Retention has always been a hot topic among growth professionals. However, there’s still a lack of understanding of why retention should be a priority. Without a clear understanding of this, a lot of managers and founders end up working on the wrong things and missing big opportunities.
Some people think retention is important just because you lose fewer users. This is wrong.
In this article, we’ll discuss the improvement of one metric that will help your business grow.
What is the metric you should focus on?
Did you know that 80% of your profits come from 20% of your existing customers? That’s why spending too much time and energy creating expensive customer acquisition campaigns makes little sense. What does make sense is to create a customer retention strategy.
Customer retention is the process of engaging existing customers to keep using your product and paying for it. The best customer retention tactics help businesses form lasting relationships with customers who can become loyal to your brand over time. They might also spread the word about a product within their own circles of influence, which can turn them into brand ambassadors.
Customers are not only cheaper to retain than attract (it can cost five times more to attract a new customer than it does to retain an existing one), retained customers are also easier to sell to. On average, you have a 5-20% chance of selling to new customers, compared to 60-70% for existing ones.
Do you remember the AARRR funnel (Acquisition, Activation, Retention, Revenue, Referral)? Retention is the core of your growth model since this metric may help you improve the rest of the funnel.
Retention and Acquisition
It can be quite obvious that the more you improve your retention, the more active users you have over time. What is not so obvious is that as you improve retention you will also increase the number of new customers you can acquire.
The more users you retain, the more chances those users take key actions that accelerate acquisition through sharing or word-of-mouth. Improved retention can help you retain a larger proportion of a cohort which means making more money from that cohort within a given period of time. Making more money will ultimately allow you to spend more to acquire new customers.
Retention and Revenue
Regardless of the business model, two things typically happen when retention rates improve:
— Revenue increases over a period of time as you retain a bigger portion of the cohort.
— Lifetime value (LTV) increases as you keep the same portion of the cohort for a longer period of time.
Retention and a competitive advantage
The benefits of increasing LTV are not limited to increased profitability. As LTV grows, you can afford to pay more to attract a customer. As a result, you can push competitors out of the acquisition channels, open new acquisition channels, and grow faster.
Retention and the payback period
Since higher retention metrics drive monetization and you make more money, the payback period is also shortened. The shorter the payback period, the faster you can reinvest the money you earned into customer acquisition.
What should you measure exactly?
When monitoring customer retention, there are several particular metrics to track.
1. MRR (Monthly Recurring Revenue) churn
MRR churn measures how much monthly recurring revenue was lost due to cancellations. Since retaining existing customers is cheaper than acquiring new ones, having a low MRR churn is a crucial component of sustainable growth.
How to calculate MRR churn: MRR churn is the sum of the cancellations and delinquent accounts. So, if you had $500 in cancellations and $300 in delinquent accounts in September, your MRR churn is $800. To figure out the percentage of MRR churn, take monthly MRR churn and divide it by the MRR for the previous month. So, if MRR at the end of August was $900 and MRR churn for September was $800, you should divide $5,500 by $55,000. That gives you approximately 0.89 (or 89%).
2. Customer lifetime value (LTV)
Customer lifetime value (LTV) is the measure of the total value each customer represents to your business over the lifetime of their journey with your brand. LTV needs to be higher than the customer acquisition cost (CAC). Ideally, LTV should outpace CAC by three.
3. Customer acquisition cost (CAC)
Customer acquisition cost is how much you need to pay to get a new customer. Basically, CAC is the cost of convincing a potential customer to buy a product or service.
How to calculate customer acquisition cost: The customer acquisition cost is calculated by dividing total expenses to acquire customers by the number of customers acquired.
The main point you should keep in mind is that retention matters for your business. While you’re considering how you’re going to improve the customer acquisition process, we’re offering to look at your retention instead first.
Before acquiring new customers try to understand what existing customers value in your product and service. Reasons why customers quit your product are also important to improve retention. You can find the answers with the help of the right analytics tools.
Aim to enhance your customer experience by:
- reducing the buyer’s potential regret about the purchase;
- building a stronger connection with your brand;
- encouraging repeat purchases;
- encouraging the customer to speak positively about your brand to others.
Try to refocus your product and marketing efforts to improve your retention. Not only will you achieve more revenue in the long run, but you’ll also find it easier to build a new acquisition strategy as well!
Anna Grechko is a marketing enthusiast and knows the field inside out. She is the marketing specialist at Smart IT. Sharing knowledge is a big part of her career, so Anna actively seeks to spread good vibes, and collaborates with the great tech and marketing minds of the world.