5 min read
The software as a service (SaaS) industry may be one of the more cutting-edge spaces in the business world, but they share universal operational challenges with every other industry: customer and net revenue retention (NRR). NRR calculates total recurring revenue minus customer churn in revenue over time. While there are various ways to measure business success, NRR is one of the best, and customer retention is a great way to improve it.
Without customers, there is no business, and acquiring them is only half of the battle. Keeping customers continually coming back to use your services is the ultimate challenge. Our team at Planhat understands this challenge better than most and created this blog to help shed light on what different rates companies should be shooting for depending on your industry.
In general, what is an acceptable customer retention rate? Ideally, every business wants to have at least a 100% customer retention rate. While this is a fantastic goal to shoot for, it is not always possible to keep this rate for any duration of time in every industry. Customers can decide to stop working with you for various reasons, many of which can be out of the business's control such as a customer’s budget changing.
So if 100% is the perfect number that everyone should shoot for, what about the opposite? What rate would mean a company is in danger? Regardless of industry, a customer retention rate below 50% would be a red flag that something fundamental about your product or how you deal with customers needs to change. This is because anything well under 50% means that very few of your customers are returning to you after the initial purchase.
Now that the generalities are out of the way, we can look at desired rates for specific industries.
Ecommerce has become a dominant staple in the retail and sales space. The average customer retention rate for Ecommerce organizations is 30%. This is much lower than other industries we will list primarily due to extreme competition that breeds an oversaturation of choice and little variety in price difference for similar products. A study by Bain & Company found that apparel customers spend 67% more on average with a company they have shopped with for at least 30 months.
The restaurant industry is highly dependent on repeat customers to keep profits at a survivable level. It is then no surprise that this and other hospitality industries average a customer retention rate of 55%. Perhaps more so than any other industry, customer service or relationships in the restaurant industry impact the decision to do business with a company over the quality of the product or service. If your food is amazing but it takes an hour and a half for any guest to receive it, you will quickly run out of customers.
Remember how we said a 100% customer retention rate was almost impossible to keep? SaaS companies are about to feel like overachievers. While the minimum rate that some companies are still able to achieve success is around 35, McKinsey & Company conducted a study that found SaaS companies that hit a net retention rate (NRR) of 120% had a much higher growth rate than other companies. 120%, how is that possible?
A company that is able to reach an NRR of over 100% means that the revenue they gained from upsells, cross-sells, etc., was more significant than the revenue lost due to downgrades and customer churn. It should also be noted that a "good" NRR for a company goes beyond the industry and is influenced by the size of the business as well. So how, then, can a business go about consistently increasing this rate?
Cross-Selling & Upselling: If you have gotten a customer to purchase one of your products or services, then there is a good chance you are also offering something else that would benefit them. For SaaS companies and other similar businesses, a definitive sales strategy will be essential to successfully implement either one of these tactics. For example, think about two services that complement each other and offer them as a packaged deal to the customer.
Improve the Customer Journey: Customer relationships directly impact customer and net revenue retention rates. Customer success tools like Planhat enables a business to sync essential data between siloed functional systems in real-time so that you can always tend to customer needs.
Recurring Subscriptions: For some SaaS organizations, this can seem like a no-brainer, but implementing recurring subscriptions into your business model can make a world of difference. This can be easily set up by offering an initial stand-alone purchase where extensive features and support from your organization come from a subscription model.
The importance of a good customer retention rate cannot be understated. Being able to retain and grow customers comes from your ability to make customers successful with your product or service.
The best way to increase NRR and customer retention rates is to follow - and grow - your customers through their complete customer journey. Planhat has become the ultimate tool to ensure your customers remain successful using your products. Don’t believe us, we are now the proud recipients of five leader badges in the G2 summer report: Customer Data Platform, Client Onboarding Software, Customer Success Software, Client Portal, and Customer Revenue Optimization.
To learn more about what Planhat can do, contact us for a demo today.
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