How to Measure User Retention Throughout The Product Experience
Building a successful SaaS company isn’t just about acquiring new customers—you also have to retain your existing users. According to astudy by Bain & Company, boosting customer retention by just 5% can lead to at least 25% more profits.
Measuring user retention and using the data to improve your product is an essential part of every SaaS strategy. You need to look at a variety of metrics to predict and react to customer churn.
Types of User Retention Metrics
There isn't a single user retention metric that can tell you everything you need to know. Instead, successful companies use a variety of formulas to predict and understand customer churn:
Basic Retention Metrics
You can use a couple of universal metrics to measure user retention. While these basic metrics are an excellent place to start when measuring your user retention, they don’t paint the whole customer engagement picture.
Customer Retention Rate (CRT)
Your customer retention rate is the number of users who stay on your platform over a specific timeframe. It’s often the first metric to measure to get an overall idea of your product user retention.
However, the CRT doesn’t show everything about your customer relationship. For example, it doesn’t take into account how often your existing customers use your platform each week or how much revenue your current customers are driving.
- How to Measure It:
- ((CE — CN) / CS)) X 100
- CE = number of customers at the end of a period
- CN = number of new customers acquired during a given period
- CS = number of customers at the beginning of a period
- ((CE — CN) / CS)) X 100
Churn Rate (CR)
Your churn rate is the number of people who unsubscribe from your platform after a period of time. While it’s an unavoidable part of doing business, SaaS companies should try to minimize it.
The more satisfied customers are with your product, the more likely they will stay on your platform. Conversely, if your customer churn is high, it likely means something is wrong with the product experience.
Measuring churn rate alone won’t explain why users leave your platform. To find out why they left, you’ll have to conduct surveys or interviews.
- How to Measure It:
- (Lost Customers ÷ Total Customers at the Start of Time Period) x 100
Customer Lifetime Value (CLV)
Your customer lifetime value (CLV) is the amount of revenue a single user brings to your company throughout the customer relationship. Measuring CLV is essential, as it costs significantly less to keep existing customers than to acquire new ones.
By measuring your CLV, you’ll be able to better measure the impact of your product experience on user retention. From there, you can find ways to boost your CLV, such as including upgrades in your product or investing in a customer loyalty program.
The biggest drawback of the CLV formula is it assumes your retention rate will remain the same in the future. Various factors could influence your CLV, such as industry trends, changes in customer expectations, or new technology.
- How to Measure It:
- ARPU (average monthly recurring revenue per user) × Customer Lifetime
Behavioral Metrics
For subscription models, low engagement is a warning sign (but since people are still paying for your service, those unengaged users are still valuable). For an ad-supported service, however, it's much worse, since your revenue depend on how active users are on your platform. Behavioral metrics go beyond customer retention rate by determining how active users are with your product:
Daily Active Users (DAU)
Your DAU is the number of users who open your platform on any given day. Measuring DAU is essential for messaging platform companies such as Slack, Discord, or Gmail. Since these types of apps are designed for daily use, how often customers open the product each day is a good indicator of product engagement.
- How to Measure It:
- Calculate the total number of unique users in one day
Weekly Active Users (WAU)
The WAU refers to the number of users who opened your platform at least once a week. It’s an essential metric to monitor if you anticipate weekly usage for your product and don’t want to get distracted by fluctuations in DAU. For example, WAU is a useful metric for a work management tool like Asana or ClickUp designed to help users keep track of all their tasks throughout the week.
- How to Measure It:
- Count the number of users that interacted with your tool within a week
Monthly Active Users (MAU)
Your MAU is the number of users who interacted with your software platform within a month. It’s an engagement metric particularly relevant to SaaS companies in the analytics space.
For example, say you’re selling a tool like Google Analytics or Ahrefs that measures the amount of traffic a user generates on their site. These types of apps are optimized for monthly reporting, not daily usage.
- How to Measure It:
- Count the number of users that interacted with your tool within a month
Retention Costs Metrics
As you measure user retention, you must factor in all the costs associated with acquiring and keeping your customers. It’s critical to determine if you’re effectively maximizing your budget to drive user retention.
Customer Acquisition Costs (CAC)
The CAC is what it costs to acquire one new customer. These costs can include marketing, sales, software infrastructure, and more.
When it comes to retention, aim for a customer lifetime value (CLV) higher than your CAC. That means customers contribute more to your bottom line over the course of your relationship than it took to acquire them in the first place.
- How to Measure It:
- (Total Marketing Expenses + Total Sales Expenses) ÷ Number of customers acquired
Customer Retention Costs (CRC)
Customer Retention Costs (CRC) indicate how much money you need to invest in retaining a customer and keeping them engaged throughout the product experience. A high CRC will lower profits since your existing customers are worth less than the money you’re investing to retain them.
- How to Measure It:
- Number of Customers at the End of the Time Period - Number of Customers Gained Within the Time Period ÷ Number of Customers at the Beginning of Time Period X 100
Customer Satisfaction Metrics
The point of optimizing your product for user retention is keeping your existing customers happy. Here are the best metrics you can use to measure your customer satisfaction:
Customer Satisfaction Score (CSAT)
Your Customer Satisfaction Score (CSAT) is a straightforward way to determine how satisfied customers are with your product. The result is based on a percentage score of 100%.
You can ask the customer to provide you their CSAT once they finish with onboarding. At this point, they’ve had the time to experiment with their platform and can tell you if your product meets their expectations.
The biggest drawback is customers usually fill out CSAT surveys when they either feel extremely satisfied or extremely unsatisfied with your product. Therefore, it could lead to inaccurate, skewed results.
- How to Measure It:
- Sum of all scores ÷ Sum of maximum possible scores X 100
Net Promoter Score (NPS)
The NPS rates how likely customers are to recommend your product to others based on a score from 0 to 9. It’s a solid metric you can use to identify your best advocates, and it takes less than two minutes for the customer to provide you with a score.
One drawback of running NPS surveys is you can’t follow up with the customer. Also, there’s a possibility the user may not be responding truthfully to the survey.
- How to Measure It:
- Score from 0 to 9
Revenue Retention Metrics
Ultimately, the goal of optimizing for user retention is to drive more revenue for your platform. There are two key metrics you can use to measure this:
Gross Revenue Retention (GRR)
The GRR measures how much of your monthly recurring revenue (MRR) you keep without factoring in the effects of churn or product downgrades. While it’s an excellent place to start when measuring the impact of retention on profits, it doesn’t provide a full picture of your revenue.
- **How to Measure It:**
- (Starting MRR – downsell – churn)/Starting MRR
Net Revenue Retention (NRR)
The NRR is how much net recurring revenue you generate from existing customers gained across a timeframe. Unlike GRR, you're factoring in the negative losses that come with churn or product downgrades. As a result, it provides a complete view of how much revenue you’re truly generating.
- **How to Measure It:**
- Starting MRR - Contraction MRR - Churn MRR + Expansion MRR / Starting MRR X 100
How to Leverage User Retention Data
Once you take into account all of these metrics, the next step is to use the data to improve the product experience and boost user retention:
1. Use Customer Retention Data to enhance your product
As a business, you can’t be all things to all people; success requires finding your audience and focusing on their needs. Analyzing your user retention data allows you to understand which type of customers are your best users and are more likely to stick with your software long-term. You can then break up raw data into user segments such as size, industry, or demographics.
For example, you notice your best users tend to be part of a specific age group, gender, and role. You can segment your Facebook ads based on these factors and boost product awareness to that group of customers.
2. Identify When Customers Churn
As you’re analyzing your user retention data, one important metric to look for is when customers churn. It may provide insight into why users start losing interest.
For example, let’s say your users often churn after just a couple of months. It could mean that new users feel confused and need more onboarding support.
3. Solve Churn Reasons With New Features and Updates
Once you identify when customers churn, focus on building new releases to better retain them at every point of the product journey.
Going back to our previous example, if customers are frequently churning within a couple of months, you can address their issues in various ways. You could add more support in the onboarding process by including product tutorials, or you could engage the user with content such as webinars to help them get the most out of your platform.
Don't Be Scared of User Retention Metrics
Your retention rate is an excellent indicator to see if your product matches the needs and expectations of your target audience. It’s also a key indicator of long-term stability for your SaaS company.
To get started with measuring user retention, identify the most significant metrics for your company. Next, set realistic goals for improving them, and then track them to measure if the changes in your product strategy are truly impactful.
