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Sid Jain on good retention rates, B2B vs B2C NRR, and cohorting product-market fit
Product State Q&A
EC: What is a good retention rate?
SJ: We recently published a study on retention based on data from over 2,100 SaaS businesses. In our analysis, we found that what is a good net retention rate (NRR), differs by the stage of business you are in.
In the pre-product market fit stage of the business, net retention is usually poor. Businesses with ARR < $300k have a top quartile net retention of just 80%.
As startups grow and find product-market fit, net retention improves.
Businesses with ARR in the range of $1-3m have a top quartile net retention rate of 94%.
Those in the $3-15m ARR segment, have a top quartile net retention rate of 99%.
Finally, as companies reach scale, and become category leaders, net retention often goes over 100%. Businesses at scale with ARR in the range of $15-30m have a top quartile net retention rate of over 105%.
When benchmarking, always keep the stage of your business in mind.
A net retention rate of less than 100% means that your ARR decays. This means that you have less ARR today than a year ago from the same set of customers. Whereas, a net retention rate of over 100% indicates strong product market fit and showcases your ability to compound your revenue from your existing customer base.
Companies with a net retention rate of over 100% grow at least 1.5-3x faster than their peers.
On average, SaaS businesses with a net retention rate of over 100% grow 43.6% per annum. In comparison, businesses with net retention of less than 60% grow at just 13.1% per annum.
Net retention is an all-encompassing metric. This means that one metric tells you a lot about the state of your SaaS business. It is easy to calculate and hard to game. You can’t hide behind a poor retention metric.
But, compared to other SaaS metrics, net retention is a lagging indicator. It’s not as high frequency and it often takes a while to move.
Also, you need to dig deep into the underlying components of net retention to get the full picture of your gross churn and expansions.
EC: Why do B2B SaaS businesses enjoy a higher net retention rate than B2C SaaS?
SJ: It’s hard for B2C businesses to have high net retention rates (NRR). That’s because, in B2C, churn is higher and expansion is lower. Churn is higher because of a lot of knee-jerk buying by the individual customers and expansion is lower because there are fewer upselling and cross-selling opportunities.
39.2% of the new revenue for SaaS businesses with average revenue per account (ARPA) of more than $500/month comes from expansion. This expansion revenue drives up net retention in B2B.
Benchmark yourself in your specific ARPA band, in addition to your ARR band. Companies are a lot more similar at a particular ARPA band than you’d expect, especially in terms of retention.
Companies with an ARPA of less than $10 per month, have a top-quartile net retention rate of 65.1%. As you go upmarket in the B2B space, retention keeps on improving. Companies with an ARPA greater than $500/month or with an ACV (annual contract value) of more than $6k have a top quartile retention rate of 109.3%.
EC: How can you use retention as a signal to tell whether you have Product-Market Fit?
SJ: By looking at the cohort retention of new customers.
In SaaS, a cohort is a group of customers, who start their subscriptions at the same time. If you plot cohort retention over time, your retention curve should flatline.
In the early days, you might notice that you don’t have product-market fit across your entire customer base.
Try to find segments where you do have it. Here are some ways to segment your data:
By geography, i.e. by country or region that shares unique characteristics
By plan or product line
By usage metrics (eg. using a certain feature)
By marketing/acquisition channel
Find the segment where you’ve product-market fit. And then double down on acquiring those customers.
“Net retention is an all-encompassing metric. This means that one metric tells you a lot about the state of your SaaS business. It is easy to calculate and hard to game. You can’t hide behind a poor retention metric.”
- Sid Jain
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