While discussing business and product growth, a key metric that is often talked about is user acquisition. Businesses that acquire a significant number of users are often described as successful. Even though customer acquisition is critical for every business, customer retention is key to scalable and exponential growth.
One of the main factors that limits growth for many businesses is ignoring the needs of current customers and driving significant efforts to acquire new customers. Customers that leave with a dissatisfactory experience may become brand defectors, which hinders growth even more. Therefore, this begins a never-ending series of acquisitions that are needed to stop the ship from sinking. This is why businesses and applications need to focus on their retention rate.
But what does retention rate even mean, and how does it affect your business?
What Is Retention Rate?
Retention rate is the percentage of customers (or users) that a business or application retains over a specific time period. With an efficient retention rate calculation, marketers and developers can understand their product’s performance over time. Much like many other critical KPIs, the retention rate is considered one of the key metrics to determine a product, campaign, or overall company’s success.
Retention rate is also a critical success metric for applications or businesses with paid, subscription-based, or freemium models, enabling the decision-makers to comprehensively understand customer parameters such as satisfaction, intent, loyalty, interest, and more. The counter of retention rate is the churn rate, which identifies the percentage of users that have stopped using (or not purchased) your product or application in a specific timeframe. Overall, retention rate and churn rate are considered extremely important metrics for businesses.
Why Is Retention Rate Important?
Even though acquiring new users is extremely important, customer retention is the key to building scalable products, services, and applications. Unlocking efficient customer retention can help businesses scale exponentially while saving their capital. Generally, investing in retaining customers is highly cost-efficient for businesses when compared to acquiring new users. To acquire new users, businesses have to spend on advertising and acquisition costs, which can be substantial if targeting is not ideal. On the other hand, businesses that retain users save a significant portion of these costs, thereby supplementing the lifetime value of the user.
The reason why many businesses consider retention rate the most vital growth metric is that it can clearly indicate how well a business or application is performing in terms of customer satisfaction. A better retention rate indicates that users are engaging highly with the product, which can convert into better monetization.
Moreover, retention rate helps businesses get answers to vital questions such as:
- When a new user enters the acquisition cycle, how long will the user stay with the product?
- What is customer satisfaction with the product?
- How often do customers leave the product completely to never return?
- How much can the company grow with the current retention rate and growth strategy?
As businesses continue to experiment with their strategies and evolve over time, the retention rate can paint a clear picture of what is working and what isn’t. Businesses that utilize retention rate as a decision-making metric can solve challenges better and drive customer engagement and satisfaction.
How to Calculate The Retention Rate?
Usually, the retention rate is calculated with the help of the number of users that have been retained over a specific period of time. Therefore, it is critical to know how many users were present on Day 1 of the retention period and how many of them were still active users on the last day of the retention period.
There are two major factors that are required to calculate the retention rate:
- User Action: The user action required to calculate the retention rate can be a user using the application, purchasing a plan, opting for a service, or visiting the website. Simply put, this is a critical action that the user takes which dictates if the user has been retained or not and can be decided by the business as per their goals.
- Time Period: Retention rates can be calculated over any time period. Many sectors use a 30-day period to calculate retention rates, but a broader picture can be achieved through half-yearly or yearly retention rates as well. Similarly, for high-volume applications that have daily use, 24-hour or 2-day, 5-day, and weekly retention rates can prove to be the right choice. Therefore, while calculating, ensure that you know which time period the retention is being measured for.
To showcase the calculation of retention rate, let us take an example. Let’s say we want to calculate the retention rate for a mobile game over a period of 30 days. Here’s what the retention rate will look like.
Retention Rate = (Number of users that played the game in 30 days / Total number of active users at the start of the 30-day period) * 100
Therefore, if the game has 1000 players at the start of the 30-day period and 400 people played the game during the period, the retention rate will be:
Retention Rate = (400/1000)*100 = 40%
However, if the decided user action is simply keeping the application on the device or opening the application, efficient retention rate calculation also requires subtracting new users that join in during the calculation period. Therefore, the retention rate formula can also be:
Retention Rate = (Number of users that performed the user action during the time period — new users that joined during the time period / Total number of active users at the start of the time period) * 100
Therefore, if an application has 1000 active users at the start of the time period and 400 users performed the user action in the period, with 150 new users joining in and performing the user action, the retention rate will be:
Retention Rate = (400-150/1000)*100 = 25%
What Is A Good Retention Rate?
Simply put, the higher the retention rate, the better. While there are multiple industry-specific retention rate thresholds that are considered good retention rates, there is no one good number that encompasses all services and products, and it all comes down to the product/application’s audience and offerings. However, there are two ways a product can use the retention rate to scale its growth. These are benchmarking retention against itself or benchmarking retention against competitors.
To get a holistic view of growth factors, brands often perform a retention analysis by measuring their retention rate against previous retention rates across the same time frame. For example, a company can compare the retention rate of six consecutive months to analyze which factors (new products, offerings, payment modes, and updates) impacted growth and optimize their strategies accordingly. Therefore, if the retention rate is dropping, some new updates, campaigns, or features might not be working as required and should be altered. Similarly, if the retention rate is increasing, the business can double down on its new offerings and campaigns.
On the other hand, businesses can also look toward their competition to benchmark their growth. To perform a comprehensive analysis, however, businesses also need to understand the industry retention rate before they can compare it with their competitors. Each industry has an average customer retention rate that might help a business in judging its own performance. For example, media and professional services have a retention rate of 63%, the hospitality and travel sectors retain 55% of their customers, and only 25% of the customers are retained by financial services (Source: Exploding Topics).
Once the industry retention rate average is clear, businesses can compare their own retention rate with competitors and perform a universal comparison with the industry average. This will help a business know where it stands across the industry and draw inspiration from the successful campaigns of its competitors.
Best Practices To Improve Retention Rates
Many times, the retention rate is not where a brand wants it to be. Therefore, it becomes vital to drive marketing and product campaigns that help improve retention rates. Here are some of the best practices brands can use to improve their retention rates:
- Ask Your Churned Customers: What better way to understand why your customers left than to ask them directly? If you collect contact information from your customers and have permission to contact them, sending a survey asking about their experience and the reason they left is a great method to understand why customers are churning. You can also provide them with a list of probable reasons or let the customers describe their issues to get a deeper understanding.
- Ensure Smooth Onboarding: Nobody likes confusing products and applications, and complex processes will only ensure higher churn. To make sure that the customers can onboard and use your products and application easily, the onboarding process should be seamless. This includes clear language, intuitive UI, and a smooth process that helps customers get started in no time. Offering support in the onboarding process is also a great way to enhance the user experience.
- Create A Feedback Loop: Your customers are your biggest evangelists, and asking for and implementing feedback can be a big boost to customer loyalty. Ensure a frequent feedback loop that asks for feedback from customers on the service, process, and everything else to tap into the minds of the customers. Incorporating feedback can also benefit users and build a better relationship with the brand.
- Measure Effectively: The retention rate is not as black and white as it may seem. Therefore, to ensure effective measurement, it might be beneficial to segment users across parameters to understand the core issues of churned customers. These parameters may include nationality, payment tier, customer behavior, and acquisition mode. For example, a gaming application with a 75% retention might be losing most players that were acquired from Facebook. Therefore, game developers and publishers have to revisit their Facebook acquisition strategy.
Retention rate is a critical parameter for businesses to truly understand their performance and scale their growth. However, simply measuring the retention rate is not enough, as it is only an indication of what the customer experience and loyalty look like. To utilize the retention rate, businesses must optimize their strategies across teams to ensure customer satisfaction and experience are taken into account. Businesses that achieve higher retention rates often witness higher revenue, scalable growth, and an overall favorable user experience that builds brand loyalty.
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