Retention is not silver bullet, but in SaaS it comes closest.
High retention indicates a strong product-market fit. It is proof that you are solving a real problem and adding value to your customers.
High retention also means better growth. Companies with best-in-class retention grow at least 1.5x-3x faster.
Finally, high retention means a more capital efficient company. In SaaS, acquiring customers is the most expensive part of running your business. Even on a grand scale, sales and marketing costs make up the bulk of your expenses. If you can’t keep these expensive customers, your business becomes less efficient and costs more to scale.
Given all this, it’s no surprise that companies with higher net income retention tend to have higher valuations.
How can companies know if their retention rate is OK? And with the recent downturn in the market, is retention lower than it used to be?
There’s no better way to answer that than looking at real data. At ChartMogul, we studied more than 2,100 SaaS companies to bring retention benchmarks and trends to the SaaS community. Here are our main takeaways.
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Preservation in 2022 was more difficult than ever
More than half of SaaS companies had lower retention in 2022 compared to 2021. A challenging macroeconomic environment meant subscribers had to reassess and reduce their SaaS spend. This is in stark contrast to 2021, when almost 70% of companies had a higher retention rate in 2021 than in 2020.
Percentage of companies with higher net income retention than last year. Image Credits: ChartMogul
This trend of lower retention in 2022 vs. 2021 is not unique to SaaS startups. SaaS giants like Snowflake also saw their retention drop from 2021 highs.
SaaS companies with an ARR of more than $3 million should aim for a net retention rate of more than 100%
What is considered a good net retention rate varies by stage of your business.
In the pre-product-market-fit phase of the business, net retention is usually poor. As startups grow and fit the product market, net retention improves. Finally, as companies achieve scale and become category leaders, net retention often goes over 100%.
When benchmarking, always take into account the stage your company is in. Companies with an ARR between $1 million and $3 million have a top quartile net retention rate of 94%. Those in the $3M – $15M ARR segment have a top quartile net retention rate of 99%. Large-scale companies with an ARR between $15 million and $30 million have a net retention rate in the top quartile of over 105%.
Net income retention rate (%) by ARR range. Image Credits: ChartMogul
A net retention rate of less than 100% means your ARR is decreasing, meaning you have less ARR today than you did a year ago from the same group of customers. A net retention rate of more than 100% indicates a strong product-market fit and demonstrates your ability to grow revenue from your existing customer base.
Among the higher ARR ranges, more companies have net retention rates greater than 100%. Just over 35% of SaaS companies in the $15 million to $30 million ARR range have a net retention rate greater than 100%.
Net income retention leaders by ARR range. Image Credits: ChartMogul
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