20 million in ARR, upsell contributes to over 40% of revenue growth. This underscores the importance of having a robust upsell strategy, as it becomes a key driver of growth once a company reaches a certain scale.
Retention and churn explained
Key definitions and metrics
Nicolas and Vincent provided a foundational understanding of key metrics like churn and retention. They explained that churn can be measured in revenue (euro churn) or the number of customers lost (customer churn). These metrics are critical for understanding the long-term sustainability of a SaaS business.
- Revenue churn: The percentage of recurring revenue lost due to customer cancellations or downgrades.
- Customer churn: The percentage of customers who cancel their subscriptions within a given period.
The financial impact of churn
Vincent used a compelling example to illustrate the long-term financial impact of churn. He showed that even a small increase in churn from 0.5% to 3% can lead to a loss of up to €44 million in ARR over five years. This example underscored the importance of effectively managing churn to ensure long-term growth.
Net Revenue Retention (NRR)
The concept of NRR was also discussed as a key metric for SaaS businesses. NRR measures revenue growth from existing customers by considering expansions, contractions, and churn.
NRR is calculated by taking the total revenue from your existing customers at the start of a period, adding any revenue gained from upsells or expansions, subtracting any revenue lost due to churn or downgrades, and then dividing by the revenue at the start. This result is multiplied by 100 to express NRR as a percentage.
For example, if your company started the month with $100,000 in revenue from existing customers, gained $20,000 through upsells, and lost $10,000 due to churn, your NRR would be calculated as follows:
An NRR of 110% indicates that your revenue from existing customers grew by 10% over that period, meaning you not only retained your customers but also expanded your revenue from them.
Benchmarking retention and churn
Industry benchmarks for churn and NRR
Vincent and Nicolas provided benchmarks for churn and NRR based on industry data. They noted that churn tends to decrease as companies grow and mature, with larger companies typically having lower churn rates due to more sophisticated pricing strategies and stronger customer engagement.
Conversely, NRR tends to increase with company size, as larger companies are better able to drive upsells and cross-sells within their customer base.
Analyzing cohorts for better retention insights
Cohort analysis was recommended as a powerful tool for understanding retention and churn patterns over time.
SaaS companies can identify trends and take targeted actions to improve retention by analyzing groups of customers who joined during the same period.
How to boost retention and upsells?
Reducing churn
Product quality and customer fit:
The foundation of retention is having a strong product that fits well with the needs of your target customers. Without a product that delivers value, no amount of customer success efforts will be able to prevent churn.
User-centric design is fundamental to driving product adoption. This approach involves understanding user needs, pain points, and behaviors to create intuitive and seamless experiences. You can develop functional and enjoyable products by placing the user at the center of the design process.
For example, by incorporating feedback loops, conducting usability testing, and iterating based on user insights, your SaaS can significantly enhance its user experience.
Here's what you can do to improve it:
- Conduct user research early and often: Engage with potential users during the product development phase. Use surveys, interviews, and usability tests to gather insights into their needs and pain points. This information will guide design decisions and ensure the product resonates with users.
- Simplify the user interface: Aim for simplicity in design. Reduce cognitive load by minimizing the steps required to complete key tasks. Use visual cues, such as icons and tooltips, to guide users without overwhelming them.
- Create personas: Develop detailed user personas that represent different segments of your target audience. These personas should include demographics, goals, challenges, and behavior patterns. Use these personas to inform design decisions and ensure the product meets the needs of various user groups.
Effective onboarding:
Vincent and Nicolas discussed the importance of onboarding in reducing churn. He highlighted data showing that customers who do not reach a minimal usage level within the first ten days are ten times more likely to churn within the first year.
Therefore, a fast and effective onboarding process ensures customers understand the product’s value quickly, leading to higher engagement and lower churn rates.
The process should include personalized guidance, clear value propositions, and immediate opportunities for users to experience key features.
For instance, offering tutorials, in-app guides, and personalized support can help users overcome initial hurdles and start using the product confidently. This approach improves the user experience and increases the likelihood of long-term adoption.
Centralizing customer data:
The webinar stressed the importance of having a unified view of customer data across different tools and platforms. Without this, teams cannot effectively monitor customer health, leading to missed opportunities and reactive rather than proactive customer management.
Health scoring beyond NPS:
While NPS is useful for measuring customer satisfaction, it is not a reliable predictor of churn. Instead, a comprehensive health score that combines usage data, contract value, and interaction history provides a more accurate assessment of a customer's likelihood to churn.
Driving upsell
Modular product design:
Vincent suggested avoiding monolithic products with a single offering. Instead, companies should design their products in modules, allowing for different plans and premium features that can be upsold to existing customers.
Pricing strategies:
The webinar recommended moving away from user-based pricing, especially in times of economic downturn. Alternatives like usage-based pricing or feature-based pricing were highlighted as effective strategies to drive upsells without relying solely on increasing the number of users, as seen with platforms like Kaspr, Livestorm, and Zapier. Features should be limited according to the chosen plan, and functionalities should be isolated per plan (e.g., workflows versus sequences).
Regular price increases:
Implementing regular price increases, backed by a clear communication strategy, was advised to ensure revenue growth from existing customers. Vincent and Nicolas mentioned the importance of including clauses in customer contracts that allow for automatic price adjustments based on external indices like the Syntec index.
Aligning teams for growth
Cross-team alignment
The responsibility for churn management extends beyond the customer success team. The webinar emphasized that CEOs must align all teams, including sales and marketing, around common retention and upsell goals. This ensures that everyone in the company is working towards the same objectives, with shared accountability for NRR.
Therefore, sales incentives should reflect the “good fit” of customers, and options offered during the signing process should be limited, including creating a workflow for discount validation.
Additionally, training CSMs in sales techniques is essential to ensure they ask the right questions and identify upsell opportunities. Finally, teams should be desiloed, perhaps by implementing a CRO role to unify efforts.
Incentivizing good fit sales
Finally, Nicolas suggested incentivizing sales teams based on the quality of customers they bring in rather than just the quantity. Companies can improve their long-term revenue outcomes by rewarding sales reps for signing customers with a high potential for retention and upselling.
Vincent and Nicolas highlighted that mastering customer retention and upselling is critical for SaaS companies, particularly in today’s challenging economic environment. Your business can ensure long-term growth and profitability by focusing on key metrics like churn and NRR, adopting effective onboarding practices, centralizing customer data, and aligning internal teams around shared goals.
Adopting these strategies will help reduce churn and drive significant revenue growth through upselling, positioning your company for sustained success in the SaaS market.
