Before we can ask this question you need to understand what retention rate stands for. This is the key when it comes to determining how good your business is concerning customer experience.
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What does customer retention rate mean?
In a nutshell, it can be defined as a metric that represents a number of customers that are “loyal” to your business in one way or another. Now the reason why I placed the word loyal between quotation marks is that it doesn’t mean that these clients are crazed fans or are in love with your brand. It’s more like that they’re satisfied and decide to stick with your business for a while. Since we’re talking about a metric, it has a formula that gives you a certain number. This number is given in percentage and can be calculated weekly, monthly or annually.
Since retention rate is used on multiple fields, there is no such thing as THE exact formula, but here’s one that meets the expectations in our case:
Retention Rate = ((CE-CN)/CS)) X 100
Where CE stands for the number of customers at end of a period. CN indicates the number of new customers acquired during the time. CS stands for the Cheap Stuff you’re trying to sell to the people and measures the time it takes them to realize it and start fleeing. If you’re lifting your eyebrows at this point, it’s completely normal and indicates that you’re listening so far. So CS is the number of customers at the beginning of the particular time period you’re measuring.
Unfortunately, some tend to confuse this with Attrition rate. Retention rate is all about satisfied customers, where the other one represents those who leave your business for whatever reason. So if you’re having an 80% customer retention rate, then A) most of your customers stick with you, B) you’ve lost 20% of the customers in that period of time.
In fact, there is a saying:
“You’re only as good as your last customer.”
So what’s the magic number?
It totally depends on your industry, your market, your goals and your business model overall. So if you prefer focusing on the newcomers rather than caring about the existing users — like when you sign some contract with some ISPs or when you’re buying the newest game of a video game producer — your customer retention rate can, in fact, below 80%. But let’s say your goal is to reach and maintain a high value. Generally speaking everything above 90% should be considered impressive. There are, of course, some really extreme situations where even 90% is considered low but those are mostly niche markets, or business models involving luxury at a high level. Regardless of your decision according to statistical data existing customers are 50% more likely to try new products and spend 31% more when compared to new customers.
Acquisition is just the first step
It might sound strange but most of the new users who try out a certain app — regardless of the source — simply uninstall it after a couple of days. This isn’t just plain coincidence. When users act like this there’s something behind the scenes that trigger such action. The main problem, in this case, can be, for example, the lack of value that the product presents on the early stage.
Even the most appealing products will experience loss of users in the first couple of days/week of usage, but that’s part of the game. The key question is where you can stop the remaining users from abandoning your product.
The following curve represents the issue:
If we take an example period that lasts from Day 0 to Day N, the first interaction between the potential users and the product will happen on Day 0. In the case of an app, this can vary between downloading through opening and actual usage.
Now, this is a very simplified way of showing how retention works. Let’s add another variable to the picture. This will be the product/market fit.
As you can see, as soon as you represent marketable value towards your users — the sooner the better — you may stop the plunge effect before your product loses too much. This will give a stronger base to your positive WOM (Word Of Mouth). The benefits of a higher retention rate are real according to a study by Bain & Company. If you succeed in increasing customer retention rates by only 5% it can result in 25% to 95% gains in profit.
When should you consider the retention rate?
When companies find themselves asking this question, it’s usually too late and here’s why.
It’s a general belief or a considered “best practice” to wait until you have gathered enough information before you make your next business decision. In this case:
“Wait until we have enough users.”
This works great in theory; however, what really happens is that the longer you wait to make that product/market fit, the more users you lose. So if you wait too much for user feedbacks (which are undoubtedly essential when tailoring user experience) you will let users slip away.
This will give a false illusion that your product is lacking something big and simply won’t “click” for the users.
Instead of doing this, what you can do is to gather a certain amount of users and start working on the quality of user experience your product offers, aka. optimize for retention.
Flattening the curve
If I have to summarize the article so far, I would say that I’ve talked about retention rate means, how it’s affecting your business and how you can slow down the process of losing potentially returning customers. However, this isn’t the whole puzzle, since this would simply mean that
“You will use all of your users at some point in the future.”
‘What can be done?’ you may ask at this point. You have to define your critical events. An event like this can be described as a certain action performed by the users within the product itself that will trigger a business goal you’ve set earlier. So in other words, you want the user to act in a certain way when the product is being used. If this “requirement” is fulfilled and the desired action is performed — for e.g. registering, trying out trial version, subscribing for a plan etc. — then the user is considered as ACTIVE.
If you are able to maintain this framework, you can reach a point when you won’t lose your users and, with proper advertising, will reach more potential customers.
How many critical events should you have?
This won’t be a surprise, but it really depends on the actual business itself. Usually, you should choose one and focus on polishing it until it shines. In some cases, there can be more than one critical events. This is more common in companies that offer services than just selling products.
eBay could be a good example. You have buyers and you have sellers in the picture. In this case, you can — should — have more than just one critical event. But the same can be applied to travel sites, Uber and so on.
Critical events are important and like always, the sooner you find them the better.
Ask questions such as:
- If my customer/user should perform a certain action every single time, what would that be?
- Is my business focusing on new users or strongly depends on returning customers and WOM? (a barber shop would be a great example)
- What metrics do I need? (strongly depends on the question above)
- How many users do I need in the future to grow? (again, strongly depends on the second question)
- How differentiated are your products? (requires detailed competition analysis)
If your business is living off loyal, active users, then increasing and maintaining your customer retention rate is crucial if you wish to grow in the future. Doing so will increase the revenue, speed up the ROI and will result in a more profitable way to go. The more you wait for data, the further you drift from this desired “utopia” so it’s a good practice to start thinking about at least critical events and how to polish them as early as possible. There can be exceptions when there are more critical events, but either way, you have to ask yourself some relevant questions in order to nail this part right.