Why Revenue Retention Is Critical to Business Success
Attracting customers is the first step a business takes toward profitability. But retaining revenue is crucial for remaining profitable over the long haul. When you keep your customers coming back year after year (and ideally upgrading their purchases and expanding into other products or services you offer), your business can achieve long-term success.
When you are evaluating revenue retention, you’ll consider various factors, including customer loyalty and engagement, customers’ decisions about upgrades and downgrades, churn, pricing and more. Understanding how to calculate revenue retention—and how to improve it—is essential to a thriving business.
What is revenue retention?
Revenue retention is a way of calculating how much your existing customers contribute to your revenue. You measure revenue retention over a period of time—months, quarters or years. It’s a key performance indicator (KPI) for measuring performance, particularly in subscription-based businesses.
Revenue retention takes into account the various ways your customers can change the amount of money they spend with your company. For example, they could upgrade, downgrade, purchase new products or cancel.
Revenue retention takes into account the various ways your customers can change the amount of money they spend with your company.
How to calculate revenue retention
There are a few factors you need to include in your revenue retention calculation:
- Recurring revenue from the previous time period
- Upgrades—when a user switches from a basic subscription to a premium subscription, for example
- Downgrades—when a user does the opposite, or switches from a premium plan to a less expensive plan
- Churn, when a user cancels a subscription altogether
Here’s the revenue retention formula: Take the recurring revenue + upgrades – downgrades – churn. Divide that number by the recurring revenue and then multiply by 100 to get a percentage.
Take a hypothetical streaming service as an example:
- Monthly recurring revenue is $10,000
- Upgrades are $3,000
- Downgrades are $1,000
- Churn is $500
Here’s how the math works out:
10,000 + 3,000 – 1,000 – 500 = 11,500
11,500 / 10,000 = 1.15
1.15 x 100 = 115%
Why is revenue retention important?
While overall revenue shows you how much money your company is bringing in, your revenue retention rate is a KPI that indicates your existing customers are getting value from your product and are willing to continue paying for what you offer.
When your revenue retention rate is above 100%, that shows you that your existing customers are spending more money with your company on upgrades than they are scaling back by downgrading or churning.
If overall revenue is growing, but revenue retention is below 100%, your business is attracting new customers, but those new customers aren’t loyal or engaged, so they are downgrading or churning.
Consider these key statistics:
- Typically, first-year customers are most likely to churn.
- If you retain a customer for three years, the odds are good you’ll keep them for 10 years or longer.
- You generally see about five times more profit from a retained customer than an existing one.
Learn more in the Pragmatic Live podcast episode, Too Much Too Soon? – Subscription Models and Revenue Retention.
What is the role of pricing in revenue retention?
There are four ways pricing factors into revenue retention. First, your revenue will grow if you can increase pricing and retain your existing customers. Of course, some of your customers will churn if you increase pricing and you’re not offering sufficient value. So you need to balance the price you’re charging with your customers’ satisfaction with your product.
Second, you can increase revenue from your existing customers by charging more based on usage. If your customer is using your product more, that indicates they are getting more value from it and are likely willing to pay more. For example, you might charge for the number of users on an account or the amount of storage used.
Third, you can upsell your existing customers to increase revenue. For example, you can offer “good,” “better” and “best” versions of your product. With solid usage data, you can determine which features offer the best value to your customers and add or enhance them in the “better” and “best” versions. Keep in mind that people often start with the “good” product, since they don’t want to take a risk. But once they understand the value you offer, they may be willing to move up to “better” or “best.”
Fourth, you can cross-sell your company’s other products and services to your existing customers.
Who is responsible for revenue retention?
Often, revenue retention doesn’t get the attention it deserves. It sometimes falls to the sales team. They contact a customer 30 to 60 days before the renewal date, and if the customer isn’t planning to renew, it’s often too late to turn them around.
Some companies place such a high value on revenue retention that they enlist a chief revenue officer to oversee sales, marketing, pricing, customer support and other areas that influence revenue. Customer engagement managers also can help by staying in contact with customers throughout the year to ensure they see the value they expect. And marketing teams can help by developing campaigns that provide support or answer questions.
How do companies increase revenue retention?
Increasing revenue retention starts the day your customer decides to buy. Make sure the onboarding process is smooth—no one likes to struggle with signing up.
Throughout your customers’ experience, you want to build loyalty. And you do that by keeping them satisfied. That can mean providing resources so they can quickly find answers to their questions. Offering an in-app tutorial can help users learn how to use your product.
You also want to keep them engaged. For example, the writing tool Grammarly sends users a weekly email that compares their writing volume to other users and provides statistics about their writing style.
And you want users to be so deeply involved with your product that the barrier to leaving is high. Take the money management tool Mint. Once users add all of their financial accounts to the product, they probably feel committed and aren’t likely to switch to a competitor.
Users should also be aware of the services and features you offer—if you have a complex product, they might not even realize its potential. Don’t overload them with emails and pop-ups, but you want to ensure they understand they can turn to you to meet their needs.
And, of course, you need to offer the value you promised. When it’s time for your customer to renew, you want them to be happy with your product and eager to continue with your company.
Increasing revenue retention starts the day your customer decides to buy.
An example of a revenue retention program that works
Good revenue retention programs create a feedback loop or, ideally, a happiness loop, that keeps customers loyal and engaged starting at the beginning of their experience with the company.
Take VRBO, for example. In a customer experience that increases revenue retention, customers have several steps where they interact with the company. They:
- Search for a rental
- Find one they like
- Book it
- Communicate with the host
- Arrive at the property
- Complete their stay
- Review their stay
In these steps, VRBO can control certain actions, encourage certain behaviors between hosts and guests, and intervene if something goes wrong. For example, they can:
- Provide appropriate and accurate listing information
- Include detailed search filters to make finding the right property easier
- Streamline the booking process
- Encourage fast and clear communication between the host and the guest
- Incentivize hosts to make the arrival process smooth
- Prompt guests to review their stay
A positive experience throughout this process can encourage customers to turn to VRBO more often and increase their spending—and VRBO’s revenue.
Additionally, VRBO could reach out to customers who searched but didn’t book to offer additional listings. They could also prompt them to review their stays. And they could follow up with customers who had negative experiences to see if they can solve problems. Even problems that VRBO can’t solve offer opportunities to serve other customers better.
For a deeper dive into revenue retention examples, check out the Pragmatic webinar How to Retain Customers, Build Loyalty and Increase Revenue Opportunities like TaskRabbit and VRBO.
Learn more about revenue retention
Understanding revenue retention and how it contributes to your company’s overall profitability is crucial for your long-term success. Retaining revenue from your existing customers can be more profitable than acquiring new customers. Take a deeper dive into revenue retention strategies by registering for Pragmatic Institute’s Market course today.