Retention margin effectively measures how much profit you take home from your existing customers. It takes the revenue you receive from your customers, subtracts the costs of keeping them a customer (operating & and service costs) and expresses this as a percentage of your revenue.
A high retention margin indicates that it costs you very little to retain your customers, and that you take home the majority of their revenue as profit. Conversely, a low retention margin indicates that a significant chunk of each customer's revenue just goes on keeping them a customer, rather than feeding back into your business.
How do you calculate retention margin?
As we said above, we can calculate retention margin by dividing the margin you make from your existing customers by the total revenue they bring in per unit of time. The margin you make from them can be written as revenue minus operating and service costs, giving us:
To clarify what some of the terms mean:
- Revenue simply represents the revenue you generate from your existing customers in a given period, be it a month, year, or something else.
- Operating Costs refers to the essential costs of providing for your customers. This typically includes things like server or infrastructure costs.
- Service Costs refers to all other costs that go into looking after a customer. This will typically include the salaries of customer success managers, or whoever else you use to manage the relationship with existing customers.
An example calculation
To let this sink in, let's run through a quick example.
Let's say that:
- You're running a SaaS business which is generating $20k in MRR.
- To service your customers, you pay $1k a month in server and hosting fees.
- You employ one customer success manager, who earns $60k a year.
We can plug these values into our equation from earlier to work out what our retention margin is:
Our retention margin is 70%, meaning we take home 70% of our customer revenue as profit.
Modelling retention margin in Causal
Causal is an interactive modelling tool, which lets you build fully customisable financial models for your SaaS business.
The below is an example of what a retention margin model might look like in Causal. You can adjust the inputs at the top of the model to see how they affect the charts.
If you want to get under the hood, and see exactly how the model works, you can also click Use this template in the top right of the model.