The 95% Illusion
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: Retention Decay · Unit Economics
Connects to Library: Switching Costs