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The Power of Better Retention

Unlocking growth by fixing the leaky bucket

Thought it was time to write an article about retention. KPIs are one of my favorite topics anyway :-)

Retention is something that is often ignored by SaaS founders for too long. I observe this especially with bootstrappers.

Although it is one of the most important KPIs and among the top valuation factors. 👇

Source: Software Equity Group

As long as you keep acquiring new paying customers and the ARR keeps growing, it is easy to disregard retention.

But as soon as the acquisition of new customers slows down, there is a risk that revenue starts to flatten out or even decline. I have seen it many times.

New MRR is eaten up by churn and contraction – and there is little to no expansion to compensate.

When we at saas.group pass on M&A opportunities early, it is often due to poor retention figures.

Quick refresher:

Gross Revenue Retention (GRR) = (Beginning MRR - Churn - Contraction) / Beginning MRR
→ Shows how well you can retain revenue, without accounting for expansion

Net Revenue Retention (NRR) = (Beginning MRR + Expansion - Churn - Contraction) / Beginning MRR
→ Gives you an idea of how well you are retaining revenue, but also how much you are expanding

Here are some benchmarks:

Source: ChartMogul

As you can see, there are three ways to improve retention:

  1. By reducing customer / revenue churn
    5 strategies to reduce churn in SaaS

  2. By preventing customers from downgrading

  3. By driving expansion (additional MRR generated from existing customers, e.g. through up-/cross-selling)

    8 Ways to Grow Expansion Revenue

The great thing about retention improvements:

  1. There is a compound effect

  2. It also has a positive effect on the #1 valuation factor: revenue growth

Let’s take a simple example:

  • SaaS with $200k MRR ($2.4M ARR)

  • Struggling to acquire new customers (new MRR = $0)

  • Serving SMBs (MRR Churn = 5%)

  • Freemium with just one paid tier (both contraction & expansion = $0)

A rare species, I know. It’s just hypothetical.

In one year, the business will lose 46% of its MRR. $2.4M ARR down to $1.3M. Ouch.

Let’s assume they managed to cut churn in half (2.5%/mo). Looks better now. The loss would only be 26%. $1.8m ARR vs $1.3m ARR.

What if they introduced a new price tier and generated $10k expansion MRR by upselling some customers – assuming they lose $3,000 again due to contraction?

Boom! 🙂 A plus of ~10% vs. beginning of the year (+104% compared to the first scenario). $2.65M ARR vs. $1.3M ARR.

And please remember: all without having won a single new customer!

In a cohort analysis, the differences between various retention values can be seen even more clearly. Below is an old example with different figures.

Cohort analysis is powerful method to dig deeper into the churn / retention dynamics of your business.

It’s a good starting point to detect possible issues before you start fixing them. Here is a helpful guide if you want to give it a try!

I hope that some founders will read this and now look at possible improvements.

Btw, the Net Revenue Retention of most publicly listed SaaS companies is well over 100% (see here). Retention is crucial to how big a SaaS business can become!

I would be very happy if you could help me spread the word about this newsletter via the link below.

As a reward for at least 1 referral, you’ll get a proper GSheets template for the cohort analysis. 🙌

The one with the most will also receive a shoutout.

A big thank you for last week goes to: Oliver Stalman