Acquisition vs. Retention - What to Focus Your SaaS On

As a SaaS founder, splitting your attention between improving customer retention and acquiring new customers is difficult. So what do you need to focus on for the greatest impact, acquisition or retention?

Most established SaaS should focus on retention. The churn preventable by working on retention will far outweigh new business acquirable. SaaS that just start out will have more success focusing on acquisition until they grow to a certain size, where economics will change the priorities.

There is so much to consider when choosing your priorities. To make your decision easier, I've compiled a few resources below, followed by the 3-step-method to make the decision more tangible.

What is Customer Acquisition in SaaS?

Customer acquisition is the act of signing new customers to pay you.

In SaaS specifically, the customer acquisition ideally adds a long-term customer that will not only pay you once but becomes a subscriber to pay each month or year.

Increasing your MRR through customer acquisition is really important at the beginning, because it's one of the few ways to build revenue when you don't have any customers yet (or only very few).

What is Customer Retention in SaaS?

Custom retention deals with how to make existing customers stay longer and keep on paying you monthly.

In SaaS specifically, churn is the metric to measure the amount of revenue that's lost due to cancelled subscriptions (in percentage of your revenue hadn't they cancelled).

Customer retention strategies aim to reduce the churn metric to keep more business. It starts at onboarding and drags through the whole customer journey.

As you can imagine, churn-reduction doesn't really make sense for early stage SaaS that have only a few customers or none.

Advantages of prioritizing Acquisition

Working on acquisition often yields quicker results. Those results are also more apparent if you only look at your business from a metrics-only point of view.

In contrast to prioritizing retention, acquiring new customers of course grows your customer base and diversifies risks, which is especially important for smaller SaaS.

As increasing prices is one of the hot topics in SaaS, I will mention that increasing prices on existing customers is generally harder, especially for bigger jumps. Only changing prices for new customers is way easier (which will have more impact if you focus on acquisition).

Advantages of prioritizing Retention

In contrast to acquisition, the advantages of retention do tend to be slower but have a longer lifetime.

Reducing your churn rate is something you can realistically achieve in one or two months. It can have a massive effect long-term. Every acquisition work you could do in one or two months will never have the same longevity.

Apart from that, acquiring new customers tends to be pricier than saving the same amount of churn.

Lastly, working on your customer retention strategy is one of the best ways to develop a better SaaS as a byproduct, as asking for feedback and listening to your customers is key.

Mathematical Relationship of Acquisition and Retention

Your revenue can be written down in a way that makes the mathematical relationship of acquisition and retention clearer.

Next month's revenue will be the revenue of the month before reduced by the churn-percentage, but increased by the acquisition revenue. It is simplified, yes, but for the matter of selecting your priorities still precise.

As you can see, depending on your retention-rate/churn, something is removed and depending on your new acquisitions, something is added to your current MRR.

3-Step-Method to balancing acquisition and retention in SaaS

The balancing act of acquisition vs. retention becomes simple with these three steps.

1. Record and Find Your SaaS Metrics

In order to decide what to prioritize, you need to record those two metrics month over month: churn and acquisitions. You can use tools like BareMetrics, ProfitWell or even the Stripe Dashboard.

2. Calculate Cost per Revenue Won via Customer Acquisition

In a broad term, this metric is often referred to as return of investment (ROI). The calculation is pretty simple:

Divide the amount of revenue that all new acquisition from one month resulted in by the amount of money you spent for these acquisitions.

3. Calculate Cost per Revenue Saved with Retention Strategies

While the cost of acquisition is well-known and easily measurable, I am introducing a more vague metric you'll need to determine in order to make the priority-decision easier.

You'll need to estimate what type of churn reduction you could achieve with what kind of cost/investment. For example, via better onboarding, enhanced feedback cycles or even more customer support.

The goal is to arrive at a "cost per dollar saved" result. For each dollar you put into better customer retention, what would you save in revenue?

Example for a Fictional SaaS

Let's say you run a business making $50k a month. The monthly churn is 8% which means you lose about $4'000 a month to churned customers. If you didn't do any acquisition or retention strategies, you'd be at $25k a month in roughly 8 months.

Let's say you currently do ads and content writing and spent a total of 5k a month for acquiring business that's worth 10k a month.

Your cost per revenue won via customer acquisition would be $0.5 per $1 you make. You make twice the money you invest in ads, nice!

Now let's assume (and this step really is only an assumption, you can never be 100% sure) you can reduce churn to 4% by working on your onboarding.

Let's assume this would cost you $5'000 in engineering and copywriting cost. You'd be able to save half of the churn lost from now on, which would equal to about $2'000 per month.

Now the decisions seems much more tangible, do you want to keep spending $5k of your budget each month to get $10k worth of new customers or do you want to fix the leaky bucket once to save half of the churn and then continue working on acquisition?

Caveats of this Method

Of course, the method above is not bullet-proof, and you need some estimations that could turn out to be wrong.

It's not meant to be a method that shuts down every discussion with a definitive answer, but instead be used as a tool to transform your metrics into ones that are tangible and suited for the task of deciding priorities.

Final Words on Prioritizing Budget and Efforts

At the end, what's really important for this decision is the amount of revenue your SaaS already has.

Fixing a leaky bucket that only gets a few drops of water every few days is a waste of time. On the other hand, filling a bucket of water with a huge hole in it is a waste of time too.

I hope the method above can help you as a useful guide to make this decision a bit more understandable and discussable.