Nothing feels as good as winning a new customer. Someone validated your service, is excited about your company, and even recommended it to others. So, where did they come from—and are they going to stick around?
One of the uncertainties in a SaaS business is the fact that you don’t always know how long your customers stay with you. Maybe they’re active users at the start, but they quickly drift off after the first few months. You can try win-back emails, new sales, and other retention initiatives, but that’s not helping you to plan for the future.
Instead, you should be looking at metrics that can help you learn about your customers and their habits. If you’re looking for long-term solutions for creating lasting relationships with your SaaS customers, use these six metrics.
Subscription Renewal Rates
Before we talk about “churn,” let’s understand renewal rates. Subscription renewal provides a basic, key insight into your customers’ patterns, and ultimately how they view your product.
For annual subscriptions, you can see if your customers are choosing to unsubscribe before taking advantage of the full year’s worth they paid for. This is a sign customers don’t see the value of your product. Unless you’re getting beat on price or have a non-functional product (which probably isn’t the case), then marketing and customer success need to develop stronger messaging and value props.
Monthly customers can turn over quickly due to cost saving goals.
In either case, understanding which customers are renewing, unsubscribing, or canceling early can help you detect patterns and characteristics of those who churn. You can target them, and learn about the “why.” It’s a basic metric to use before using the financial aspects of the churn rate.
Are you providing an option for your customers to recommend the service to a friend? Are they filling out surveys that provide you with a “share-ability” factor? Giving customers the opportunity to recommend your product gives you further insight into customer satisfaction.
If they’re perfectly happy with the service, and continue to subscribe without recommending to a friend, they may be indifferent or happy with your service, simply using it because they like it. If they are recommending to a friend, it’s possible that they’re motivated by the rewards and incentives you're providing. If so, here are ideas for generating referrals without spending much on incentives.
And maybe they’re just excited about your service and want to spread the word! Either way, recording this kind of metric is a quick and easy way to gain valuable customer insights.
“Discretionary Churn” Rates
Now let’s talk about churn. Rather than going the traditional route, let’s highlight a term coined by rjmetrics.com’s Karan Mehandru: Discretionary Churn.
Simply put, it’s the percentage of dollars that are churning based on how many dollars are available to churn in a given month. Because a portion of your deals are unavailable to churn because they are tied to annual contracts, a more accurate indicator of success is discretionary churn rate.
Here’s an illustration:
As mentioned above, based on subscription styles, not every customer can churn every month, so calculating the churn rate based on total customers is silly. Instead, calculate the churn rate based on how many customers are eligible to churn during that month.
This is going to give you a full and clear picture of which customers are leaving and how it’s affecting your business.
Customer Lifetime Value (LTV)
The lifetime value of a customer, most simply, can be calculated as the average monthly returned revenue of a customer, multiplied by the average customer lifetime.
This can transform the way that you relate to your customer, how you market to them, and how you develop strategies for long-term retention. It’s like a crystal ball for customer relations.
Customer Acquisition Cost (CAC)
At its most basic essence, this is what you’re spending to bring in new customers. For detailed discussion on how to calculate CAC, see "Understanding SaaS: Why the Pundits Have It Wrong," but what’s important to understand is that CAC is measuring how long it takes to get back to zero on your marketing costs. How long it takes for your marketing investment to break even.
If your acquisition costs are greater than the lifetime value of a customer, then your customers aren't profitable, and never pay back the cost to acquire them.
If you understand the lifetime value of a customer, then you know when your marketing dollars aren’t effective. What’s more is that you know what kind of customer you’re really trying to get with those dollars.
Maybe that means a call for more premium services, and maybe it just means a new messaging approach is in order.
The simple question here is: are you profiting? Is what you’re doing to reduce churn and acquire customers leading to profit?
You can’t simply pigeonhole your customers into profit margins, but you also have to be realistic about what your customers do for your bottom line. Is your service learning towards profitable, or are you just making ends meet?
The general calculation for this metric is along the lines of activity-based costing. Is the amount of current customers you’re holding, multiplied by the net gains, more than the total current CAC? If it is, then you’re definitely doing something right, and keep pushing to make that gap wider.
Understand the numbers behind your SaaS business, and get to know your customers. It can give you the insight you need to go from scraping by, to growing fast.
Sujan Patel has over 12 years of digital marketing experience and has helped hundreds of clients increase web traffic, boost user acquisition, and grow their businesses. Now as the VP of Marketing at When I Work, he’s applying the tactics and strategies he’s learned and developed over the years to take the company to the next level.