SaaS customer retention: must-track metrics for sustained growth

In the competitive SaaS landscape, customer retention isn’t merely a measure of satisfaction; it’s a foundation for scalable, sustainable growth. For founders, focusing on retention metrics not only helps improve user loyalty, but also maximizes Customer Lifetime Value (CLV), strengthens ARR, and reduces acquisition costs.

Retained customers often become your brand’s strongest advocates, driving down churn and enhancing product stability. Studies show that improving customer retention by even 5% can increase profits by up to 95%​. This article examines the must-track metrics for retention in SaaS. It provides actionable strategies for turning data insights into effective retention tactics, with real-world examples to inspire your approach.

Churn rate: understanding customer attrition

Churn rate is the most direct indicator of customer retention, showing the percentage of customers who stop using the service in a given period. A high churn rate signals unmet customer expectations, while a low churn rate suggests strong loyalty and satisfaction. Companies can implement proactive retention strategies by monitoring churn and understanding why customers leave.

Tracking and calculating churn rate

There are two key types of churn to track:

1. Customer Churn Rate - This measures the number of customers lost during a specific period, with the following formula:
   
   

For example, if a company starts with 1,000 customers and loses 50 by the end of the period, the churn rate would be 5%. This metric is useful for understanding overall customer retention but doesn’t capture the financial impact of lost customers.

2. Revenue Churn Rate - This measures the revenue lost from downgrades and cancellations, using the following formula:
   
   

For instance, if a company starts with $100,000 in MRR and loses $7,000 due to cancellations and downgrades, the revenue churn rate would be 7%. This metric is especially valuable for subscription-based businesses, providing a clearer picture of the financial impact of churn beyond customer numbers.

How to reduce churn?

Improve onboarding

Effective onboarding is essential in SaaS because it helps users quickly realize the product’s value, setting the foundation for long-term engagement and reducing early-stage churn. A strong onboarding experience that’s tailored to user goals ensures that customers understand how to achieve what they need within the platform, leading to higher satisfaction and commitment.

Research indicates that poorly guided onboarding is a leading reason for SaaS churn, with up to 23% of customers leaving due to initial usability issues​. By aligning onboarding to users’ specific needs, you can increase your chances of converting new users into loyal customers.

For instance, the project management app Notion designed an onboarding process that adapts based on user type, such as personal, team, or business use. This ensures new users can quickly access the tools most relevant to their needs. Such a tailored approach shows users immediate value, setting the foundation for higher engagement and reducing the likelihood of early cancellations.

Monitoring engagement

Monitoring user behavior can provide valuable insights into potential churn risks. SaaS companies can track user engagement closely and set up automated alerts to identify when customers stop using key features or show signs of disengagement. Intervening early with personalized outreach, support, or product education can re-engage at-risk customers before they churn.

Offer flexible pricing options

Another way to prevent churn is to provide flexible pricing structures that accommodate customers’ changing needs. This could include offering:

• different subscription tiers;
• freemium models;
• the ability to pause subscriptions.

SaaS companies can retain more users by allowing customers to adjust their plans rather than cancel outright.

For instance, Slack offers a range of pricing plans, allowing customers to scale their usage as their teams grow. Slack’s freemium model also allows smaller teams to use the platform before committing to a paid plan, reducing the likelihood of churn due to pricing concerns.

📌 TL;DR - Churn rate measures customer attrition and helps identify retention issues. Tracking both customer and revenue churn provides insights into growth and financial health. Reducing churn can be achieved through effective onboarding, monitoring user engagement, and offering flexible pricing options.

Net promoter score (NPS): measuring customer loyalty and advocacy

NPS is a popular metric that measures how likely customers are to recommend your product to others. High NPS scores generally indicate satisfied customers who are more likely to renew their subscriptions and act as brand ambassadors. In contrast, low NPS scores can reveal dissatisfaction and potential for churn.

Using NPS feedback effectively

NPS is calculated by asking users to rate, on a scale of 0-10, how likely they are to recommend your product. Promoters (9-10) are enthusiastic supporters, while detractors (0-6) might be at risk of churn. Subtracting the percentage of detractors from promoters provides your NPS score.

Source: https://frill.co/blog/posts/guide-to-customer-satisfaction-nps-i’-saas

Boosting NPS for better retention

1. Close the feedback loop: It’s not enough to gather NPS feedback; we should consider acting on it. For instance, a company can increase its NPS score by responding to detractors’ concerns and implementing changes based on customer feedback. Active engagement helps enhance user experience and strengthen loyalty.

2. Segment NPS results by customer type: You can identify which groups might require tailored attention by analyzing NPS data across customer segments. When identifying some customers at greater risk of churn, you can think of implementing support programs targeted for these users, helping improve retention within the segment.

3. Encourage advocacy among promoters: Engaging with promoters can turn them into brand advocates. For example, HubSpot leverages high-NPS users for its referral program, encouraging them to promote the platform to others. This strategy has helped the company increase its customer base through organic referrals while boosting retention among current users by creating a sense of community and loyalty.

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Customer lifetime value (CLV): maximizing long-term revenue

CLV is the total revenue a customer is expected to generate over their entire relationship with your business. Optimizing CLV helps SaaS businesses focus on high-value customers and build acquisition strategies that emphasize long-term profitability.

There are two straightforward formulas for CLV:

or:

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Segmenting CLV by customer demographics or industry can also identify the most profitable segments, allowing for more targeted retention efforts.

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Strategies to increase CLV

To increase CLV, companies often employ strategies that encourage greater engagement, commitment, and satisfaction among their customer base.

One effective approach is introducing upsell and cross-sell opportunities by offering complementary products or enhanced features. For instance, a SaaS company might bundle premium tools that meet specific customer needs, increasing average revenue per user while boosting satisfaction by providing more robust solutions.

Another key strategy is incentivizing long-term subscriptions by offering discounts for annual plans. This approach can drive commitment, stabilize revenue, and reduce churn, as customers are more likely to stick with a product they’ve invested in for the year.

Dedicating additional support resources to high-value customers can maximize their engagement and loyalty. For example, companies that assign customer success managers to high-spending clients often see improved retention rates, as these customers benefit from personalized guidance and quicker access to solutions, increasing their satisfaction and lifetime value.

Customer engagement score: predict and enhance retention

Customer engagement scoring is a custom metric that tracks user action indicators to show how actively and effectively they engage with your product. This allows you to understand user satisfaction and potential loyalty better. High engagement signals satisfaction and loyalty, while low scores can help pinpoint customers at risk of churning.

How to build an effective engagement score?

To build a meaningful engagement score, prioritize actions that correlate most strongly with retention for your product. Measure key activities such as login frequency, use of core features, and time spent on the platform, then assign weights based on their importance to user retention.

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Source: https://surveysparrow.com/blog/customer-engagement-metrics/

This score is an early warning system highlighting customer health trends that can guide your engagement strategy.

Actionable ways to use engagement scores to drive retention

• Leverage engagement scores: Spot users with low activity, especially those who haven’t adopted core features, and reach out with targeted support or tutorials to guide them.
• Reward highly engaged users: Recognize and incentivize your most active users with special offers, discounts, or exclusive content. For example, LinkedIn strengthens loyalty by offering premium discounts to highly active users, and encouraging renewals. Consider offering similar perks to top users to show appreciation and reinforce their loyalty.
• Gather and use user feedback: Active users are more likely to provide thoughtful feedback that highlights what’s working and what needs improvement. Ensure product development aligns with user needs—this is the best way to keep customers loyal in the long term.

Source: https://www.innertrends.com/blog/customer-engagement-score

By making customer engagement scores central to your retention strategy, you can transform data into actions that not only keep users engaged but also actively reduce churn.

MRR and the financial impact of retention

While MRR is typically used to measure growth and sales performance, it also provides valuable insights into customer retention. MRR can reflect how well your business retains and expands its existing customer base, making it a financial indicator of retention success. By tracking MRR, you can gauge whether customers are staying and deepening their engagement.

Focusing on expansion MRR - revenue from existing customers through upsells or upgrades - signals strong retention efforts. A consistent increase shows that customers are not just staying but growing with your product. Conversely, contraction MRR, or revenue lost due to downgrades, can reveal dissatisfaction. Monitoring this closely helps businesses address issues before they lead to greater losses.

MRR also serves as an early warning system. A sudden drop in MRR due to churn or downgrades allows businesses to intervene quickly.

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