SaaS Retention Rate: a quick guide

Growth and analytics metrics are key for SaaS companies seeking a broad picture of their financial health. The SaaS Retention Rate is an indicator that provides an accurate quantification of the feedback customers are looking to express, it is an essential metric for understanding the value of products to customers.

In this article you will get detailed information to know what SaaS Retention Rate is, the different ways to calculate it and what it can offer you when evaluating the performance of your products or services.

What is SaaS Retention Rate?

It is a metric that quantifies the percentage of customers that your business or company was able to retain during a certain period of time.

Retention Rate is one of the most important indicators for SaaS companies that have a business model where customer renewal and retention sustains their profitability, an example of which are subscription-based models. Of course, Retention Rate is closely related to Churn Rate, since a high retention rate implies a low churn rate.

Thanks to this metric, it is possible to know the efficiency of the different departments of the company, including the marketing team, customer service and others. It is also possible to measure the effect of the changes implemented by knowing how many customers have continued to buy the product after the changes.

How to calculate the SaaS Retention Rate?

The SaaS Retention Rate is an easy metric to calculate, it requires only one mathematical operation and uses input data that is easy to get from the company’s own managed statistics.

The SaaS Retention Rate calculation is obtained by dividing the number of users who renew their plan minus new users by the number of total users who have the option to renew. In this way, a percentage is obtained that corresponds to the quantification of how many users renewed after analyzing the total universe of users who had the possibility to do so.

It is an easy metric to obtain with input data that does not come from another calculation, this translates into less chance of errors. However, the key and complexity to get a Retention Rate that fits reality is to rigorously define the concepts and benchmark the results obtained.

The criteria to define to calculate the SaaS Retention Rate

There are two key aspects to define before proceeding with the SaaS Retention Rate calculation. We will detail them for you below.

The critical event

It is understood as the action that the user must take to determine whether or not he/she is considered a retained user. Generally, the critical event is an action that generates revenue for the company through the product and, in addition, should be an indicator that the customer is getting what they need out of your product by paying for it.

The usage interval

This is the time interval in which the user is expected to perform the critical event action defined above. Of course, it is important to choose a consistent usage interval for the type of product and features offered so that the analysis and interpretation of the Retention Rate will be consistent.

The calculation based on users

One of the ways to calculate the SaaS Retention Rate is to consider the different types of users. Here we explain more.

Customer Retention Rate

This metric is responsible for measuring the percentage of customers or subscribers of users who are retained by the product. Calculating the Retention Rate using this criterion can give you an idea in terms of profitability when considering those who pay for your product or service.

User Retention Rate

The User Retention Rate is responsible for measuring retention across the entire customer base, without differentiating between customers on free and paid plans. In this way, you can know figures about user experience and engagement regardless of the revenue generated.

Retention rate of a sector

It is the Retention Rate that is calculated considering a sector with specific characteristics according to different segments or groups. Thus, it is possible to know more about the behavior of some particular customers and what has made their experience pleasant.

The time-based calculation

Another way to calculate Retention Rate is to use time as the evaluation criteria to define the metric. Here are the details.

Retention Rate of N-days

This is the metric in charge of quantifying the amount of users that were retained after a specific period of time. You have the possibility to adjust this metric to get one day results or with custom time windows.

Retention Rate with no limits

Measures the users who were retained by the product after one day or at any time thereafter. That is, there is no limit for defining a user as held.

Retention Rate with parentheses

It has the task of measuring user retention during a specific period, thanks to this type of measurement you can customize the interval with the intention of obtaining results tailored to your needs.

Final Conclusions: Why Retention Rate is important

The Retention Rate is important to know details of the performance of the product or service, in particular it provides answers of the user experience in the long term. Generally speaking, a higher Retention Rate means more engaged users and greater monetization opportunities.

At the same time, it is a very useful metric to know the reasons why users abandon the product. By knowing when customers abandon the product, it is possible to conclude why they did so.

This is certainly a metric that has a lot of potential for analysis and interpretation. Despite being a simple calculation, the different possibilities of settings to define the metric make it a powerful tool for those looking to improve the performance of their SaaS enterprise.

You can use our free SaaS data analysis tool to calculate SaaS Retention Rate and other metrics for free.