Retention: how to make sure your customers are coming back
The second, or third, phase of the funnel. First things first, acquisition does not necessarily come after activation, its position in the funnel depends on your business model and your customer journey, either way acquisition of users is the core phase.
Whether you are collecting leads, email addresses, phone numbers and forms or you are generating money, acquisition can make or break your product very quickly.
Satisfaction is a rating, loyalty is a brand.
1. What is retention?
You will find different answers for different types of business.
- monthly subscriptions
- the number of times an app is being opened
- purchases repeated in time
Either way, it rotates around a client satisfied with your product/service who is coming back, and this is where you should turn your attention to.
2. Why is it important?
Well, if you are looking for a way to boost revenue and you think acquisition is the one and only key to achieve it, think again. If acquiring customers is important, making them stay is vital.
Increased customer retention means a higher customer lifetime value, resulting in greater profits, how great? A 5% increase in retention is expected to result in something between 25 and 95% increase in profitability.
Balancing the amount of money invested in acquisition and retention is the key: investing in retention will proportionally raise customer lifetime value, instead, high acquisition costs combined with a low retention rate is a recipe for failure.
3. Some numbers to keep you hooked
Let’s talk numbers: when it comes to a retention iconic example we cannot help to mention Amazon. You might be familiar with the ecommerce giant but here’s what you can learn from its retention strategy.
- 73% of free trial users turned into paying Prime members
- 91% or renewed subscriptions after the first year
- 96% after the second
- Prime members buying twice as much as standard users
Surprisingly, analysts did not see Amazon Prime’s success coming at all. Amazon was facing really high costs for the free two-days shipping and the discounts for Prime’s products. It did not look like a sustainable choice. CEO Jeff Bezos was not scared by the numbers, instead, Amazon’s rewards system got users hooked into a so-called engagement loop. Thanks to this strategy the program was able not only to recover the costs, but to do it in just three months, far before the two years prediction.
2. Retention in the funnel
So when you dive into the funnel looking for weaknesses and growth opportunities, getting to the retention phase might reveal to be more complicated than you expected. What you want to learn is how different users interacted with your product, the different relationships that they grew with it. The best way to do so is probably a cohort analysis and luckily enough, Google Analytics will do it for you. But first, you need to identify the metrics you are going to use.
Metrics to consider:
When it comes to retention, your go-to metrics are most definitely churn rate and customer lifetime value.
- NPS: net promoter score, it calculates loyalty and is closely related to revenue growth
% of promoters – % of detractors
- RPR: repeat purchase rate, the percentage of users that came back for a second purchase or renewed a subscription.
number of returning customers / number of total customers
- Purchase frequency: it’s the time between one purchase and the other, a long time is not necessarily bad, it is strongly related to the nature of the product you’re offering.
Sum of all individual average purchase rate / number of repeat customers
- Churn rate: indicates the rate of loss of new users. Users can leave you for endless reasons, maybe they are switching to a competitor, or your communication strategy is leaking
users at the beginning of the period – users at the end of the period / users at the beginning of the period
- CLV: customer lifetime value, is the revenue that comes from a single user over their relationship with your business, the total amount of money earned from a client minus the acquisition and maintenance costs.
average revenue amount per customer per year* x average lifespan of the customer
*average revenue amount per customer per year = gross annual sale / amount of clients
A tool to look closer at retention and determine the rate for more specific groups of users, it works by taking data and breaking it down into cohorts (group users who share common features, such as the time of acquisition). You might find things like a high churn rate for users acquired during a campaign that you considered successful in terms of acquisition.
So take a look at the data and compare periods of time. Does anything seem off? What you should be looking for is a pattern that can be linked to a change you made or an experiment you ran. The reason why this is not an easy task is that multiple factors can influence a user’s behavior and their relationship with your business, from different audiences or channels, to ads or campaigns you ran.
3. Understanding retention
Understanding retention starts with understanding user behaviour. Hence, the need to identify the percentage of returning users and the reasons behind their decision. Map their journey and find out when it’s safe to say they’re here to stay or at what point they leave you for good. Then, gather insights from users and analyse data to improve customer experience and grow retention
Gather insight and happiness measurement
As always, asking customers for feedback is crucial. Ask customers if they are happy with your product, what they like the most and the least about it and what they would change. Even better, ask them to leave a review: happy clients will turn into ambassadors for your product and they will be the core of the next phase, referral. The same goes for the users who left you. Some users found a reason to stay, others one to leave. Understand the critical moments that lead to the decision of not returning: how could these users miss the things that made others come back? use this information to improve customer journey and reduce churn rate. You cannot of course measure happiness but you can measure Net Promoter Score, and that will do the trick. The NPS survey is used to calculate loyalty between you and your customers, is an alternative to customer satisfaction and it seems to be linked to revenue growth. How to calculate it?
“How likely is it that you would recommend our company/product/service to a friend or colleague?”
Use a scale from one to ten where 1 is not at all likely and 10 is extremely likely. Those who answered 1 to 6 will be the detractors, while 9 and 10 the promoters. Simple as that but surprisingly effective. In this way you will identify both happy and unsatisfied clients. On one edge you will find the happiest ones, those most likely to recommend your product, on the other those who are going to leave and it’s exactly from them that you will get the information to decrease the percentage of customers that leave your service / stop subscribing (churn rate).
Run surveys and ask them why they dropped out or they didn’t renew their subscriptions, learn from their experience how to:
Improve customer experience
If you have a product users are happy with, your goal is to maintain that feeling in time. Once good experience it’s certainly not enough, to keep them coming back you need to be consistent in the values you deliver. Having said that, it does not come as a surprise the importance of customer service: just think about it, it’s the number one tool to identify and resolve the problems that will bring users to leave before it’s too late. Besides, referral is not just about the product, having a good support network, fixing those issues and letting users see that their opinion mattered will get you positive feedback that goes beyond the product itself.
4. Phases of Retention
There is no such thing as one common way to inspire retention, you will see how the methods differ according to what moment of the retention phase you consider.
1. Initial retention period: it’s that moment in time when users decide to stick to your product or leave it after the first interactions. You should look at this initial retention period as an addition to the acquisition phase, it’s here that you can work on making user experience and onboarding better.
How: make users experience core value as fast as possible, make it easier for them to come back and make sure the purchase process runs smoothly
2. Medium retention phase: you can expect the interest to slowly decrease in this phase. Now is the time to make your product an established habit, something genuinely consolidated into customers’ routine (take a look at our behavioural psychology chapter here)
How: the hook model, or engagement loop. It starts with triggers that lead to action, users get rewards for that action and the ongoing rewards result in investment and so on.
3. Long-term retention: the goal is for your product to be perceived as essential, a must have.
How: get them to experience those core values as often as possible. Optimization of both the product and the related rewards together with the introduction of new features is the key.
5. Retention in a nutshell
Retention is an ongoing process, a cycle. In order to grow you will constantly need to find ways of retaining users.
This means the more you invest in it, the more you earn back in revenue from each customer. The longer a customer stays loyal, the more you can learn about them and use that information to meet their wants and needs, increase revenue and start again.