Is 45% an appropriate long-term retention rate for your company? It might be if you're a big social media site like Twitter. But if you're an enterprise SaaS company like Salesforce, anything below 90% might signal trouble, according to an analysis by two product and growth specialists.
Acquisition costs are key. If acquiring customers doesn't involve much more than good SEO, which might be the case for Twitter, having a lot of churn doesn't have to be the end of the world, says Lenny Rachitsky, growth advisor and former Airbnb engineer.
For companies spending a lot to target specific customers, which you would expect with an enterprise SaaS business, churn is expensive, and not just because customer acquisition costs (CAC) tend to be high. Lost customers have a downward effect on factors that impact your lifetime value formula, says Casey Winters, chief product officer at EventBrite.
Winters and Rachitsky teamed up earlier this year on an analysis of what good and great long-term retention rates look like. Their conclusion — it depends on your business. Consumer businesses tend to see more churn, so retention rates are lower; business-to-business models see less churn, so their retention rates are higher.
There are other factors as well: whether your business targets large or small clients, has a lot of products or just a few, the amount of money you charge, the lifespan of your product, and whether your retention is dependent on network effects, among others.
"Every company has a bunch of different factors that impact retention, Winters said in a SaaS Brief article.
These factors are your starting point for identifying and addressing weaknesses in your retention strategy, he suggests.
Good and great long-term retention
To pinpoint appropriate long-term retention rates by business type, Winters and Rachitsky convened a panel of 20 product and growth specialists earlier this year.
Their findings: A good retention rate for a social media site might be as low as 25% while for a consumer SaaS company it might be as high as 40%. A great rate for these types of companies might be 45% and 70%, respectively.
Other types of companies will have very different retention rates:
- Consumer social (Twitter, Facebook). Good: 25%, great: 45%
- Consumer transactional (Airbnb, Lyft). Good: 30%, great: 50%
- Consumer SaaS (Netflix, Spotify). Good: 40%, great: 70%
- SMB/mid-market SaaS (Slack, Atlassian). Good: 60%, great: 80%
- Enterprise SaaS (Salesforce, Workday). Good: 70%, great: 90%
They also asked the panel about appropriate long-term net revenue retention. Those findings also vary by business type:
- Consumer SaaS (Netflix, Spotify). Good: 55%, great: 80%
- Bottom-up SaaS (Slack, Zoom). Good: 100%, great: 120%
- Land and expand VSB SaaS (Gusto). Good: 80%, great: 100%
- Land and expand SMB/mid-market SaaS (Atlassian, ZenDesk). Good: 90%, great: 110%
- Enterprise SaaS (Salesforce, Workday). Good: 110%, great: 130%
The product and growth specialists call retention the single most important factor in product success.
"Retention is not only the primary measure of product value and product-market fit for most businesses; it's also the biggest driver of monetization and acquisition," Winters said.
This is partly because of the trickle-down effect of retention on other metrics. "Retention is the enabler of the best acquisition strategies," Winters said. "For virality or word of mouth, for example, one of the key factors ... is how many people can talk about or share your product. The more retained users, the more potential sharers. ... For paid acquisition or sales, the more retained users, the higher lifetime value, the more you can spend on paid acquisition or sales and still have a comfortable payback period."
If your retention rates aren't where you want them to be, you have three options for improving them, Winters says.
- Make the product more valuable by improving the product-feature fit. "Every product is a bundle of features," he said. "Your product may be missing features that get more marginal users to retain better."
- Do a better job connecting users to the value of the product. You can try improving onboarding, adding emails and other notifications as expiration nears, and either reducing or increasing friction, depending on which one promotes value. "[Reduce] friction in the product where it’s too complex and [add] friction when it’s required to connect people to the value," he said.
- Create a new product. If you're really struggling to retain users, you likely don't have good product-market fit and might need to introduce something new.
Before embarking on a strategy, try understanding how retention rates relate to your business model. If you’re a business-to-business company targeting small companies as customers, you can expect to have low retention rates because smaller businesses fail at a faster pace than big companies. At the same time, there are more small businesses than large, so your opportunity for acquisitions is greater.
There are other relationships to consider, including network effects. For a company like Slack, for example, whose customers bring in networks of people to collaborate, you can expect less churn because of the way the platform ties everyone together, creating a barrier to leaving.
"Retention matters," Rachitsky said in his analysis. "No other metric is as singularly telling of whether your business will thrive or die. And so, the better you understand what good retention looks like for your business, the better shot you have at [thriving]."