Software companies are realizing they need to use precise data rather than vague guidance to determine how to enhance net revenue retention. Now, the variance in growth trends between average and top-tier companies is mainly attributable to contract size, billing methods, and early use of their products.
Therefore, this guide to saas retention strategies details all of the data benchmarks, scoring systems, and billing methods that software companies may utilize in order to cease losing customers and to protect their monthly recurring revenue.
How Data Helps Software Companies Keep Customers
Why Average Contract Value Matters
For many businesses, retention is commonly viewed as one single global figure. However, this view is misleading. Retention is determined by how much money you receive from a customer's average contract.
There is a profound difference between a small business that pays $50 (per month) and an enterprise (company) that pays $100,000 (annually). Top-performing B2B software companies have an annual churn rate of less than two percent.
Top-performing B2B companies track precise health scores to hold users accountable to their contracts and to push users towards annual contracts. The goal is creating a system that will provide advance notice to the company when the user is likely to drop off within sixty (60) days of cancellation.
Why Basic saas retention strategies Ignore Contract Size
The Contract Size Reality
In order to develop a retention goal, you must know your average contract size. For example, small business software with average contract sizes below $10,000 generally have a monthly retention rate of 95.8 percent, while the annual retention rate is an extremely low 59.7 percent.
When you reach the mid-market sizes of $10,000 to $50,000, monthly retention rates increase to 97.9 percent (an increase of 2.8 percent), while annual retention drops down to 77.5 percent.
In summary, contracts valued at $50,001 to $100,000 maintain a monthly retention rate of 98.7% and an annual retention rate of 85.5%, while enterprise accounts having contract values greater than $100,000 retain customers at a rate of 99.3% monthly and 91.9% annually. Applying enterprise objectives on small business products creates false expectations.
Monthly Versus Annual Math
A monthly churn of 3.5% seems insignificant, but it translates to a total churn for the year of 35%. Flat rate monthly billing companies will typically have the worst retention.
You need to analyze the total impact of that fractionally small monthly loss on your user base. The first step in preserving revenue is to shift your focus from monthly retention to annual retention.
The Health Score Model to Predict Churn
Setting Core Signals and Weights
To adequately identify risks before they occur, you need to have an established and defined scoring model as part of your saas retention strategies. Simply monitoring how frequently a customer logs into your application does not constitute adequate insight. To effectively create a customer health score, you must utilize precise weights.
35% of the score should account for product usage, based upon active weekly trends and session depth. Engagement quality should account for 25%, based upon meeting participation and reply to emails.
Support health should account for 20%, tracking sentiment of support tickets and escalation rates. Business outcomes should account for 15%, tracking return-on-investment (ROI) and discussions for expanding service offerings. The final 5% should account for any relationship risk. The relationship risk includes aspects like losing a core champion.
Setting Clear Thresholds for Early Action
Once established, the weights need to be translated into actionable thresholds that will trigger early warning signs for potential churn. For example, 70-100 on the health score indicates that the customer is healthy. The score between 40 and 69 indicates risk to the account.
A number lower than 39 represents the account's critical status. An analyst company (that is, a firm who employs analysts) with a revenue of $12 million utilized this specific breakdown, extending its ability to detect cancellations from 8 days to 71 days.
On top of the overall longer detection period, the save rate of that company grew from 14% to 51%. Allow your team the time to effectively save the accounts.
Prioritizing Early Product Activation
Why Your First Activation Events Matter
A true measure of time until value isn't achieved from having users "click through" a standard product tour. To activate users means to enable them to perform the one key action that demonstrates that the software works; that is, either running their first report and/or sending out their first campaign.
A strong correlation exists between the number of first activation events achieved and the gross revenue retention rate exceeding 90%. For example, ConvertKit achieved a drop in its monthly churn rate from 7% to 1.7% simply through utilizing white-glove onboarding techniques aimed at ensuring the user ultimately reaches his or her first activation event.
Your Onboarding Process for the First Sixty Days
Your company's onboarding must focus decidedly on achieving an activation event. Create a schedule to eliminate all obstacles to achieving the activation event. Having a well-defined schedule to work towards a successful activation event is ideal for your users; therefore, it is best that you use this schedule:
Days 0-5: For users who have not completed their main activation event, initiate specific directed messages.
A week 7 email provides direct insights for how like-clients achieve results using core features.
Days 14-30: Slowly introduce advanced tools, combined with in-app help for general stopping points.
How Payment Mechanics Lower Cancellations
Discounted Annual Payments
The average cancellation rate for annual subscribers is one-third that of monthly subscribers. The most effective way to start with annual billing in your saas retention strategies is to discount the initial annual payment by 15-20% for the switch from monthly billing. Making the annual payment option the default billing option will reduce customer cancelation rates by up to 60% without changing any of the customer's product.
Using Usage-Based Models
How a customer is charged for your service affects how long that customer stays with your business. The monthly churn rate for usage-based models is only 2.1%, whereas the monthly churn rate for flat-rate models is 3.9%.
A customer who is charged based on usage is less likely to cancel their account if they have a slower usage month, as their charge will be less. This keeps the customer's account open until usage increases again.
SaaS Retention Strategies in Action
Managing Involuntary Revenue Loss
Not all cancellations are due to dislike of the product. Many are related to credit card expiration. Involuntary churn has been categorized as a "silent killer" of revenue.
Create an automated system for recovering amounts due to failed payments. A properly implemented dunning system will retry a customer's credit card on a smart schedule, and automatically send a clear and concise e-mail requesting updated payment information prior to the account being locked for non-payment.
How to Build Smart Cancellation Flows
When users click cancel, you have one final opportunity to potentially retain them, so rather than allowing them to leave without any options, you should show a clear path of alternatives:
Offer to Pause — allow the user to put their account on hold for up to three months, as they may only need their account seasonally.
Offer to Downgrade — Provide a service at a lower price that limits the service access to keep their data in the backend system.
Offer a Discount — Provide a 15% discount for the next three months if price is their primary concern.
The Modern Customer Success Technology Stack
You won’t be able to manage these saas retention strategies with Excel spreadsheets alone. Enterprise companies deploy some profile or account management systems like Gainsight, which provide more complex scoring and mapping of user profiles to implementation, with warnings given to end-users.
ChurnZero is an example of a service that provides real-time alerts and messaging for teams focused on mid-market accounts. Tools such as Totango, Pendo, or Userpilot provide value and tracking in the area of product-led growth. However, these systems should be used based on the size of your contracts and whether your sales process is being driven by your product or a sales force.
Revenue Defense Final Verdict
To protect your users, you need to implement a highly-methodical approach. You need to build an approach that segments your users’ health metrics by the size of their contract. You also must enforce strict health scoring for each of your users and have a method of pricing that envelops them in a way that 'keeps them locked in.'
You cannot simply provide vague counsel by stating you need to increase customer happiness. Hard metrics, clearly defined activation goals, and auto-recovery of payments are essential. Companies that establish these systems consistently achieve over 120% net revenue retention. Therefore, they will be able to sustain long-term growth even during challenging market conditions.
The Critical Bottlenecks for Retaining Users
How late can I wait to take action based on a low health score?
If your system doesn’t begin sending an alert until a user has reduced their use of your product by 40% within the last two weeks of their contract, you’ve lost that account. It is essential to have a minimum of 60 days lead time for your success team to have the opportunity to take action. Anything less will turn your success team into a complaints department, as opposed to your strategic defensive unit.
Why do we experience drops in short-term conversions when switching to annual default billing?
Customers are required to have a higher level of trust in your company if they are required to pay an entire year's worth of service up front. Therefore, fewer customers will sign up within the first month of moving to default annual billing. That said, customers that sign up during that first month will tend to stay much longer. So you will effectively trade numerous weak, short-term customers for a smaller number of highly committed, long-term customers.
What aspect of the customer success model ceases to function first when you scale to mid-market accounts?
When scaling to mid-market accounts, the first area that fails is the human capacity to monitor customer accounts. A single manager can only oversee a limited number of accounts manually. With no automated alerts triggered by the user's pattern of usage of the product, the customer success team will find out about a number of unnotified cancellations only when their checks for the renewal are returned.
How do usage-based pricing models mask early warning signs?
The fact that a user can reduce their spending to close to $0.00 without having officially canceled will create a blurring between an active account and a dead account. Therefore, you need to utilize your core product functions to ascertain whether a usage-based customer is receiving value, rather than looking only at the monetary amount that the user is to be billed.
