Of all the tech company IPOs launched in 2018, including Softbank, Dropbox and Spotify, only one was singled out by investor cheat sheet Seeking Alpha. Eventbrite, it stated, was one of the top IPOs of the past few years. Why? Eventbrite’s customer retention rate. The company kept 97% of its customers during 2017-2018.
“I’d say that, over the past five years, retention rates have become more requested by investors and are a more important metric overall,” said Rob Belcher, Managing Director at SaaS Capital. “Retention metrics demonstrate customer success and put a company in a better position to measure lifetime value.”
Customer retention metrics have gained momentum as investors look for indicators of business traction and CMOs look for proof of their strategies. Belcher’s company is among those innovating around measuring and deploying customer retention — and the business case for reporting it. SaaS Capital is an investment and debt management company specializing in the SaaS space. It has zeroed in on retention rates as a predictor of success for SaaS companies, and has created new analytics to measure it.
For example, the company has created a new way to view customer retention as a ratio to customer lifetime value. According to Belcher, that ratio “is the unit economic driver of value and profits that is obscured by normal GAAP financials.” Its 2018 SaaS survey quantified the importance of lifetime value and customer retention. A key finding: the calculated lifetime value of a customer doubles when the retention rate increases just three percentage points from 94% to 97%. Even at lower retention levels, such as the difference between 86% retention and 90% retention, the lifetime value increases 40%.
The SaaS Capital study is reinforced by research from Profitwell, which shows that improving retention rates can positively impact a company’s bottom line by as much as 6% versus acquisition, which has a 3% impact. In addition, 70% of companies say it is cheaper to retain rather than acquire a customer.
Metrics and analytics like this prove the impact of retention to the enterprise. Expect that the emphasis on customer retention will be driven by three dynamics in the current business environment.
Maturation of B2B SaaS models: According to Cisco, 83% of best-performing U.S. businesses used a planned SaaS strategy in 2017. The runway for B2B companies that rely on customer acquisition in the SaaS space is shrinking. In the hypergrowth, venture-backed environment of the past few years, B2B companies have preferred measuring and reporting revenue. It was consistently positive and fit the demands of investors. But as they mature, SaaS revenue models depend on repeat business to sustain revenue. Retention is the metric that shows consistent customer value. Without retention the most important B2B strategy — upsell and cross-sell — is a non-starter.
Proliferation of B2C Churn models: Telcos have long been held to the churn standard. “Understanding how much your customers actually use and depend on your product is the best indicator of happiness,” said Dale Chang, VP at Scale Venture Partners. “Engaged customers are more likely to renew their contract — which helps to keep your retention numbers steady. They’re also more likely to tell others about their experience with your product, which improves top-line growth.”
Retention rates will become the churn rate of a wider array of business categories, especially as subscription models proliferate. Retail subscriptions for pure play e-commerce and brick-and-mortar expansions are almost ubiquitous. Retention has become the priority for these companies, and a failure to report it has been noticed on Wall Street. In fact, meal kit subscription service Blue Apron took a 15% stock hit in Q3 2018 when it became apparent that it was losing more customers per quarter than it was adding. Blue Apron has still refused to provide a consistent retention metric.
Accountability: CMOs have struggled with finding impactful metrics to prove their marketing activities. A Demand Gen Report study from January 2019 shows 87% of B2B companies ranked marketing measurement and reporting as a growing priority, but more than half (58%) said their current ability to track marketing performance “needs improvement” or worse. Retention is an effective solve for this problem. B2B marketing retention metrics prove that marketing activities are either adding value or falling into the grey area of revenue. For B2C marketing, it will define whether strategies and campaigns get customers to buy again.
What’s the best way to measure retention? A group of marketing automation companies including Perficient, Optimove and Pipestream are leading the way with new technology and algorithms. The combination of necessity and innovation will continue to keep retention metrics and reporting front and center.