Q&A recap | 2022 SaaS retention benchmarks

2022 continues to be a grave reminder that change is constant. With the “great resignation,” fluctuations of the public and private markets, and the omnipresent pandemic, we find ourselves continuously, and quickly, adapting to the shifting landscape.

What does this mean for B2B SaaS businesses? How do you stack up against your peers?

In our webinar, 2022 SaaS retention benchmarks, SaaS Capital Manager Director Rob Belcher shares the results from their 11th annual B2B SaaS benchmarking survey. It’s the largest survey of private SaaS companies in the world with over 1,500 responses. You can download the full report for net retention and gross retention benchmarks as well as retention metrics in relation to ACV, growth, size, and more.

The webinar’s Q&A session uncovered great tips and insights, including advice on whether SaaS businesses should implement price increases due to inflation, if Customer Success should be considered an OPEX or a COGS, and how much of the total operating budget CS should account for.

Before we jump in, given the tech downturn and looming recession, we polled our attendees to find out if they anticipate their company’s 2022 retention rates to fare better or worse than their rates in 2021.

A little more than one-third (37%) reported they expect this year’s retention rates to be about the same. Another third (31%) said they believe they will be better, followed by 22% of respondents stating they will be worse. Those who predicted extreme change were in the minority with 7% of respondents citing rates that will be much better and only 2% of respondents citing rates that will be much worse.

Rob Belcher from SaaS Capital answers your SaaS benchmarking questions

Q: We have a revenue model that has both seat license and usage-based items. Should you calculate NRR based on these individual revenue models or the combined total?

A [Rob]: We do both. Whenever we talk to a new company, we want to know the global retention rate and then we want to dive in. We will do our due diligence and understand what that is. Is usage-based driving all of that NRR and actually gross retention is 70%? That’s really important to understand. You need to understand it, too. That’s the double-edged sword with usage; it can go up fantastically but it can also go down. It’s something to be aware of.

The other thing we’ll say about usage-based is our long-held tenant is not to penalize your customers for using more of your service. You want to encourage them to use more. A good rule of thumb is 80/20. Seat licenses are nice and stable and recurring. You can build your business off of it; it’s cash flow you can count on. Usage has got the fun upside, it can be really impactful but if you can over tilt the wagon a little bit on it too. So, the answer is all of it, but then also drilling in. And that’s the same if you sell to SMBs versus enterprise.

Q: Should SaaS businesses increase prices this year because of inflation?

A [Rob]: We have not seen as much of it yet as we thought we would. The conversations now probably will include it more. But up until now, I’d wait and see if it’s transitory.

A [You Mon]: I feel like I’m paying more for software. I will say a couple of things. Historically, buyers don’t expect software costs to go up. Everyone expects Moore’s Law and whatnot to keep it stable. But I do think what’s happening now in the economy gives permission to software companies to raise prices. Those don’t come along very often. It’s generally a trap to feel like software should always be cheaper because it’s not. Now, some of it is competition. Your ability to raise prices is more than just a macro, it’s macro competition, your own cost. I’m seeing it a little bit more, but you’re right, it’s not widespread.

A [Rob]: I recently heard something really interesting on pricing. Someone who makes tires or a manufactured good is more inclined to increase prices because their gross margins are being eroded, their cost of goods are increasing. Software, because it’s basically free to provision one more seat license, software vendors are reluctant to increase prices because they don’t have that extra cost. I mean AWS or whatever might be going up too. But what you’re hearing from You Mon and I is you have permission, it’s worth it, go for it.

Q: How should you approach NRR and GRR for on-prem, hybrid, and SaaS. Should you combine or segment them?

A [You Mon]: Basically, you have different delivery models. What’s really most important is your subscription model. If your on-prem is more historic where they pay a lot upfront for a perpetual license and you sell them maintenance, that’s not a subscription model. But a lot of folks are doing on-prem and subscription. If you do that, you should as a company think about them in their entirety. But it’s very easy to segment to show which are my healthy clients because the delivery model can affect SaaS. I guess the answer is both. But especially if the business model and the pricing model are the same.

A [Rob]: This goes hand in hand with the question earlier about how do you calculate or think about seat license versus usage. Global is important but then you also have to dig in. You got to be honest with yourself first and foremost, but the investors are also going to dig in and want to understand that perpetual license, on-prem, retention—what’s that look like versus SaaS, etc. It’s important to look at all of them and segment.

Q: What OKRs and KPIs do you use to monitor the success of Customer Success?

A [You Mon]: I won’t focus so much on OKRs because there are different ways to improve CS. I’ll focus on KPIs. What I find most people measure on is net revenue retention, gross revenue retention, things that we talked about today. Two others I see happen a lot are logo retention, so it’s not revenue retention. It’s the number of customers you have and how many you’re keeping; that’s logo retention. Then on the way to retention, because retention happens after a cycle, people may also have KPIs around NPS. If you have a health score system, it might be an improvement in your health score. Those are the types of things that you can use as KPIs, on the way to the ultimate metric which is NRR.

A [Rob]: Depending on your ACV and your target market, logo is more important.

Q: Should Customer Success represent up to 15% of total operating budget?

A [You Mon]: I’ve seen it actually be a little bit more but right now best practices are anywhere from 5% to 15%. Those numbers are pretty wide, just like sales and marketing are often wide. People will spend very large amounts. CS tends to hover around that.

A [Rob]: There is a separate study we do on spending. We measure it based on percent of revenue and so it’s a little bit different. Because some of those companies are burning a lot, so 5% to 15% can be a whole different deal. Across most ACVs and ARRs, 12% of total revenue is the other metric, which actually lines up. Again, because two-thirds of the companies are bootstrapped, it’s about the same as total budget so not too far off your number.

Q: How should you structure a comp plan for Customer Success managers?

A [You Mon]: What I’ve seen is that generally CSMs have anywhere from 10% to—on the high end—25% to 30% of their on-target earnings be variable. To make the math super easy, let’s say that if they hit their goals, a CSM will make 100. That means anywhere from 10 to 30 of that is variable based on goals. The goals could be NRR, NPS, GRR.

I would try to make it a hard metric. The lower it is, say 10%, the more they’re going to act like support. They’re going make sure the customers are happy. That’s what you’ll likely get. The higher it is, the more they’re going to act like salespeople. It’s what I’ve seen.

Q: Should Customer Success be part of operating expenses (OPEX) or the cost of goods sold (COGs)?

A [Rob]: We have seen historically that support is in COGS. Again historically, support was all of CS, and so all of CS was in COGS because it was just support. I don’t think there’s any gap; there’s no rule on it. It’s a judgment call is the bottom line. If you have a bigger team and you can easily break it up, we think it’s better to throw the sales side of your CS group down below the margin, below COGS, and then keep your support folks in COGS. The whole point of the P&L is basically, what does it cost to deliver the product. That’s going to be your IT infrastructure, your dev ops, and your support team. That’s what it takes to serve your customers so that should be in COGS. The sales functions can all be below and that’s more your ongoing OPEX. If you have a smaller team, there’s three of you, and you can all do a little bit of everything, throw it all in COGS; that’s fine.

A [You Mon]: I see it the same way. I see generally CSMs being lumped into sales and marketing pool. Support being lumped into COGS. If you have an implementation team, I’ve seen those in COGS more often than not. In other words, if it’s part of delivering the product—although if you talk about is support really part of delivering the product—I don’t know. Anyway, I’ve seen support and implementation specialists in COGS and the rest in sales and marketing.

Want to brush up on your Customer Success and SaaS metrics?

Give our Churnopedia a whirl. It’s a glossary of the metrics, formulas, and terms CS professionals must know to understand the health of their SaaS business. Be sure to bookmark it for easy reference.