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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
by 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%.
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- nxb 11y agoYou 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.
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- LukaAl 11y agoThe 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).
- nxb 11y agoThe particular case I'm thinking of, is not a one-off type of service at all. It's a long-tail ecommerce shopping advice app that generates affiliate & advertising commissions that are much higher than the cost per user acquisition. The same customers are coming back repeatedly, and buying different things each time.
- LukaAl 11y agoSo you have retention. Being long tail means that probably the users does not open your app every day and measuring retention could be challenging. For gauging retention I would look at two number, times the app is opened each month (per users) and average number of transactions per month per users (depending on the stage the transaction value could be irrelevant). And I would check the distribution. Usually you could cluster users in different class (actually, segment them) and you will find a reasonable number to use as a measure for "lost customer". Every customer that doesn't use your app for more than that time, is a lost customer and you use it to calculate the churn rate. Where you set the threshold is a judgement call, so be honest with yourself, better to estimate a slightly higher churn rate than underestimate it. Also, understand that retention is an important measure in the long term, so don't optimize for it immediately, but it is strictly related to other important measure (for instance retention influence in a couple of way virality, and a poor retention could be a symptom of bad Product-Market fit). P.s: the number in the article seems just examples, not number to use as a benchmark.
- brudgers 11y agoFree trials, freemium, and plain old free are fairly common models that boil down to paying to acquire users. Two of them move toward paying to retain them. Free as in Google is clearly an example of a business constantly spending money for retention.
- brudgers 11y agoThe current value of such a company will still be in future cash flows. Any realistic financial model will project flattening growth at some point. This means that retention dominates the long term -> dominates future cash flows -> dominates present value. A good financial model captures the scenario you describe. The examples in the article should be seen as illustrative, not exhaustive.
- nxb 11y agoTo clarify, the problem is that most people are only talking about "organic retention" when they say "retention", and ignore any "paid retention". So in my example, I can get a very high percentage of people to return if I continue to spend money. But if I stop spending money to acquire users, they mostly stop coming back.
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