{"id":816,"date":"2017-07-07T22:34:16","date_gmt":"2017-07-07T20:34:16","guid":{"rendered":"https:\/\/capturly.com\/blog\/?p=816"},"modified":"2023-06-08T12:09:23","modified_gmt":"2023-06-08T10:09:23","slug":"why-customer-retention-rate-is-essential-for-business-and-ux","status":"publish","type":"post","link":"https:\/\/capturly.com\/blog\/why-customer-retention-rate-is-essential-for-business-and-ux\/","title":{"rendered":"What is a Good Customer Retention Rate Formula for Business\/UX?"},"content":{"rendered":"

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.<\/em><\/p>\n

What does customer retention rate\u00a0mean?<\/strong><\/h4>\n

In a nutshell, it <\/strong>can be defined as a metric<\/strong><\/a> that represents a number of customers that are \u201cloyal\u201d to your business in one way or another. Now the reason why I placed the word loyal between quotation marks is that it doesn\u2019t mean that these clients are crazed fans or are in love with your brand. It\u2019s more like that they\u2019re satisfied and decide to stick with your business for a while. Since we\u2019re talking about a metric,\u00a0it has a formula<\/a><\/strong>\u00a0that gives you a certain number. This number is given in percentage and can be calculated<\/a> weekly, monthly or annually.<\/p>\n

Since retention rate is used on multiple fields, there is no such thing as THE exact formula, but here\u2019s one that meets the expectations\u00a0in our case:<\/p>\n

Retention Rate = ((CE-CN)\/CS)) X 100<\/strong><\/p>\n

Where CE<\/strong> stands for the number of customers at end of a period. CN <\/strong>indicates the number of new customers acquired during the time. CS<\/strong> stands for the Cheap Stuff you’re trying to sell to\u00a0the people and measures the time it takes them to realize it and start fleeing. If you\u2019re lifting your eyebrows at this point, it\u2019s completely normal and indicates that you\u2019re listening so far. So CS <\/strong>is the number of customers at the beginning of the particular time period you’re measuring.<\/p>\n

Unfortunately,\u00a0some tend to confuse this with Attrition rate<\/strong>. Retention rate is all about satisfied customers, where the other one represents those who leave your business for whatever reason. So if you\u2019re having an 80% customer retention rate, then A) most of your customers stick with you, B) you\u2019ve lost 20% of the customers in that period of time.<\/p>\n

In fact, there is a saying:<\/p>\n

\u201cYou\u2019re only as good as your last customer.\u201d<\/p><\/blockquote>\n

So what\u2019s the magic\u00a0number?<\/h4>\n

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 \u2014 like when you sign some contract with some ISPs or when you\u2019re buying the newest game of a video game producer \u2014 your customer retention rate can, in fact, below 80%. But let\u2019s 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.\u00a0Regardless of your decision according to statistical data existing customers are 50% more likely to try new products<\/strong><\/a> and spend 31% more when compared to new customers.<\/p>\n

Acquisition is just the first\u00a0step<\/h4>\n

It might sound strange but most of the new users who try out a certain app \u2014 regardless of the source \u2014\u00a0simply uninstall it after a couple of days<\/strong><\/a>. This isn\u2019t just plain coincidence. When users act like this there\u2019s 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.<\/p>\n

Even the most appealing products will experience loss of users in the first couple of days\/week of usage, but that\u2019s part of the game. The key question is where you can\u00a0stop the remaining users from\u00a0abandoning your product.<\/p>\n

The following curve represents the issue:<\/p>\n

\"retention
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 source: amplitude.com<\/figcaption><\/figure>\n

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.<\/p>\n

Now, this is a very simplified way of showing how retention works. Let\u2019s add another variable to the picture. This will be the product\/market fit.<\/p>\n

\"how
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 source: amplitude.com<\/figcaption><\/figure>\n

As you can see, as soon as you represent marketable value towards your users<\/a><\/strong> \u2014 the sooner the better \u2014 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<\/strong><\/a>).\u00a0<\/strong>The benefits of a higher retention rate are real according to a study by <\/strong>Bain & Company<\/strong>.<\/a> If you succeed in increasing customer retention rates<\/strong><\/a> by only 5% it can result in 25% to 95% gains in profit.<\/p>\n

When should you consider the retention rate?<\/h4>\n

When companies find themselves asking this question, it\u2019s usually\u00a0too late and here\u2019s why.<\/p>\n

It\u2019s a general belief or a considered \u201cbest practice\u201d to wait until you have gathered enough information before you make your next business decision. In this case:<\/p>\n

\u201cWait until we have enough\u00a0users.\u201d<\/p><\/blockquote>\n

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\u00a0essential when tailoring user experience) you will let users slip away.<\/p>\n

This will give a false illusion that your product is lacking something big and simply won\u2019t \u201cclick\u201d for the users.<\/p><\/blockquote>\n

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<\/strong><\/a>.<\/p>\n

Flattening the\u00a0curve<\/h4>\n

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\u2019t the whole puzzle, since this would simply mean that<\/p>\n

\u201cYou will use all of your users at some point in the future.\u201d<\/p><\/blockquote>\n

‘What can be done?’ you may ask at this point. You have to define your critical events<\/strong>. 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\u2019ve set earlier. So in other words, you want the user to act in a certain way when the product is being used. If this \u201crequirement\u201d is fulfilled and the desired action is performed \u2014 for e.g. registering, trying out trial version, subscribing for a plan etc. \u2014 then the user is considered as ACTIVE<\/strong>.<\/p>\n

If you are able to maintain this framework, you can reach a point when you won\u2019t lose your users and, with proper advertising, will reach more potential customers.<\/p>\n

How many critical events should you\u00a0have?<\/h4>\n

This won\u2019t 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.<\/p>\n

eBay could be a good example. You have buyers and you have sellers in the picture. In this case, you can \u2014 should \u2014 have more than just one critical event. But the same can be applied to travel sites<\/a><\/strong>, Uber and so on.<\/p>\n

Critical events are important and like always, the sooner you find\u00a0them the better.<\/p>\n

Ask questions such as:<\/em><\/p>\n