Editorial 21 Jul 2021

Retention beats acquistion for calm, customer-funded SaaS

A few years ago I was in the south of Spain looking for a place to get dinner. At some point, in front of some restaurant, a guy walks to me, promoting the place. After a short smooth talk, I went in. The place was packed, sure, but the service was quite poor. It was hectic and no joy to eat at all. I'd ate as quickly as possible and left right after, making sure never to go there again. And by the look of the faces around me, I wasn't the only one thinking this. That's a real-world analogy for “retention beats acquisition”. Yes, the smooth-talker got many people in the door, but manmany would never come again.

Photo by Markus Spiske on Unsplash

I think it’s a generally expected truth that it’s more expensive to acquire new customers, than to retain your existing ones.

It’s the number one reason I launched and am running this very company. Every feature, every improvement is build with this mantra in mind. Your features can be copied, your UI design can be copied, but how you treat your customers—the good you do, that’s a whole different story. Others can try to mimic it, but it’s near impossible to copy.

“The success of your SaaS company literally depends on how long you are able to get customers to pay for your product.”

The success of your SaaS company literally depends on how long you are able to get customers to pay for your product. Pretty simple, right?

Let’s get some definitions out of the way first.

What is customer retention?

Customer retention is the ability to keep existing customers to continue paying for the service or product your provide. It is a feedback metric. Meaning that it directly correlates to what your customers think of your product, your company and the service that comes with it.

If you got a poor retention rate, it’s similar like paying off debt while also spending more than you make.

For SaaS companies this is crucial.

What is customer acquistion?

Customer acquisition is when you find and then persuade prospective customers to use and pay for your service or product.

It’s the thing most people think of when they want to grow their business. This also goes for business leaders who find it more straightforward as retention requires additional thoughts. But I think it can be done easier and cheaper and with little help of your friends at Seos.

Why does retention beat acquistion?

Businesses spend a lot of hours and money to get customers, but that CAC increases quickly if they only stick around for a few months tops. Instead of constantly chasing more, your company would likely do a lot better if you’d dive deeper into the relationship with the customers you already have.

These are all convincing numbers, but no company is alike so let’s learn about some useful calculations you can do with your own customer data.

Let’s do some math

The two most important things to know in regards to customer- retention and aqcuisition is Customer Retention Rate and Customer Acquisiton Cost. Both are straightforward to calculate.

Customer Retention Rate is calculated per period using the formula: ((END - NUMBER) / BEGIN) * 100. The period (BEGIN and END) can be anything, from one day to a month. For most calm SaaS companies, a monthly period is most common.

Let ‘s say at the start of the month we started with 500 customers, at the end of the month we had 505 customer. We added a total of 20 customers in this period. Now we fill in the formula: ((505 - 20) / 500) * 100 = 97. A retention rate of 97 is impressive, we should be proud!

Any number above 90 is generally considered as really good.

Customer Acquisition Cost is a bit tricky as the numbers are usually not as readily available as our customers numbers. You can use the following formula: (TOTAL_COSTS / NEW_CUSTOMERS). So assuming we spent $50,000 on sales and marketing and within that period you gained 750 customers, your CAC is $66.

It goes without saying that your CAC can quickly go up, if your SaaS is like bucket of water with holes in the bottom. Hence retention beats acquisition.

How to improve your retention rate

There are numerous ways to improve your retention rate, but the most obvious and important one is to have a solid product that says what it does on thin and then some. You gradually improve your product, fix bugs timely and provide great customer support. That is your baseline. On top of that, there are a few more things you can do.

Have a pro-active customer support

Pro-active support teams are winning teams. By regularly checking in with your customers, you can be sure to also hear back from the “silent customers”. And with a bit of luck nip an almost churned customer in the bud. You shouldn’t randomly send emails to your customer, but checking in with them after 1 or 3 months or on their first subscription anniversary are perfectly acceptable.

Talk to your top 20%

Find the top 20% of your customers. And start a conversation with them about what they love about your product. You can use Seos’ segmentation tool to get help with that. It depends on your business what “top 20%” means, but it could be a combination of years subscribed, MRR and TCV. With the segment in place, you can create an automation that sends them automatically an email. Keep it brief and ask an open question. A simple: “how can we do better?” could be enough.

With the automation set up, you don’t have to do anything but keep track of the answers you get. Instant insights from your most valuable customers to continue improve your retention rate.

Listen to your customers

So you sent your top 20% an open question (and with a solid relationship with these) your response rate should be high (60 - 70%). Be sure to listen to your customers. Make note of recurring themes, and then relay your findings, solutions or answers to them. Don’t make them feel like they’re shouting into a void. If you get harsh critics—yes, that can happen!—reply without being defensive.

Incentives are nice, but not enough

Incentives, like swag, discounts or other are surely appreciated, but it’s the quality of your product and the service you provide that will you brand ambassadors. See swag only as the cherry on top.

Provide value in the background and let them know

A true worthy product also provides value when your customer isn’t actively using it. Not to brag: but once you set up your Seos account, most of the work then is done for you. And to be completely honest: I can do a better job of showcasing all that value (it’s on the roadmap!).

Do some churn analysis

Churn happens. Customers will leave for various reasons. But when they do, use that as an opportunity to get some insights into the why. And then act upon that. You can use Seos to send a lifecycle email when they cancel their subscription.

In conclusion

I am a big on customer retention, that much is clear. But that’s no reason to completely abandon any marketing or sale campaign you are currently running. When you are just starting out with almost no customers, it’s clear you need to go and acquire customers. But at a certain point, realise that, if you got all the pieces in place as outlined in this article, you got a solid system in place that will actually help you acquire new customers as your oldest and happiest customers can accelerate your WOMM campaign. A good product, with excellent, pro-active support equals a company that can aim for infinity and beyond.

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