What is a “Good” Retention Rate for a SaaS Company?

May 01, 2017 at 1:19 PM

It is a simple enough question to ask, but not all that easy to answer.  You first need to decide the best way to actually measure retention, and you then need to find peer companies with similar businesses against which to benchmark. 

Over the years, we have analyzed thousands of SaaS companies and we firmly believe the best metric for benchmarking churn is gross revenue retention which should be benchmarked against companies with similar annual contract values or revenue values per customer

While most firms should track both gross and net retention (net retention includes cross-sell, up-sell, and price increases), gross retention best isolates a company’s true customer retention characteristics without being clouded by its ability to sell more product into the installed base or raise prices. For a definition of gross revenue retention, please consult our research brief on the topic

In terms of finding companies to benchmark against, the one key variable you need to account for is annual contract value (ACV). Higher ACV products naturally have higher retention as purchasers of these SaaS products spend a lot of time, energy and money scoping, negotiating, and implementing the product. Also, these SaaS products are sold to larger, more established companies which tend to churn less frequently due to failures or mergers. For these reasons, comparing the churn of companies with high ACV products with those of low ACV products is not constructive. 

The chart below provides the relevant retention targets based on your SaaS company’s ACV. This data was based on our survey of over 700 private SaaS companies and their retention rates in 2016.  

Gross Revenue Retention by Annual Contract Value - SaaS Capital.png

We did additional research on churn based on this same data which you can find in our research brief on churn benchmarks. Interestingly, the data in the report shows gross churn rates actually decline as companies get larger and older. We also report on the impact a customer success program can have on retention. 

Todd Gardner
Founder and Managing Director, SaaS Capital

Tags: saas financials saas fundamentals saas metrics saas capital
Category: Financials

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