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Customer Acquisition vs. Retention: Which Is More Important for SaaS Startups?

Updated: May 6

Customer Acquisition vs. Retention: Which Is More Important for SaaS Startups?

Customers are the lifeblood of every SaaS business. Customer acquisition, monetization, customer lifetime value…these are the things that tech entrepreneurs wake up thinking about and obsess over until they go to sleep at night.

Customer retention, on the other hand, tends to get lost in the startup shuffle. But this shouldn’t be the case. Retaining customers is equally, if not more, important than customer acquisition, especially when you don't have many to lose!

Business revenue streams follow the theory of the Pareto principle. That is, 80% of future profits will come from 20% of existing customers. Combine this with the fact that the average cost of acquiring a new customer is 5 to 25 times more than retaining a current customer, and it should seem like a no-brainer for SaaS leaders to put retention at the top of their priority lists.

With all the evidence pointing toward customer retention being cheaper and more effective than finding new subscribers, it seems counterintuitive that customer acquisition is typically the main driver of SaaS revenue growth.

The importance of customer retention for scaling a SaaS startup

Focus on Customer Retention

Few SaaS companies focus on customer retention as a means of scaling. Many of them focus almost exclusively on the more exciting parts of growing their company – leaving customer retention solely to chance and hoping for the best.

Trial to paid conversions, sign-ups, and getting new customers on a demo are the bright, shiny objects of the SaaS world. Customer retention and up-sells? Not so much. It doesn’t seem as important as reeling new customers in.

This is where a mindset shift needs to happen. Everything is connected when it comes to your customers.

Customer retention actually begins the very moment you onboard a new account. If you can view customer retention through the lens of your acquisition strategy, then you can impact both through your customer acquisition efforts.

A great onboarding experience sets the foundation for a healthy customer retention rate, and this experience needs to be maintained and built on over time.

Why spend all those dollars getting a customer to sign up in the first place if you're comfortable just letting them walk away?

Studies have shown that if you can raise your customer retention rates by a mere 5%, your profits can increase anywhere between 25% and 95%. In turn, this will increase your customer lifetime value.

These benefits are simply too good to be ignored, but customer retention presents its own set of challenges for growing SaaS startups.

It's getting harder for SaaS startups to retain customers

Common customer retention challenges for SaaS startups

The SaaS landscape is inundated with different products offering the same or similar solutions. Today's SaaS startups have to be prepared with strategies that minimize customer churn due to:

New competitors

With increasing competition and a low entry barrier for new companies to enter the marketplace, merely having “a product” isn’t good enough anymore. You have to have an incredible product that people genuinely value and want to use.

Lower switching costs

It’s great when customers switch over from a competitor and choose your product, but this can also happen in reverse with alarming regularity. The easier it is for a customer to switch away from your product, the easier it is for them to leave in favor of your competition.

Freemium trials are a good example of this. While it’s a low-risk way for customers to see what you have to offer, it also makes it incredibly easy for them “sample and switch” to a competitor.

Data integration

It used to be the case that once customers spent enough time with your product, they would be reluctant to leave because of all the data they would have in storage. With the arrival of companies such as Segment, this is no longer the case. Customers can now uplift and transfer their data with relative ease and little downtime.

Customer retention strategies are too often deployed reactively. The threat of churn is ever-present — in reality, once you see your startup has a customer churn problem it can be too late for damage control. So, remember to put retention-focused strategies in place to head off customer churn before you see any issues.

5 ways to improve SaaS customer retention

Customer retention strategies for SaaS startups

The secret to SaaS customer retention is finding ways to grow with your users as your company grows.

1. Make customer support proactive

Make it a priority to check in with your customers to see if they’re still happy with your product. Have they stopped using it for some reason? Have they been in touch with customer support previously to ask questions? Are they making the most of the features?

Dealing with problems before the customer starts questioning the value of your product can often head off any objections. It also helps to build longer-term relationships, which in turn means more stable revenue.

2. Step up your email marketing

SaaS companies still tend to underestimate the power of their email lists for customer retention, but email is still an effective customer engagement channel. Emails don’t need to be complicated or long, but they do need to be genuine and caring.

Regular contact with customers helps to establish trust and can give you insight into things that can be improved.

Customer retention emails might include:

  1. Customer loyalty discounts/rewards/freebies

  2. Surveys

  3. Educational emails for “later customers” helping them accomplish bigger things with your product

  4. Milestone emails

Here’s an example of a milestone email from Sleeknote. No sales pitch. No ulterior motive. It's just a genuine and human message acknowledging a great customer to make them feel special and appreciated.

Example SaaS customer retention email from Sleeknote

3. Switch monthly subscribers to annual plans

If your SaaS startup relies on monthly subscriptions, then a customer (or an entire company) can question their payment every single month. Which means that every month you could potentially lose all your customers (talk about a worst-case scenario!).

Getting subscribers onto an annual plan means that this conversation will only happen once in the mind of your customer, and you’ll have a smooth 12-month stretch of revenue (and runway, potentially).

This up-sell is best used once you’re confident your monthly subscribers are going to stick around. For monthly sign-ups who are happily using your product, the option to switch to annual accounts on a product they’re enjoying can be incentivized by, say, a percentage saving if they upgrade. Make it as easy as possible for them to say yes to switching to a longer plan.

4. Forecast renewals

Measuring customer data and predicting its impact on the likelihood of customer renewals can be time-consuming, but there are tools available that can help gather and analyze this information.

Forecasting data can help teams understand which predictions can be changed using intervention tactics, and it gives them a chance to put these plans in place. It’s also measurable, as teams can see if the retention tactics directly resulted in more renewals.

Customer support teams can also get a good feel for the sentiment of subscribers around renewal time, so it’s important that you check in on the human side of your data collection as well.

5. Increase prices

This may seem counterintuitive when you’re trying to retain customers, but if your prices haven’t changed in five years it might be time to wiggle them up a little. Inflation costs alone will merit increasing your prices.

If your SaaS business is established and growing, you’ll be providing more value than you were when you started out. Your product might have a ton of new features, better help documentation, stellar customer support, and a raft of case studies and testimonials proving that your product helps customers get results.

Make your unique value proposition and benefits clear to customers at all stages of their journey. Establish brand loyalty and don’t hesitate to nurture your subscribers, encourage them, and remind them why they signed up with you in the first place.

Is customer retention really more important than customer acquisition for SaaS startups?

Whether your startup is in its early stages or you're nearing an exit, customer retention will always be equally as important as new customer acquisition. After all, you need customers to retain in the first place!

Key Takeaways
  • Put solid frameworks in place to support and nurture existing customers and meet objections before they happen so your customer retention rates remain high.

  • Keep your finger on the pulse of both your low-touch and high-touch customers at all times so you can minimize customer churn and grow your startup sustainably.


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