For B2B SaaS companies, customer retention isn’t just a metric—it’s the heartbeat of sustainable growth. Retention rate tells you how well you’re keeping customers, whether they’re here for a single project or the long haul. It gives clues about customer loyalty, product value, and revenue stability, all wrapped up in one metric. If you’re looking to understand what retention rate really means, different ways to calculate it, and how to improve it, read on!
What is Retention Rate?
At its simplest, retention rate measures the percentage of customers who stick around during a given period. High retention means your product resonates with users; low retention is a signal to investigate and improve. For SaaS businesses, retaining customers helps create predictable revenue and reduces the pressure to find new ones.
But, here’s the trick: There’s no single retention rate formula for every situation. The way you calculate it depends on the story you want the metric to tell. Below are a few popular methods and examples to give you a better sense of how it works.
The Go-To Method: Customer Retention Rate (CRR)
The most common way to calculate retention rate is Customer Retention Rate (CRR), which zeroes in on the number of customers who start and end a given period with you. Here’s how it’s calculated:
\(\text{Retention Rate} = \left( \frac{\text{E - N}}{\text{S}} \right) \times 100\)
- E = number of customers at the end of the period
- N = number of new customers acquired during the period
- S = number of customers at the start of the period
CRR Example
Imagine starting the quarter with 100 customers (S). By the end, you have 120 customers (E) but added 30 new ones (N). Your retention rate would be:
\(\text{Retention Rate} = \left( \frac{120 - 30}{100} \right) \times 100 = 90\%\)
This 90% CRR shows that most of the customers you began with stayed—great news for a SaaS company focused on customer loyalty.
Expanding the View: Net and Gross Dollar Retention
While CRR focuses on customer count, Net Dollar Retention (also known as Net Revenue Retention) tracks customer spend. It’s particularly useful for B2B SaaS, where you may have multiple pricing tiers, expansions, and downgrades.
The formula:
\(\text{Revenue Retention Rate} = \left( \frac{\text{MRR at the start + expansions - contractions - churn}}{\text{MRR at the start}} \right) \times 100\)
Where:
- MRR = Monthly Recurring Revenue
- Expansions = added revenue from upsells or cross-sells
- Contractions = revenue reductions from downgrades
- Churn = revenue lost from customers leaving
Revenue Retention Example
You start the month with $50,000 in MRR, earn $5,000 from upsells, lose $3,000 to downgrades, and see $2,000 in churn. Your Revenue Retention Rate:
\(\text{Revenue Retention Rate} = \left( \frac{50,000 + 5,000 - 3,000 - 2,000}{50,000} \right) \times 100 = 100\%\)
Achieving 100% retention with upsells shows your team’s efforts are paying off, as the value retained from existing customers outweighs any churn.
Gross vs. Net Retention: A Key Difference
Gross Revenue Retention (GRR) and Net Revenue Retention (NRR) dive deeper into revenue retention by offering two unique perspectives:
- GRR focuses on existing customers, ignoring expansions.
- NRR includes expansions, giving a fuller picture of retained revenue growth.
GRR and NRR Example
With $50,000 MRR at the start, experiencing $2,000 in churn and $3,000 in expansions:
- GRR: \(\frac{50,000 - 2,000}{50,000} \times 100 = 96\%\)
- NRR: \(\frac{50,000 + 3,000 - 2,000}{50,000} \times 100 = 102\%\)
With a 96% GRR, you’re keeping most of your existing revenue, while the 102% NRR shows growth from upselling, a strong signal for long-term health.
Why Retention Rate is the Real MVP for SaaS
Retention rate is so much more than a loyalty check; it’s a growth lever. SaaS companies that retain customers are building a foundation of recurring revenue, reducing acquisition pressure, and increasing customer lifetime value. Small increases in retention can lead to large revenue improvements—an appealing proposition for any SaaS founder.
How Customer Retention Rate Helps Calculate Customer Lifetime Value (CLTV)
Retention rate is a key factor in calculating Customer Lifetime Value (CLTV)—the total revenue a business can expect from a single customer over their entire relationship with the company. For B2B SaaS, CLTV provides a long-term perspective on the profitability of retaining customers, helping teams justify investments in customer success, product improvements, and support.
To understand how retention rate influences CLTV, let’s first look at the basic formula for CLTV:
\(\text{CLTV} = \text{ARPU} \times \text{Customer Lifetime}\)
Where:
- ARPU = Average Revenue per User
- Customer Lifetime = how long a typical customer remains active, based on retention rate.
Calculating Customer Lifetime Using Retention Rate
The “Customer Lifetime” metric is often calculated as the inverse of churn rate, which is the opposite of retention rate. Here’s how it works:
\(\text{Customer Lifetime} = \frac{1}{\text{Churn Rate}}\)
Since Churn Rate = 1 - Customer Retention Rate, you can indirectly use your retention rate to estimate how long customers typically stay with your business.
Example: Calculating Customer Lifetime with Retention Rate
Suppose your company has a monthly retention rate of 90%. This means that your churn rate (percentage of customers leaving) is 10%:
\(\text{Churn Rate} = 1 - 0.90 = 0.10\)
Then, the Customer Lifetime would be:
\(\text{Customer Lifetime} = \frac{1}{0.10} = 10 \text{ months}\)
With an estimated customer lifetime of 10 months, you can now calculate CLTV if you know your ARPU.
Example: Calculating CLTV
Let’s say your ARPU is $500. Using the Customer Lifetime from the example above:
\(\text{CLTV} = 500 \times 10 = 5,000\)
In this case, each customer is worth approximately $5,000 over their relationship with your company.
Why CLTV Matters for Retention Strategy
Understanding CLTV can help your team make informed decisions about how much to invest in customer acquisition and retention. For instance, if a customer's lifetime value is $5,000, investing in a customer success strategy that costs $500 per customer annually may well be worth it, especially if it increases retention and extends the customer lifetime. In B2B SaaS, where relationships are long-term, knowing your CLTV-to-CAC (Customer Acquisition Cost) ratio can also help you evaluate your growth strategy and set a sustainable path forward.
Wrap-Up: Retention’s Role in Scaling B2B SaaS
For B2B SaaS, high retention rates mean more than keeping customers. They signify that your product delivers real, ongoing value. Whether you’re calculating customer or revenue retention, focusing on these metrics helps align your team’s efforts to boost growth and customer satisfaction. In the end, every percentage increase in retention could mean thousands (or millions) more in recurring revenue—a pretty compelling reason to start tracking today.