Customer retention metrics are an important temperature check for your business’ health.
They provide insights into how much revenue your business retains each month, if your business can survive at its current churn rate, and how well your organization converts contract renewals.
11 Important Customer Retention Metrics to Track in 2021
- Customer Churn Rate
- Customer Retention Rate
- Net MRR Churn Rate
- Gross MRR Churn Rate
- Net Dollar Retention Rate
- Gross Revenue Retention Rate
- Customer Lifetime Value (CLV)
- Expansion MRR Rate
- Daily Active Users/Weekly Active Users/Monthly Active Users (DAUs/WAUs/MAUs)
- Net Promoter Score (NPS)
- Customer Satisfaction Score (CSAT)
The most obvious way to measure customer retention is to calculate direct retention metrics like retention rate and customer churn. But these metrics only tell you the rate at which you retain and lose customers — they fail to paint a more detailed picture about the revenue attached to those customers, why customers do and don’t churn, and other important factors related to retention.
In this piece, we’ll look at 11 essential customer retention metrics to measure the stickiness of your product, the growth potential of your business, and the value of your existing customers.
1. Customer Churn Rate
Customer churn rate is the percentage of customers that cancel their product subscription during a given period.
High churn rates indicate your product isn’t sticky or valuable enough for customers. Churn is also a barrier to business growth — no matter how many customers you acquire, a high churn rate means you’ll quickly lose most of them.
How to calculate customer churn rate
The following is the formula for calculating customer churn rate:
(Number of churned customers during a given period / Number of total customers at the start of the time period) * 100
Example of customer churn rate in practice
The following is the formula for calculating Let’s say you have 50 customers at the start of the month and 25 at the end of the month. This means your churn rate is 50%.
This is one of the simplest ways to calculate churn. However, your business may calculate churn differently depending on how you define a churned customer, the time period you consider, the seasonality of your business, and the difference in the behavior of different customer segments.
According to ProfitWell’s churn studies, a healthy churn rate lies between 2% and 8%. churn rate:
2. Customer Retention Rate
Customer retention rate is the percentage of customers that continue paying for your product for a given period. Customer retention is also called logo retention or user retention.
A high customer retention rate indicates your business can grow revenue month over month because churn is less of an issue.
How to calculate customer retention rate
The following is the formula for calculating customer retention rate:
(Total customers at the end of a time period – New customers acquired during that time period) / Existing customers at the start of the time period * 100
Example of customer retention rate in practice
Let’s say you have 50 customers at the start of the month and 46 customers at the end of the month. Out of these, six are new customers you recently acquired. This means your business retained 40 customers in the month. Thus, your retention rate becomes 80%.
Software companies targeting enterprises must have a logo retention rate of 90%, while those targeting small and medium-sized businesses must retain at least 75% of their customers.
3. Net MRR Churn Rate
Net monthly recurring revenue (MRR) churn rate is the percentage of revenue you lose in a month from cancellations and downgrades after taking into account revenue from existing customers through upgrades or expansions.
Net MRR churn rate tells you how much revenue you actually lose in a month after taking expansion into account. In addition, your net MRR churn helps you understand if growth in your existing customer base is strong enough to offset losses from churn.
How to calculate net MRR churn rate
The following is the formula for calculating net MRR churn rate:
(MRR churn in a month – Expansion in the same month) / MRR at the start of the month * 100
Ideally, your net MRR churn rate should be zero or negative. If net MRR churn is greater than zero, you’re losing revenue faster than your existing customer base adds revenue.
4. Gross MRR Churn Rate
Gross MRR churn rate is the percentage of revenue lost due to the total number of cancellations or downgrades in a month. Gross MRR churn rate is usually greater than net MRR churn rate, as it doesn’t factor in expansion from existing customers.
Your gross MRR churn rate gives you an unfiltered view of revenue lost in a month.
How to calculate net gross MRR churn rate
The following is the formula for calculating gross MRR churn rate:
Total MRR churn in a month / Total MRR at the start of the month * 100
As per investor Alexander Bruehl, “if the Gross MRR Churn is above 1% to 2%, there seems to be an issue with the product or the ROI [return on investment] story.”
5. Net Dollar Retention Rate
Net dollar retention rate, also called net revenue retention rate, is the opposite of net MRR churn rate. Net revenue retention rate is the percentage of recurring revenue retained from customers for a given period after factoring in upgrades, cancellations, downgrades, and pause requests.
Net dollar retention helps you gauge how well your business retains revenue from existing customers, as well as how well your upselling and cross-selling strategies are working.
How to calculate net dollar retention rate
The following is the formula for calculating net dollar retention rate:
(MRR at the start of a given period + upgrades during that period – downgrades – churn) / MRR at the start of a period * 100
Ideally, the net dollar retention rate should be greater than 100%, which means your business retains more revenue than it loses in a given month. Here are some common net dollar retention rates for SaaS businesses.
6. Gross Revenue Retention Rate
Gross revenue retention rate measures the percentage of revenue retained over a given period without factoring in upgrades. Gross revenue retention is also called gross dollar retention or gross MRR retention.
Gross revenue retention tells you how well you can maintain existing revenue, even if none of your customers upgrade to higher plans. If gross revenue retention is low, it means churn and cancellations are eating into your revenue each month, and you need to ramp up your retention efforts.
How to calculate gross revenue retention rate
The following is the formula for calculating gross revenue retention rate:
(MRR at the start of a given period – downgrades – churn) / MRR at the start of a period * 100
Example of gross revenue retention rate in practice
If you start with $1,000 in a month and lose $300 due to churn and downgrades, you’re left with $700 in MRR in the end. So, your gross MRR retention rate is 70%.
If you don’t lose any recurring revenue in a month, your gross MRR retention will be 100%, which is the maximum value for this metric. The median gross revenue retention rate for SaaS is 80% to 90%.
7. Customer Lifetime Value (LTV)
Customer lifetime value (LTV) represents the amount of money you expect customers to spend throughout their relationship with your business.
Your business may cater to wide-ranging customer segments, and lifetime value helps you gauge which customer groups are most profitable for your business and, thus, most worthy of your retention efforts.
How to calculate customer lifetime value (LTV)
The following is the formula for calculating customer lifetime value:
Average revenue per account during a time period / Customer churn rate during the same time period
Since customer churn isn’t always linear and you may also experience expansions along the way, this is only a simplified formula that gives you a rough estimate of customer LTV.
8. Expansion MRR Rate
Expansion includes upsells, cross-sells, add-ons, and reactivation. Expansion MRR rate is the percentage of additional revenue you gain from existing customers for a given month.
High expansion MRR helps you offset losses from cancellations and downgrades.
How to calculate expansion MRR rate
The following is the formula for calculating expansion MRR rate:
(Expansion MRR at the end of the month – Expansion MRR at the start of the month) / Expansion MRR at the beginning of the month * 100
Expansion MRR should ideally be greater than churn MRR for a given period to build a sustainable business.
9. Daily Active Users/Weekly Active Users/Monthly Active Users (DAU/WAU/MAU)
Daily active users (DAU), weekly active users (WAU), and monthly active users (MAU) are engagement metrics that tell you how many customers use your product regularly. By keeping a pulse on DAU, MAU, and WAU, you can proactively monitor product usage, nudge inactive users to use your product more often, and prevent churn.
To calculate DAUs, MAUs, WAUs, first define what “active user” means for your SaaS business. For example, for a business chat app like Slack, an active user could mean someone who opens the app, clicks on unread chats, and sends messages.
Once you define active users for your product, calculate engagement metrics depending on how often your app should ideally be used.
For instance, for a social media app that could be used daily, DAU is an ideal measure of retention, while for a grocery shopping app that may be used weekly, WAU is an ideal measure of stickiness. MAU is a good metric to track for an app with monthly usages, such as an employee payroll app
How to calculate DAU, WAU, MAU
The following is the formula for calculating DAU, WAU, and MAU:
- DAUs: Number of users who use your product on a daily basis
- WAUs: Number of users who use your product on a weekly basis
- MAUs: Number of users who use your product on a monthly basis
Use DAUs, WAUs, and MAUs to track retention trends for your business. If your active users decline from one month to the next, proactively help inactive users to find value in your product to boost usage.
10. Net Promoter Score (NPS)
Net promoter score is the percentage of customers likely to recommend your product (or promoters) minus the percentage of customers unlikely to recommend your product (detractors).
An NPS survey includes a single question, “How likely are you to recommend us to a friend?” Customers must choose from a scale of 1 to 10, where 1 means they’re unlikely to recommend a product, while 10 indicates they’d be happy to recommend it.
A positive NPS score means your current customers are satisfied with their overall product experience and likely to become product advocates.
How to calculate NPS
The following is the formula for calculating net promoter score:
% of promoters (customers who give you a score of 9 or 10) – % of detractors (customers who give you a score of 0 to 6)
For B2B software and SaaS companies, the average NPS is 30.
11. Customer Satisfaction Score (CSAT)
Customer satisfaction score (CSAT) is the percentage of customers who are happy with your product or customer service experience.
CSAT surveys ask customers to rate a business on a scale of 1 to 5 based on the following question: “How satisfied were you with our product/service?”
Like NPS, CSAT is another metric to get a pulse on customer experience and gauge retention.
How to calculate CSAT
The following is the formula for calculating customer satisfaction score:
Number of customers who rate your company 4 or 5 on a CSAT survey / Total number of customers who take the survey
For software companies, CSAT generally hovers around 76%.
The goal of tracking customer retention metrics is to use them as a compass to guide your customer retention efforts and retain more customers and revenue over time.
For instance, if you find product usage declining over time, you know your customer success team needs to spend more time helping users find value in your product. If your customer retention rate remains steady but your revenue retention rate declines, it means your existing customers are downgrading to lower-priced plans. Thus, you need to ask customers why they choose to downgrade and modify your offerings or provide customers additional incentives to stay. If your CSAT scores are low, you’ll need to improve the overall customer experience to boost retention.
Track customer retention metrics over a period of time to check if your retention improves over time. If you serve a wide customer base, track retention for each customer cohort separately, and compare retention trends across customer segments for greater accuracy. Here’s a complete guide to customer retention strategies to get you started.
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