Key Takeaways on Retention Benchmarks for SaaS Companies
October 13, 2021
SaaS Capital has been conducting the industry’s top benchmarking survey in Q1 of each year for nearly a decade. Here, we summarize the findings relating to retention in our 2021 survey of private SaaS company owners and execs.
Retention or Churn?
A note first on terminology. Retention is, of course, the glass-half-full cousin of “churn,” the enemy of all subscription businesses. In the numbers that follow, churn is usually best described as (1 – “gross retention”), meaning, if you have 95% gross retention, that equals 5% churn. Net retention, in turn, adds to gross retention the positive effect of upsells, so net retention is always higher than gross retention. And, the means of calculation should follow a cohort over time for consistency.
The Impact of COVID-19 on Retention
- COVID was the major headline story of 2020, but surprisingly had a low effect on retention for private SaaS companies. We can’t fully explain this with the data, but we speculate that SaaS, among all industries, was particularly vital to continuity in a shift to remote work.
The Impact of Funding on Retention
- Bootstrapped companies outperformed VC-backed companies on retention for the first time ever. This also requires some speculative explanation, but we think it is likely that the VC “playbook” for managing product-market fit and reducing churn is now widely available to non-venture-backed SaaS companies at this point.
The Impact of Industry Focus on Retention
- Vertical-focused SaaS companies tended to outperform horizontal on retention, reflecting a small but persistent difference between the two types of companies. We think this may be due to the ability of more highly focused vertical SaaS companies to achieve tight product-market-fit, on average.
The Impact of Company Size on Retention
- Across the size categories (from sub-$1 million up through over $20 million) we found that gross — but not net — retention actually tended to be lower at larger companies. One way to explain this is that part of a SaaS company’s journey to $20 million involves shifting from an “explore” mode where all customers are sought-after, to a more focused “exploit” mode where only the best-fitting customers make sense to attract and retain. Under that idea, it becomes normal for a maturing SaaS company to go through a period of shedding ill-fitting customers (lower gross retention) while experiencing upsell growth from happy well-fitting customers (offsetting the losses to achieve good net retention).
The Relationship Between Growth and Retention
- Lastly, high growth (over 40% annualized) almost requires a greater than 100% net retention. Viewed another way, the turbo-boost of having your revenue “automatically” grow year-over-year is an extremely powerful way to get into the higher growth segment of SaaS companies. And the inverse is true as well; a “leaky bucket” with low retention is harder to fill.
We explore these themes, and others, more robustly in our Research Brief 2021 B2B SaaS Retention Benchmarks, and invite you to download a copy here.
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