7 ms·

Retention Is the Key

41 points by smu 11y ago

reasonnw 11y ago
The math doesn't sound realistic to me. He use a percentage for the churn rate but not a percentage for the number of new users, he is comparing an arithmetic progression with a geometric progression. As is well known, a geometric progression always beats an arithmetic progression.
- peterjancelis 11y ago
  Typically you are investing into getting new customers, so unless you can get CAC < first month payment[1], you will have a limited marketing budget hence a static number of new users. [1] One way of achieving infinite marketing budget is to offer discounts for annual prepay, if e.g. you get 25% of customers to pay 10 months upfront (annual plan with 2 months free), you receive 25% * 10 + 75% * 1 = 3,25 monthly payments in month 1. If you get CAC below 3,25 ARPU then you have infinite marketing budget and that can indeed go geometric. But that's a big if, and even then at some point your marketing channels will dry up at some scale, while churn remains the same at scale as businesses keep dying or changing their mind.
- jacquesm 11y ago
  The math is pretty realistic for a given starting point. Of course in practice there will be other factors that might compound the churn braking the growth or that might allow a larger marketing budget based on the increasing growth in absolute terms leading to more turnover (I devoted a paragraph to that at the end of the article). But for the purposes of illustration it is the easiest to keep all the numbers fixed and let only one of them vary.
  - reasonnw 11y ago
    The Matthew Effect. The herd behaviour. Word of mouth. People like to see an application has a lot of good reviews and users to buy, so your growth is a percentage of your users. It would be interesting to know when the number of users is increasing as a percentage or as a fixed number depending of the sector. Is there available data for the growth of users by sector/product/industry?
- brudgers 11y ago
  That's what you want: linear costs and geometric profits. It's not sustainable forever, of course, but the longer you can push the flat part of the curve to the right the better. All three flatten. but flattening at 60,000 versus 10,000 is the difference between an article in the local paper and one in the WSJ.
martijndeh 11y ago
I think it's very hard to say that one metric is key for every product. Teams should think careful about their metrics and figure out what matters most. Retention is not always the key. Think about a dating website for a second. Personally I feel focussing on growth is focusing an all pirate metrics, but one or two at a time. You shouldn't solely focus on acquisition or activation. Especially if your retention is too low. But sometimes your retention is good enough so you can focus on other things.
- jacquesm 11y ago
  For a dating website retention is extremely important. After all, if the dating website is to be a commercial success the last thing you want with a subscription model is to have everybody use the site once on their trial period and then cancel. Successful dating websites all bank on being able to extend their customer life-cycle as long as possible. If your retention is good enough (> 98% month-to-month) then you can focus on other things but if it isn't then you're likely going to burn through a lot of cash faking growth when you really should be focusing on why people are leaving and fixing that first before you spend the big marketing bucks.
  - michaelt 11y ago
    All other things being equal, a plumber or mechanic isn't better because his/her customers are returning every 3 months instead of every few years. Likewise, I'd rather use a dating website to meet a long-term partner (and cancel my subscription) than go on a bunch of unsuccessful dates leading to short term relationships (keeping my account open). A dating website that is delivering what customers want /should/ have low retention. A dating website with excellent retention has probably decided retention is more important than getting their users into long-term relationships.
    - brudgers 11y ago
      In the context of the article, all things aren't equal because: new business != startup Startups in the sense the author describes do not include ordinary plumbing and mechanical companies because such companies lack a capital structure that could allow growth to a publicly traded entity. The second example company is in a good business and it's owner can buy a boat. It could never IPO.
Dorian-Marie 11y ago
Soon, retention hackers: - Prevent people from unsubscribing - Prevent people from canceling their orders - Discounts if buy every day/week/month - Sending tons of emails with fake site activity ("somebody sent you a message"-style)
- duggan 11y ago
  No "soon" about it, this is already how companies behave. If you have a Spotify subscription, try to cancel it. As I've been trying out various companies for different (B2B) services over the last few months, I've noticed the wonderful "sign up in a few seconds with your credit card!" onboarding paired with "contact our customer service team if you want to cancel," which inevitably leads to a protracted discussion with a retentions team. If there was any chance I'd have recommended them (or at least not actively recommended against them), that ship sails when I have to invest more time into offboarding than onboarding.
  - icebraining 11y ago
    The show Reply All had a section on that, trying to see why they couldn't cancel their subscription to Handy over the site. They actually got a fairly honest reply: SHARMA: Thank you for holding sir I do apologize for that wait. But it’s just what I was advised is that the system is not set up for customer’s to cancel the recurring bookings because when you want to cancel, they’re wanting the customers to call in to see if we can help the situation out on actually why they’re wanting to cancel the bookings and offer promotions and discounts and things like that. https://gimletmedia.com/episode/33-isis/ https://gimletmedia.com/episode/33-isis/
  - probably_wrong 11y ago
    > No "soon" about it, this is already how companies behave. If you have a Spotify subscription, try to cancel it. I remember closing my account for a certain online dating site. I was presented with three different screens asking me whether I was really sure about canceling, and after that I was greeted with a message that read (more or less) "We've closed your account. Sometimes things in life take a bit of effort, you know?", which was the first time ever a website called me lazy. The fact that it played like a bitter breakup was not lost on me.
nxb 11y ago
Here are my problems with retention being the star metric: What if you have a customer lifetime value far higher than your acquisition costs per customer, and a very wide addressable market, but low retention rates? E.g. I acquire users for $5 each and same-day convert them to $15 profit each, and they rarely come back unless I return some of the profits back into the funnel to acquire them again. You may ask - Shouldn't we assume that that growth channel will quickly collapse? -- Well, what if it doesn't? Something is very wrong with the trend of assuming that retention is everything, particularly in the case where there's a high immediate return on investment for each acquired user. My second problem with retention is the time-span. Consider an ecommerce site for basic household necessities that may be accessed 20 times per year by a 100% retention user that always uses your service to his problem that your service solves. That return frequency is so low though, that if you're growing at 40%+ month over month, your retention may appear to be near zero, even though your retention is near 100%! Most of your users are new users and only a tiny percent returning, all due to your high growth rate. The compounding growth combined with the long expected time between visits just makes 100% retention look like 0%.
- deleted 11y ago
  [deleted]
  - nxb 11y ago
    You think it's rare? Consider where you actually spend most of your money online. Ecommerce, Uber, Airbnb, Fintech services, etc. Most of these you don't use every single day, as you would with Facebook or Google or a dating website. When weighted by money spent, the picture is very different. It's not a constructed example. It's my company's exact situation.
    - deleted 11y ago
      [deleted]
    - LukaAl 11y ago
      The problem with your question is that you don't understand retention (nor the author of the post explain it well). Retention in theory is not that I buy from your service every day. Retention is that, whenever I need your type of service, you are my first choice. Obviously it is very difficult to measure this retention, so you measure returning users. But you have to understand your market. This said, paying for keeping users is not unheard of. Discounts for loyal customer, targeted email for new purchase etc etc... Usually this value is factored in the LTV (Life Time Value of a customer) and you could play with it to optimize the LTV versus the cost of acquisition (Cost of retention should be lower of cost of acquisition, if it is not, look at your product/service because it sucks). But from your original question, it seems you have a "one-off" type of service. Think about wedding planners. Your problem is that if you acquire customers faster than new customer are born, you are in trouble. Otherwise it is a sustainable business, just take care because you have an upper bound on your growth and your cost of acquisition should be lower than the profit you get in every transaction (excluded acquisition).
frade33 11y ago
For Small business, growth even could kill their business. that's where wisdom comes in, sometime you have to slow the pedal of sales, to focus on customer retention. my current strategy has been to pile enough funds before the next stage growth., and dividing growth into stages, we deliberately don't sale, just to manage current customers. It's slow but for sure.
- brudgers 11y ago
  The context is startups, not small business...though the same maths apply, a small business will at best vary between the first and second examples.
TeMPOraL 11y ago
Many startups focus on growth because acutal profitability is largely irrelevant - just show enough sustained growth and you'll get bought by Apple, Google or whomever. Focusing on retention would require them to actually care about people using the product, and not only about bringing more of them to increase the metrics that lead to the Big Payoff.
EGreg 11y ago
It's simple: Nail retention before virality and you won't be a fad.
- sokoloff 11y ago
  That has two possible readings: 1. Do well on retention before doing well on virality and you build a long-standing business (facebook). 2. Focus first on retention, ignore virality, do poorly on both and never build something worthy of even being called a fad (many, many, many startups).
odonnellryan 11y ago
I think this is true for a lot of things! 1) It is very important to retain relationships with people. Friends from four years ago can help you so much today. But, that means you need to help them at times, too, of course! :) 2) It is important for companies to retain their staff. They have knowledge and connections. Loyalty is hard to buy, if a person wants to help their company because they are loyal, that is the difference between adding that case/test/log/whatever and "just forgetting about it." 3) It is important for people to build strong relationships with companies, just as it is important for companies to retain relationships with clients.
deleted 11y ago
[deleted]

41 points by smu 11y ago

The math doesn't sound realistic to me. He use a percentage for the churn rate but not a percentage for the number of new users, he is comparing an arithmetic progression with a geometric progression. As is well known, a geometric progression always beats an arithmetic progression.

peterjancelis 11y ago
Typically you are investing into getting new customers, so unless you can get CAC < first month payment[1], you will have a limited marketing budget hence a static number of new users. [1] One way of achieving infinite marketing budget is to offer discounts for annual prepay, if e.g. you get 25% of customers to pay 10 months upfront (annual plan with 2 months free), you receive 25% * 10 + 75% * 1 = 3,25 monthly payments in month 1. If you get CAC below 3,25 ARPU then you have infinite marketing budget and that can indeed go geometric. But that's a big if, and even then at some point your marketing channels will dry up at some scale, while churn remains the same at scale as businesses keep dying or changing their mind.
jacquesm 11y ago
The math is pretty realistic for a given starting point. Of course in practice there will be other factors that might compound the churn braking the growth or that might allow a larger marketing budget based on the increasing growth in absolute terms leading to more turnover (I devoted a paragraph to that at the end of the article). But for the purposes of illustration it is the easiest to keep all the numbers fixed and let only one of them vary.
- reasonnw 11y ago
  The Matthew Effect. The herd behaviour. Word of mouth. People like to see an application has a lot of good reviews and users to buy, so your growth is a percentage of your users. It would be interesting to know when the number of users is increasing as a percentage or as a fixed number depending of the sector. Is there available data for the growth of users by sector/product/industry?
brudgers 11y ago
That's what you want: linear costs and geometric profits. It's not sustainable forever, of course, but the longer you can push the flat part of the curve to the right the better. All three flatten. but flattening at 60,000 versus 10,000 is the difference between an article in the local paper and one in the WSJ.

martijndeh 11y ago

I think it's very hard to say that one metric is key for every product. Teams should think careful about their metrics and figure out what matters most. Retention is not always the key. Think about a dating website for a second. Personally I feel focussing on growth is focusing an all pirate metrics, but one or two at a time. You shouldn't solely focus on acquisition or activation. Especially if your retention is too low. But sometimes your retention is good enough so you can focus on other things.

jacquesm 11y ago
For a dating website retention is extremely important. After all, if the dating website is to be a commercial success the last thing you want with a subscription model is to have everybody use the site once on their trial period and then cancel. Successful dating websites all bank on being able to extend their customer life-cycle as long as possible. If your retention is good enough (> 98% month-to-month) then you can focus on other things but if it isn't then you're likely going to burn through a lot of cash faking growth when you really should be focusing on why people are leaving and fixing that first before you spend the big marketing bucks.
- michaelt 11y ago
  All other things being equal, a plumber or mechanic isn't better because his/her customers are returning every 3 months instead of every few years. Likewise, I'd rather use a dating website to meet a long-term partner (and cancel my subscription) than go on a bunch of unsuccessful dates leading to short term relationships (keeping my account open). A dating website that is delivering what customers want /should/ have low retention. A dating website with excellent retention has probably decided retention is more important than getting their users into long-term relationships.
  - brudgers 11y ago
    In the context of the article, all things aren't equal because: new business != startup Startups in the sense the author describes do not include ordinary plumbing and mechanical companies because such companies lack a capital structure that could allow growth to a publicly traded entity. The second example company is in a good business and it's owner can buy a boat. It could never IPO.

Dorian-Marie 11y ago

Soon, retention hackers: - Prevent people from unsubscribing - Prevent people from canceling their orders - Discounts if buy every day/week/month - Sending tons of emails with fake site activity ("somebody sent you a message"-style)

duggan 11y ago
No "soon" about it, this is already how companies behave. If you have a Spotify subscription, try to cancel it. As I've been trying out various companies for different (B2B) services over the last few months, I've noticed the wonderful "sign up in a few seconds with your credit card!" onboarding paired with "contact our customer service team if you want to cancel," which inevitably leads to a protracted discussion with a retentions team. If there was any chance I'd have recommended them (or at least not actively recommended against them), that ship sails when I have to invest more time into offboarding than onboarding.
- icebraining 11y ago
  The show Reply All had a section on that, trying to see why they couldn't cancel their subscription to Handy over the site. They actually got a fairly honest reply: SHARMA: Thank you for holding sir I do apologize for that wait. But it’s just what I was advised is that the system is not set up for customer’s to cancel the recurring bookings because when you want to cancel, they’re wanting the customers to call in to see if we can help the situation out on actually why they’re wanting to cancel the bookings and offer promotions and discounts and things like that. https://gimletmedia.com/episode/33-isis/ https://gimletmedia.com/episode/33-isis/
- probably_wrong 11y ago
  > No "soon" about it, this is already how companies behave. If you have a Spotify subscription, try to cancel it. I remember closing my account for a certain online dating site. I was presented with three different screens asking me whether I was really sure about canceling, and after that I was greeted with a message that read (more or less) "We've closed your account. Sometimes things in life take a bit of effort, you know?", which was the first time ever a website called me lazy. The fact that it played like a bitter breakup was not lost on me.

nxb 11y ago

Here are my problems with retention being the star metric: What if you have a customer lifetime value far higher than your acquisition costs per customer, and a very wide addressable market, but low retention rates? E.g. I acquire users for $5 each and same-day convert them to $15 profit each, and they rarely come back unless I return some of the profits back into the funnel to acquire them again. You may ask - Shouldn't we assume that that growth channel will quickly collapse? -- Well, what if it doesn't? Something is very wrong with the trend of assuming that retention is everything, particularly in the case where there's a high immediate return on investment for each acquired user. My second problem with retention is the time-span. Consider an ecommerce site for basic household necessities that may be accessed 20 times per year by a 100% retention user that always uses your service to his problem that your service solves. That return frequency is so low though, that if you're growing at 40%+ month over month, your retention may appear to be near zero, even though your retention is near 100%! Most of your users are new users and only a tiny percent returning, all due to your high growth rate. The compounding growth combined with the long expected time between visits just makes 100% retention look like 0%.

deleted 11y ago
[deleted]
- nxb 11y ago
  You think it's rare? Consider where you actually spend most of your money online. Ecommerce, Uber, Airbnb, Fintech services, etc. Most of these you don't use every single day, as you would with Facebook or Google or a dating website. When weighted by money spent, the picture is very different. It's not a constructed example. It's my company's exact situation.
  - deleted 11y ago
    [deleted]
  - LukaAl 11y ago
    The problem with your question is that you don't understand retention (nor the author of the post explain it well). Retention in theory is not that I buy from your service every day. Retention is that, whenever I need your type of service, you are my first choice. Obviously it is very difficult to measure this retention, so you measure returning users. But you have to understand your market. This said, paying for keeping users is not unheard of. Discounts for loyal customer, targeted email for new purchase etc etc... Usually this value is factored in the LTV (Life Time Value of a customer) and you could play with it to optimize the LTV versus the cost of acquisition (Cost of retention should be lower of cost of acquisition, if it is not, look at your product/service because it sucks). But from your original question, it seems you have a "one-off" type of service. Think about wedding planners. Your problem is that if you acquire customers faster than new customer are born, you are in trouble. Otherwise it is a sustainable business, just take care because you have an upper bound on your growth and your cost of acquisition should be lower than the profit you get in every transaction (excluded acquisition).

frade33 11y ago

For Small business, growth even could kill their business. that's where wisdom comes in, sometime you have to slow the pedal of sales, to focus on customer retention. my current strategy has been to pile enough funds before the next stage growth., and dividing growth into stages, we deliberately don't sale, just to manage current customers. It's slow but for sure.

brudgers 11y ago
The context is startups, not small business...though the same maths apply, a small business will at best vary between the first and second examples.

TeMPOraL 11y ago

Many startups focus on growth because acutal profitability is largely irrelevant - just show enough sustained growth and you'll get bought by Apple, Google or whomever. Focusing on retention would require them to actually care about people using the product, and not only about bringing more of them to increase the metrics that lead to the Big Payoff.

EGreg 11y ago

It's simple: Nail retention before virality and you won't be a fad.

sokoloff 11y ago
That has two possible readings: 1. Do well on retention before doing well on virality and you build a long-standing business (facebook). 2. Focus first on retention, ignore virality, do poorly on both and never build something worthy of even being called a fad (many, many, many startups).

odonnellryan 11y ago

I think this is true for a lot of things! 1) It is very important to retain relationships with people. Friends from four years ago can help you so much today. But, that means you need to help them at times, too, of course! :) 2) It is important for companies to retain their staff. They have knowledge and connections. Loyalty is hard to buy, if a person wants to help their company because they are loyal, that is the difference between adding that case/test/log/whatever and "just forgetting about it." 3) It is important for people to build strong relationships with companies, just as it is important for companies to retain relationships with clients.

deleted 11y ago

[deleted]