- An increase in Net Promoter Score (NPS) can lead to a significant reduction in customer churn and boost Monthly Recurring Revenue (MRR).
- In a moderately competitive B2B SaaS industry, we estimate that a 25% surge in NPS could result in a 10% to 15% lift in MRR.
- Investing in customer satisfaction reaps benefits beyond retention, paving the way for referrals, upselling, and financial growth.
In B2B SaaS, customer retention is critical, given that acquisition costs tend to rise naturally over time as competition intensifies.
The trouble is that customer retention metrics are lagging indicators, so it is difficult to isolate the effect of a business decision on them. By contrast, customer satisfaction metrics are leading indicators that can be more readily measured in isolation.
In this post, we build on existing research to estimate the impact of customer satisfaction metrics on churn in a typical B2B SaaS market, and then the effect of churn on revenue.
A Primer on Key Customer Retention Metrics
Key indicators of retention are:
- Customer Retention Rate (CRR): measures the percentage of customers who continue to use the service over a set period. This helps to understand the effectiveness of customer retention strategies and provides a clear measure of customer loyalty.
- Churn: the flip side of CRR. For the rest of this article, we will refer to a simplified definition of churn as (1 – CRR).
CRR and churn are both lagging indicators, meaning they are measurements that can only be observed and analyzed after a certain period has elapsed. They are heavily influenced by the overall satisfaction of the customer base and their likelihood to consider alternatives.
Customer satisfaction and propensity to churn can be forecast by leading indicators like the Net Promoter Score (NPS), which assesses a customer's willingness to recommend a company's products or services to others. This metric is a strong indicator of customer loyalty and, by extension, future business growth.
A Primer on Key Financial Metrics
Financial metrics help businesses gauge their profitability and overall financial health. Among the common financial metrics for B2B SaaS companies are Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC), and the ratio between CAC and CLV. These metrics provide insights into how much revenue the business is generating, the value of customers over their lifecycle, the cost to acquire new customers, and the efficiency of the company's customer acquisition strategies.
While understanding CLV and CAC are crucial for the marketing strategy and long-term financial model, the metric that investors and P&L owners tend to track most closely is MRR growth, as it is the best encapsulation of the overall efficiency of the business and future growth potential. The rest of the article will focus on MRR.
The Interplay of Retention on Revenue: The Implication of Delighting Customers
The relationship between customer retention and financial metrics in a SaaS business is complex but follows broad patterns. Falling NPS scores are almost always an early warning of higher churn in the near future.
Research by Frederick Reichheld (the creator of the NPS system) and others suggests that in most industries, companies with higher NPS scores tend to have lower churn rates. The correlation is not infallible in every case and can depend on several factors, including the baseline NPS, the availability of alternatives, the uniqueness of the product or service, and the complexity of the switching process. But in a modestly competitive B2B SaaS industry where alternative products are readily available and switching is straightforward, we should expect a moderate to strong negative correlation between NPS and churn.
The impact of churn on revenue is not always straightforward. For example, if a business sheds most of its low-value customers but grows spend from high-value customers (perhaps because it paid them more attention during the onboarding process) then NRR would be positive and MRR could actually increase in that period. However, shedding those low-value customers today forgoes the opportunity to grow them into better customers in the future, so likely reduces future MRR.
In general, we expect a very strong negative correlation between churn and MRR. This means that when customers leave (i.e., when churn increases), MRR tends to decrease in a similar proportion and must be offset by new customers.
|NPS to Churn
|-0.5 to -0.7
|Churn to MRR
|-0.8 to -0.9
Based on this range of estimates, we can now calculate the potential MRR lift caused by different changes to NPS.
|2% (0.05 * 0.5 * 0.8)
|3.15% (0.05 * 0.7 * 0.9)
In other words, a 25% increase in NPS can increase MRR by 10-15% solely by reducing the likelihood of customer churn. The total impact on MRR is likely much higher, since happier customers are more open to upselling and cross-selling opportunities and are more likely to refer new customers to the product.
NB: This analysis assumes there is not just a correlation between NPS and churn, but a causal relationship. The proposed causal mechanism – that an increase in satisfaction reflects an increase in perceived product value and emotional attachment, which in turn make a customer less likely to consider alternatives – is intuitive and comports with our general model of customer retention, but may have limits. For example, this link will not hold when a business juices its NPS score in superficial ways, such as when it only gives the survey to its existing champions.
Conclusion: Understanding the Vital Link Between Customer Retention and Financial Health
This deep dive into the intertwined relationship between customer retention metrics and financial metrics has underscored the significant impact that customer satisfaction can have on a B2B SaaS company's financial standing.
Metrics such as the Customer Retention Rate and Net Promoter Score, when analyzed alongside financial metrics like Monthly Recurring Revenue, provide an insightful snapshot of the health of a business. An uptick in customer satisfaction, as reflected in a rise in NPS, can be a harbinger of decreased churn rates and increased MRR.
Based on external research and internal data from Dromo and similar providers, we expect a compelling correlation between these metrics. In a moderately competitive B2B SaaS landscape where alternative solutions exist, we estimate that a 25% surge in NPS could potentially lift MRR by 10% to 15%, merely by reducing customer churn. This has strong implications for businesses as it shows that the rewards of investing in customer satisfaction are significant.
Overall, this highlights the importance of placing customer satisfaction at the core of your business strategy. Not only does it foster customer loyalty and improve retention rates, but it also brings about a ripple effect of positive financial outcomes, solidifying the company's standing and setting the stage for future growth.