How to Increase Customer Retention and Get More Profit From Your SaaS
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As a SaaS company, you know how crucial it is to keep your customers happy, so that they will come back and buy more. After all, your revenue stream depends on the subscriptions they renew. But did you realize that knowing how to increase customer retention by even a small percentage can have a significant impact on your profits?
Retention not only helps you reduce customer acquisition costs but also boosts revenue growth, as repeat customers tend to spend more (67% more!) than new ones and are more likely to make referrals. In fact, studies have shown that increasing customer retention by just 5% can lead to a 25% to 95% increase in profits.
So, how can you increase user retention and keep your customers happy and engaged with your product? As a UI/UX design agency for SaaS, we can answer this question from a UX perspective.
In this article, we'll explore practical UX tips for increasing customer retention and this way, growing revenue. But first of all, let’s define what retention rate is optimal for your cloud company and how to calculate it.
Understanding and measuring customer retention
Essentially, the retention rate is the percentage of customers who stick around with a company's product or service over a period of time. The question it answers is simple, yet crucial: has a user returned and performed another action after leaving the platform? If the answer is yes, then the user has been retained. If the user did not return, then they've "churned" away.
Considering the definition we've just provided, before measuring the retention rate, you need to figure out several things:
- Choose what qualifies as an "action" in your specific case. For instance, some companies define such events as purchases, sign-ups, or profile completions as actions, while others may consider opening the app to be enough.
- Decide the time period over which to measure retention. Is it a week, a month, a couple of months, or else? The length of the time period depends on when you typically see users stop returning.
- Specify the number of actions that must occur during that period in order for retention to occur. It can be one action, a couple of actions, or a mix of valuable actions.
Once you have these elements defined, you can use a simple formula to calculate the retention rate.
P.S. If you have access to a product analytics platform, it can calculate your retention rate for you and present it on a dashboard.
Now that you know how to calculate the retention rate, you need to know if the value you received is suitable for your specific case, or might potentially raise some concerns.
The answer to the question “What is a good retention rate?” can vary depending on the business model and the stage of the company. For instance, a newer SaaS business might have a lower retention rate as it's still building its customer base, whereas a more established company might have a higher retention rate due to its strong reputation and customer loyalty.
There are two methods that can help you understand the optimal user retention rate for your business:
- Compare it to competitor companies. This variant is complicated because it requires the performance data of your competitors, which is generally not publicly available.
- Compare it to your past performance. This method, also known as retention analysis, requires evaluating your own performance on a regular basis (weekly, monthly, or so) to uncover trends. Over time, it’ll allow your team to establish your appropriate retention rate and act accordingly.
For example, if the retention rate is decreasing, you should identify the reasons and try to address them. If the retention rate is increasing, you should identify the related changes in features, marketing campaigns, and user behavior that may have caused it and capitalize on them.
Still, besides the user retention rate itself, there are also other metrics you should track to gain a better understanding of whether you have a problem with keeping your customers.
Key user retention metrics
Here are five more metrics that will help you get a holistic view of your SaaS retention.
This is the percentage of customers who have canceled their subscriptions during a specific time period. The churn rate can help identify the number of customers who are leaving and provide insight into why they are leaving. Simply put, churn is the opposite of retention.
Similar to the retention rate, the benchmark for SaaS customer churn rate varies depending on the stage of your company and the industry it operates in. According to ProfitWell, the acceptable churn rate for established companies ranges from 2% to 4%, while early-stage startups may experience churn rates as high as 24%.
- Renewal rate
This is the percentage of customers who renew their subscription at the end of a billing cycle. The longer a user stays with your business, the more profit they bring.
A high renewal rate can indicate the overall health of your business, especially if you have a long-term customer base. Companies for whom this metric is relevant, should strive to achieve a renewal rate of 100%, but a target of around 80% is considered good.
- Customer lifetime value (CLV)
CLV estimates the total value a customer will bring to a company over their entire relationship. It is an important metric for understanding the profitability of a company's customer base.
- The ideal scenario is to observe a steady or growing trend in this metric. But if your CLV is decreasing, it could be a sign that your customer base is flooded with low-value customers.
For a clearer picture, you can calculate Customer Lifetime Value in relation to your Customer Acquisition Cost (CAC). In SaaS businesses, the recommended benchmark for the ratio of CLV to CAC is 3:1 or higher.
- Customer acquisition cost (CAC) payback period
This metric helps you make sure you don't spend more on acquiring customers than what they're actually paying you. It measures how long it takes to recover the cost of acquiring customers.
The lower the CAC payback period, the better it is for the business. For SaaS startups, a good CAC payback period usually falls between 5 to 12 months, though it may vary during the early stages. In general, it's best to aim for a CAC payback period that doesn't exceed 12 months.
In order to track this indicator you need to measure the CAC SaaS metric, average monthly recurring revenue per customer, and gross margin percent.
- Net Promoter Score (NPS)
This metric measures the likelihood of a customer recommending your product or service to others. It is used to gauge customer loyalty and is particularly relevant for SaaS companies, as recurring revenue depends on retaining customers.
To measure NPS, a company typically asks customers how likely they are to recommend their product or service on a scale of 0-10, with 0 being "very unlikely" and 10 being "extremely likely." Customers who give a score of 9 or 10 are considered "promoters", while those who give a score of 6 or below are considered "detractors."
The NPS is then calculated by subtracting the percentage of detractors from the percentage of promoters, resulting in a score that ranges from -100 to 100. A positive NPS score for the SaaS industry is typically around +28, and scores higher than that are considered to be particularly favorable.
While all mentioned metrics provide valuable insights, their true value lies in their ability to help businesses take action to improve customer retention. Simply understanding the metrics is not enough; it's crucial to use this knowledge to implement effective customer retention strategies to enhance your business growth. So let’s learn how to do it with the help of UI/UX design.
5 effective principles to boost user retention rate with UI/UX design
Retaining users means you have to make your product sticky, so that people want (and need) to engage with it again and again. And though there are numerous user engagement strategies out there, at Eleken, we see a user-centered design as one of the keys to achieving product stickiness. So, all the customer retention best practices we will mention here are based on knowing your users, with their problems and needs, really well.
1. Onboard users properly to let them quickly experience the value of your SaaS
On average, the app loses 77% of its daily users within the first 3 days after the install. It means, optimizing user onboarding can have the most significant impact on retaining the largest segments of users and maximizing returns.
A poorly designed onboarding can drive customers away from your product, even if it has great potential. If people can't find value in your software or it's difficult to use, they may leave without looking back.
That's why, you need to define your app’s aha moment and try to lead your user to it as soon as possible. Consider being clear and concise in communicating your product value proposition right during onboarding. As an example, take a look at the onboarding screen we designed for Gridle (now Clientjoy), a CRM software for small businesses.
It simply states "Get paid faster", which is exactly what users want. After that, they are invited to create a new invoice and experience how quick and effortless it can be with Clientjoy.
2. Personalize the user's journey to exceed customer expectations
Approximately 76% of B2B customers expect companies to have a deep understanding of their specific needs and requirements. As personalization and customization help provide customers with exactly what they desire, it strengthens customer relationships, increases brand loyalty, and encourages users to come back for your product again and again.
For example, Acadeum, an online course-sharing and selling software designed for universities, has diverse user groups, including advisors, student consultants, and institution admins, each having distinct requirements from the platform. To cater to their specific needs, we designed an interface that allows users to select their role, and the platform will provide them with relevant information accordingly.
3. Minimize friction as much as possible
Even minor issues can lead to major frustrations over time, and this can cause users to lose interest in your product. When talking about friction, we refer to any obstacle or difficulty that prevents a user from completing a desired action on your product, such as an intrusive newsletter signup overlay that blocks the main content, or unnecessary and optional questions in a checkout process.
To prevent this, consider implementing features like form autofill to streamline everyday processes.
Here’s what we did with a long and confusing fill-in form for Ricochet360 CRM system.
It went from a large 30-field form with no indication of data format to a shorter and simpler screen with hints and only the most commonly used fields shown.
4. Reduce cognitive load
The amount of mental effort required to use an app, also known as cognitive load, impacts how easily users navigate the app and complete tasks. And quick and successful task completion makes users want to stay with you longer.
After years of experience working with complex and data-intensive products, we have compiled a list of top UX patterns that are effective in reducing cognitive load, such as using Wizard pattern, two-level menus, and versatile filtering systems.
In UX design, it is recommended to limit the optimal cognitive load to 5 (+/- 2) objects. We used this rule to get rid of the navigation overload when creating designs for Spoonfed, a food logistics company.
5. Keep upgrading your product
SaaS solutions are constantly evolving with the advancements in cloud technologies and changing business and users' needs. So, it’s natural for SaaS providers to ensure that their software keeps pace with these changes if they want to survive in a competitive modern market. And probably that is the reason why we’ve seen so many product redesign requests from our clients recently. SaaS product redesign is aimed to enhance the value of your product, making it more efficient in serving its users, and this way retaining them.
As you can see, investing in UI/UX design can be an effective customer retention strategy for SaaS companies. It can help simplify complex workflows, streamline navigation, and make it easier for users to achieve their goals. This, in turn, can reduce frustration, boost customer satisfaction, and encourage users to continue using the software.
To make sure you spend your resources wisely, you need a reliable design partner who will understand your business, listen to your ideas, but also have their own professional opinion. Partnering with Eleken means collaborating with a team of experienced designers who are passionate about creating intuitive and delightful user experiences. Let's turn your SaaS product into a customer magnet together. Reach out to us to schedule a consultation.