Movens Capital

Retention is the king of growth!

What separates top growing companies form all the rest? You might think it customer acquisition, bu it’s not! It’s retention!

If you have poor retention, what’s the point of customer acquisition?

Goal of the text below is to show why customer and user retention is the most important factor in traction and growth, the anatomy of retention, and strategies and tactics to improve and optimize the various pieces of retention.

It seems so obvious. Every improvement in retention also improves all of the other factors of your business. Why than so many companies put all the focus on customer acquisition?

Most (if not all) of your future revenue will come from existing customers.

In a recent project 50% of an ecommerce store’s revenue is created by 10% of its customers

You increase LTV. The longer you retain a user, the more money you’ll make of them. and can afford higher CPA at the top of the funnel. That increases your growth opportunities. You’ll be able to afford more users from more expensive channels and spend more and grow faster

→You increase virality. The longer users stay, the more opportunities you have to prompt them to invite other users or recommend your product. The best example is any file hosting platform. Take dropbox.com. The longer and more intensive a user uses the platform the more folders they might share with users outside of the platform which brings them to the product. As you increase virality, you decrease effective CPA and you can get more out of every dollar spent on acuqisition

→You increase upgrade rates. Take freemium products. What we see in our projects is a strong positive correlation (r>.7) between the time user spends with the product and odds that he or she will upgrade. This way you decrease payback period- every dollar invested in acquisition you get back faster and you can reinvest that at faster rate and grow faster

For an ecommerce we worked with- 2% increase in customer retention had an equivalent impact upon profitability as a 10% reduction operating costs

→It costs 5 times as much to attract a new customers as it costs to keep an old one.

→Cheaper than Acquisition. …

→Loyal Customers are More Profitable. …

→Your Brand Will Stand Out from the Crowd. …

→You’ll Earn More Word of Mouth Referrals. …

→Engaged Customers Provide More Feedback. …

→Customers Will Explore Your Brand. …

→Loyal Customers are More Forgiving. …

→Customers Will Welcome Your Marketing

If you have poor retention, nothing else matters.

Source: https://clevertap.com/

It shows you what percentage of acquired users still use your product and how it develops over time. In the case below, after day 2 over 80% of users are gone. Is is a lot? That depends on what happens next.

The most important factor of retention curves is that they flatten out at some point. Hopefully, you’re get cohorts of users that stay with you over time and stack up on top of each other. If your retention trends toward zero, that’s bad. It means that over time you’ll churn all the users that you acquired. That makes it hard to sustain growth over time.

To understand this curve you can’t just look at it with an ambitious goal to optimize it. You need to also break it down into pieces.

In the graph above you see “day 1” retention (it can also be “week 1” or “month 1” depending on your curve shape, duration of the onboarding etc.). this one is about how to get users to experience the core value of our product. It’s commonly known as the “Aha moment”

Source: Tushar Jawa

What is that action that makes your users understand the value that your product delivers?

Second part is “mid term retention” in our case it’s days 1–4. So, your user got your core value. You think you’re done. Just the opposite is true. This phase is even more challenging. You must make your users use your product on regular basis, create habits and processes round your product. We all know how difficult it is to change habits. As we’re stubborn creatures, the hardest thing to change in this world is human behavior.

A lot of businesses make this mistake- if our users get our value, they’ll automatically get hooked, come back to my application or my product and use it regularly.

If you want to be successful, you must create habits round your product.

Third part is “long term retention”. You got your users to experience your core value upfront, managed to re-wire their brain to use it over time. But now you have to get your users in front of your product as often as possible. The more they use it over a long period of time, the more chances you have to keep them for long.

There are a lot of strategies on how to slow or flatten the curve off. There’re two I’d want to draw your attention to.

Retention hooks

You get endorsed by someone on LinkedIn. Not only will you receive a notification email, but you’ll receive a notification as well. More importantly, LinkedIn will encourage you to endorse people in your network.

These types of retention hooks make you feel good about yourself and encourage a retention loop. Active users are continuously pulling inactive users back to the product, reminding them of the core value.

Referral programs work!

Let’s take dropbox again. The more people users refer to Dropbox, the more free space they have for themselves. On the surface, referral programs might seem like strictly an acquisition play. However, the benefit for Dropbox here is threefold:

  • Trusty word of mouth advertising results in new users.
  • Habits begin to form as groups of friends and / or colleagues begin relying on the same product.
  • A longer habit formation period (extra of free space) results in a higher likelihood of purchase down the road.

Experience shows that referral programs deliver customers of up to 50% greater lifetime value than other customers. So, while encouraging habit formation with existing customers, you’re simultaneously acquiring new customers with a higher probability of repeating the purchase behavior.

Thanks for reading. Happy to hear your thoughts. You can reach me at https://www.linkedin.com/in/maciejkraus/

Movens VC is an early stage fund (Seed/Series A), that supports the most ambitious founders in the first steps of building global startups — movenscapital.com