A user logs into your product for the first time, completes one or two actions, then never returns. This is an all-too-common situation and one that PMs want to avoid. As a result, more and more PMs are rigorously measuring retention and asking themselves, “What keeps people coming back to our product?” Below, we’ll give an overview of the two kinds of retention product leaders are most concerned with: user and customer.
What is user retention?
Also known as “cohort retention,” user retention is a key metric to measure the growth of SaaS and digital products. User retention looks at first-time users within a specific timeframe (typically one month or one week) and calculates the percentage of those users that return in subsequent time periods. User retention can measure user logins globally, logins for a subset of users, or retention for specific behaviors like visiting a part of an application, using a specific feature, or completing a key workflow.
Retention analytics can be used to answer questions like:
- Do large or small accounts have higher retention rates?
- What features are used most heavily by users who return regularly?
- How does retention vary across different customer personas?
- Is retention consistent among different marketing channels?
- How well is a new feature performing?
What is customer retention?
For SaaS businesses, customer retention is a measure of how many customers renew their contracts at the end of their subscription term. It is the inverse of customer churn, and is also known in the industry as “logo retention rate.” The key to maintaining a high customer retention rate (CRR) is to create a high concentration of engaged and successful customers.
Customer retention vs. user retention
Although they seem similar, customer retention and user retention measure different things. User retention looks at the individual level, and asks, “How often does a specific person come back to my product?” Customer retention looks at the account level, and asks, “Will this organization continue to pay for and use my product?” In other words, user retention looks at the individual who logs in to use a product (a usage metric), while customer retention looks at the account that pays for access to the product (a financial metric).
User retention can be independent from customer retention. For example, an individual user might leave the organization for a new job or switch to a new team. However, high user churn can be a leading indicator of customer churn. Finally, losing key users on an account like an internal champion or executive sponsor can be more damaging than losing a low-usage end user, and should be managed accordingly.
What drives user retention?
User retention starts with successful onboarding. A user must be able to execute product basics, like setting up their new account. If there are key configuration steps, such as completing an integration or inviting teammates, the user must be guided through those actions as quickly as possible.
Once onboarding is complete, it’s critical that new users see immediate value from the product. Helping the user realize early wins builds momentum and motivates them to return.
The final step in driving user retention is creating usage habits. What triggers should prompt a user to come back to the product to complete another task? Combining user habits, like taking a photo of a receipt for expense-processing apps, with the natural usage frequency for the application can inform an organization’s onboarding and activation strategies.
How do I measure customer retention?
Retention is 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. This measure should, however, exclude any new customers gained during this time.
For example, a company that begins the year with 100 customers, acquires 10 new customers and loses 10 of the initial customers. By the end of the year, this company has 90% retention. Despite the fact that the number of customers remained the same — meaning growth is flat — only 90 customers are retained. Strong customer acquisition does not cover up low retention.
Every organization can measure retention over any time period, but it’s important for each business to find the right cadence. If a company has shorter sales cycles or a pay-as-you-go contract structure, monthly customer retention might be ideal. For longer sales cycles or multi-year contracts, an annual retention rate may make more sense. If it’s not obvious, it is best to begin by measuring retention on a quarterly basis.
Why is retention important?
User acquisition is expensive. Often it takes SaaS companies years before they can turn a profit on a new customer. Failing to retain customers means that every new business win results in a financial loss. Only by retaining customers past the payback period can an organization turn a profit on each customer.
A high customer retention rate drives long-term customer relationships, and because the cost to acquire a customer can often be greater than the initial contract value, low retention can cause an organization to lose money when they sign a new customer. Watching customer retention can help a business maximize customer lifetime value (LTV) and ensure that the business can recoup its customer acquisition costs.
Stated another way, a company with strong user acquisition but low retention is like a hole in a bucket. In our example above, losing a customer for every gained customer means flatlining growth, increasing revenue churn, and ultimately running out of customers to sell to. Since it’s 5-25x more expensive to acquire a new customer than to keep an existing customer, it’s always more prudent to invest in improving retention for the current base than continuing to add customers who aren’t going to be retained. Measuring customer retention allows an organization to detect and diagnose if it has a hole in its bucket, so it can understand where to invest for maximum growth.
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