Why Logo Retention Should (Or Shouldn’t) Matter For Your Tech Company
You have a 60-70% likelihood of selling to an existing customer, while the odds for new customers are only 5-20%. Given these figures, prioritizing logo retention should be a priority for any tech CFO.
What Is Logo Retention?
Logo retention is the number of customers that a SaaS business retains during the renewal period, denoted as a percentage. Revenue retention, on the other hand, measures the amount of money that the business retains each year, excluding revenue from new customers.
There are two types of revenue retention to consider in more SaaS metrics: Gross Revenue Retention (GRR) only considers lost revenue, and Net Revenue Retention rate (NRR) considers additional details such as upsells or downsells.
Logo retention (also called customer retention) simply tracks the number of customers that a business is able to retain over a given period. For example, if a company started with 100 customers, gained 25 new ones, but still ended up with 120 customers, it means they retained 95% of their customers from the previous year.
Why Logo Retention Matters
Most tech CFOs understand that good net revenue retention helps SaaS businesses grow. It's like a flywheel; once you get it going, it helps things run smoothly and allows them to pick up speed with a little incremental effort.
According to this SaaS retention study, businesses that hold onto more than 85% of their customers grow by up to 1.5 to 3 times faster. This gives you the perfect balance of customer acquisition and customer retention.
Good customer retention is proof that your product is meeting their needs. Over time, your satisfied customers will become the key ambassadors for your product.
Having strong logo retention matters as it means a SaaS business can sell more to its current customers and also get new customers through word-of-mouth – one of the most effective forms of advertising.
Who Needs To Care About Logo Retention?
Simply put, your industry determines how important logo retention is for you. Some businesses can't grow their revenue every year without getting new customers.
However, your product managers should be leading the logo retention metrics conversation in your company as these metrics allow you to focus more on customer and product experience. While a general logo retention number is good to know, managers should dig deeper.
They should break down the data by things like how much customers earn, their industry, or even who sold them the product to truly understand the driving factors of customer retention vs. customer churn.
How To Calculate Logo Retention
Logo retention, or keeping your customers, is found by seeing how many customers a SaaS business loses over some time compared to how many they started with.
To find the retention rate, you take the total customers at the end of a period, subtract your new customers from that period, and then divide the amount by the number of paying customers at the beginning of the period. So, it looks something like:
Logo Retention = (# of paying customers at the end of a period - # of new customers from the period) / # paying customers at the start of the period
For example, let’s say the periods we’re looking at are fiscal years; at the end of 2022 (end of last period) you had 500 paying customers. Throughout 2023, you had a total of 800 customers; however, of the 500 that you started with, you retained 400 customers and churned 100. Therefore, your logo retention equals [(800-300)/400] x 100. In this example, your logo retention rate is 80%.
Even if you offer both monthly and yearly subscriptions, it’s good to check how many customers stay with you over a full year. This gives a complete picture of the customer's journey and avoids inconsistencies that might happen due to seasonality.
Necessary Components Of Your Calculation
To properly calculate logo retention, you need the following data:
- The number of paying customers you had at the beginning of the period. Don't count the ones using free trials or freemium versions.
- The total number of customers at the end. You can usually find this information in systems that manage customer relationships, subscriptions, or contracts.
- The number of new customers from the period.
Consider the following factors when collecting this data:
- Be mindful of what you consider as churned – Deciding when a customer has left can sometimes be tricky. For example, a customer might have paid their invoice and promised renewal, but haven’t signed anything before the deadline or the end of the report time. Whether that’s considered to be a churned account, for the sake of this calculation, is something you need to decide on at an organizational level.
- How churn is calculated in a consumption-based pricing model – Companies that charge based on how much a customer uses might see some customers not use the service at all for a few months. You must set a rule to decide when a customer is considered churned for the purpose of calculating logo retention.
Having clear guidelines and rules in place will ensure you get the most accurate number and can compare accurately across periods.
Tech Benchmarks For Logo Retention
The typical range for logo retention varies based on customer size, with large organizations often achieving 90-95%, mid-sized companies around 85%, and small businesses within the range of 70-80%. If you fall below these numbers, then it’s time to evaluate your product offering.
Here’s a breakdown of the average customer retention rate by industry according to 2022 data.
- Insurance: 84%
- Retail: 63%
- Banking: 75%
- SaaS: 35%
- Hospitality: 55%
- Media: 25%
- Fintech: 37%
- Edtech: 4%
Logo retention cannot exceed 100% because the number of logos or customers cannot grow beyond the initial count due to the structure of the equation. Consequently, logo retention rates tend to be lower compared to Net Dollar Retention rates.
If you want to see more benchmarks, check out our 2023 gross margin benchmark report.
Does Logo Retention Matter For SaaS?
The short answer is: kinda… but not really.
It’s okay to evaluate the specific efforts of your customer success teams and product stickiness; however, for comprehensive financial health, there are better metrics (such as net revenue retention).
Figuring out the right logo retention rate for a SaaS business isn't straightforward. You may have a high logo retention rate but that doesn't necessarily translate to success. Owing to various factors, there's no one-size-fits-all benchmark for SaaS logo retention.
Business Model
Most SaaS revenue isn't just about the number of customers. It can be influenced by other things like billing cycles, pricing plans, and seasonal changes. So, a lower logo retention rate doesn't always mean you’re doing poorly.
You might have gained more through upsells or account expansions. Consequently, even if you keep all your customers, if some downgrade, your earnings might drop.
In short, you need to look at other factors - such as your magic number, aka how much you're spending on sales & marketing to earn your revenue - to evaluate business health and performance.
Type of Business
B2B and B2C SaaS companies should ideally have different benchmarks for logo retention. For B2C, each customer typically brings in similar revenue, so if customers leave, revenue drops at about the same rate. However, in the case of B2B, customers differ in value. Losing a big customer might have a different impact than losing another.
Change In Business Strategy Or Pricing Model
Changing your business strategy can impact your retention rates. For example, if you're a small business pivoting to the enterprise market, you might see higher customer loss than average for small businesses. This is because you’ve made a major shift. In this case, a change in the pricing model could lead to some logo churn while also increasing your overall profitability.
Retention has many angles. Don't get stuck on a one-size-fits-all measure.
How To Improve Logo Retention
Retention costs less than acquisition. So, before diving into tactics, consider the three retention strategies listed below as a starting point for your business’s revenue growth by retaining the customers you already have.
While these don’t exactly fall into the purview of the CFO, you can make a big impact in your organization by prompting the right teams to focus on them and using your financial metrics as the scoreboard.
Take Customer Support Seriously
This may seem like an obvious strategy but often, it can be the reason why a customer chooses to stay or leave. Quick replies lead to happier customers. In a Zendesk survey, 73% said fast support is crucial for a good customer experience.
Faster replies usually mean quicker solutions. But even if you can't fix an issue right away, reply quickly. Just a simple message saying you've got their concern, or telling them when they can expect a solution, can go a long way in building customer satisfaction.
Additionally, customers get upset when they have to repeat themselves. So, support your customer success team with the right tools so they can access key details, see past chats, and make conversations smoother.
Actively Build Product Excitement
When you’re building your product, everyone at your company feels the momentum and excitement. However, are your customers feeling it too? Bring them into the loop by highlighting how the new features can help them.
Collaborate with your marketing team to launch email campaigns and social media posts. Give customers a behind-the-scenes look at what's coming up. Staying in touch not only informs but also builds a stronger sense of community and connection which helps with cross-sells, upsells, and, in the long run, improves your customers’ overall contract value.
Build a Solid Onboarding Plan
Customer onboarding is crucial. It’s where you build confidence in your customers that you can deliver on the promises you made. You don't want customers feeling lost after signing up. Offering easily accessible resources that help them get familiar with your product/platform is vital.
Here are a few ways to do that:
- Offer tooltips and tutorials directly in your product.
- Send a structured email series that guides them through all your key product features.
- Offer personalized training by arranging sessions with customer support, sales, or onboarding specialists.
- Build and manage a community where both new and existing customers can seek advice and share insights.
Growing your company's reputation and a dedicated customer following takes time. But, with commitment and the right customer support, you can build a solid and loyal customer base.
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