_A 95% retention rate can describe a thriving business or a dying one. The number tells you almost nothing without knowing contract length._ --- ## Contract length distortion KONE, the elevator company, reports 95% customer retention on maintenance contracts. Their maintenance contracts run three years. The relationship between retention and renewal is: **renewal rate = 1 + t × (retention rate - 1)**, where t is contract duration in years. For KONE: 1 + 3 × (0.95 - 1) = 0.85. Only 85% of customers actually renew. One in six walks away at every renewal point. If contracts lasted twenty years and you still saw 95% retention, the underlying renewal rate would be zero — every customer leaving at exactly the moment they're allowed to. The same 50% renewal rate produces these reported retention rates: | Contract length | Reported retention | |-----------------|-------------------| | 1 year | 50% | | 5 years | 90% | | 10 years | 95% | | 25 years | 98% | High retention with long contracts isn't evidence of product-market fit. It might just be lock-in, and you won't know which until the renewal window opens. --- ## Monthly versus annual SaaS companies often report monthly retention. The numbers compound catastrophically when annualised. | Monthly retention | Annual retention | |-------------------|------------------| | 95% | 54% | | 90% | 28% | | 85% | 14% | A 90% monthly retention rate means losing 72% of customers per year. What sounds like a small monthly leak empties the bucket within eighteen months. When someone quotes retention, ask: monthly or annual? --- ## Net versus gross Revenue retention adds another layer of distortion. Net revenue retention includes upselling, cross-selling, and price increases — it can exceed 100% whilst customers are leaving. A business showing 110% net retention with 85% gross retention masks a churn problem with expansion. When expansion slows, and it always does eventually, the churn becomes visible. Gross retention strips out expansion. It's the number that's harder to flatter. --- ## What to check When evaluating retention metrics, three questions cut through the noise: **What's the contract length?** Annual contracts and monthly subscriptions mean retention roughly equals renewal. Multi-year contracts inflate retention relative to the underlying renewal rate — a company reporting 96% retention on five-year contracts has an 80% renewal rate. **What's the measurement period?** Monthly retention of 95% sounds healthy but compounds to 54% annually. Always convert to annual for comparison. **Is this customer or revenue retention?** High net revenue retention can mask customer churn if remaining customers expand. Look for gross revenue retention. A 95% retention rate on its own is nearly meaningless. The context tells you whether you're looking at a compounding asset or a slow bleed. --- **Related:** [[Notes/Retention Decay|Retention Decay]] · [[Notes/Unit Economics|Unit Economics]] **See also:** [[Ideas/Switching Costs|Switching Costs]]