I like Hiten Shah’s simple but clear explanation about the importance of measuring retention: “retention is the indicator of whether a product is working for its users or not.” Retention is typically measured by comparing the number of customers at the start of a given time period with the number of customers at the end of that period whilst excluding any new customers acquired during that period.
‘Usage’ and ‘revenue’ are the two lenses that we need apply when measuring retention:
- Usage retention: Measuring the number and percentage of users* that are active in your product. How many users remain active after signing up to your product or service?
- Revenue retention: Measuring your ability to sustain the revenue that you’ve generated. How much revenue do you continue to generate from a customer in a defined time period, after they’ve converted?
* Particularly for B2B or SaaS products, it’s important to make a distinction between ‘customers’ and ‘users’, as they’re often not the same. If you, for example, take a product like Salesforce, then the ‘customer’ is the decision-maker in the company with the Salesforce account. The ‘users’ will be the person(s) in the company using Salesforce on a daily basis.
Brian Balfour, Founder / CEO at Reforge, adds that “every improvement that you make to retention also improves virality, lifetime value and payback period.” Balfour’s point about lifetime value is significant. Looking at retention over a longer period is imperative if you want to successfully manage the “leaky bucket” that is your customer base; whilst you’re acquiring customers at the top of the bucket (or funnel), you’ll lose customers at the bottom. In other words, you’re constantly measuring and managing customer churn.
Especially if you take into account the cost of acquiring customers (CAC), it’s important to ensure that your average customer lifetime value (LTV) exceeds CAC. In the past I’ve made the mistake of measuring the LTV:CAC ratio only within short window from the customer onboarding journey and their moment of conversion.
However, to build up a much richer picture of gaining and losing customers, you need to look at customer retention metrics over an extended period. Improving customer retention becomes much easier once you’ve got a full understanding of why and where you are losing / retaining customers:
Core action — What is the core action that you want customers to perform on a frequent basis and why? For example, I can imagine that “streaming or creating a playlist” is a core action for Spotify users and a key indicator of their engagement with the product. If I think of the HelloFresh meal-kit as another good example, “choosing a recipe” can be considered a core action. The key thing here is not forgetting about the customer’s perspective when thinking about retention; what will make the customer keep coming back and engaging with your product and why?
Frequency — How often do you expect customers to (realistically) perform your “core action”? For example, I expect the frequency of a customer choosing a weekday meal to be higher compared to the creation of a music playlist. Combining frequency with core action informs the appropriate usage retention metric that you want to measure in relation to your customers (e.g. daily active usage vs weekly active usage).
Who — Who do we expect to perform out the core action at a certain frequency? What will make the customer keep coming back to our product? This is where a clear customer definition is critical. Even if you have a well defined user persona, you might be actively looking to acquire or retain a very specific customer segment within your overall customer population.
Main learning point: If there’s one thing I’ve learned about customer retention is that there isn’t a single silver bullet that will help retain or resurrect your customers. However, a thorough understanding of “core action”, “frequency” and “who” will help significantly in identifying the right retention levers, for the right customers and at the appropriate point in their customer journey.
Related links for further learning: