There’s a great quote about big data from Dan Ariely, Professor of Behavioral Economics at Duke University, that’s been circulating for the last couple years: “Big data is like teenage sex: everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it.”
That got us thinking – big data isn’t the only thing that’s like teenage sex; by Ariely’s analogy, this is particularly true of user retention too. We talk about how important retention is and we all think we do it, but we don’t have a set definition for what it is and we don’t have a clear framework for driving retention. Think about it for a moment: the concept of retention has been around over 15 years, yet most people still don’t truly understand what it is, why it matters and how to do it right.
We’re going to shed light on this topic by reviewing what retention is, why it matters and how you can track your retention metrics. By the end of this post, you will:
- Have a fundamental understanding of retention.
- Learn how you can set up a framework to assess your app’s retention.
The age old question: What is retention?
In its simplest form, retention is keeping someone engaged with your website or mobile app over time.
Let’s take this a step further and look at what industry folks think about retention:
Brian Balfour (VP at Hubspot), believes retention is the King of Growth. The more you focus on retention, the more it impacts all of your key metrics like activation, engagement, LTV and payback period. Without a focus on retention there is no growth.
Jamie Quint (Co-founder of Interstate Analytics) boldly states Retention is King! Most folks need to realize asking “How do we acquire more users?” is not the right question. Asking “How do we get better at keeping the users we already have?” should be the focus.
From these two examples, we can define retention as a mechanism that drives growth, increases your engagement and allows you to keep the users you have from one time period to the next.
Let’s take a look at an example of retention rates for Android apps:
The graph above shows that the average app loses 77% of its daily active users (DAUs) within the first 3 days after install; within 30 days, it loses 90% of DAUs. So this tells us that the average app loses almost its entire user base within a few months. Ergo, if an app can retain more than 33% of their DAUs in the first three days, they are off to a great start!
Now let’s focus on a question that product and marketing folks often ask: How do I know if I have good retention? To answer that question we can look at the retention curves of top apps.
Looking at the graph above, we can estimate the D1 retention of the top 10 apps is ~75%, the next 50 app is ~65% and next 100 is ~48%. So what is different about apps in the top 10 and apps that aren’t? There could be many factors, but one thing’s for sure: apps that show value to users immediately are able to retain more users over longer periods of time.
It’s clear that users’ early experience is really important and has a large impact on long-term retention.
Now tell me, why does retention matter?
Two key factors make the focus on retention even more critical:
- Users’ attention spans are shorter than goldfish.
- The cost of acquiring app users is more expensive than ever. Since last year, user acquisition costs have jumped 117%, with the current cost being $4.04 per user.
It’s imperative for companies making mobile and/or web applications to have a user retention strategy in place in order to keep the customers they spent so much money and effort acquiring.
Let’s look at an example of how user retention can directly affect revenue. We can do this by comparing a top 10 app, lets call this Craftbox, to a next 50 app, called RockGear, based on the retention averages we saw earlier (assume both are ecommerce apps).
Here is the tabular data for reference:
|Top 10 Apps||100||74.67||71.51||67.39||63.28||59.80||55.10||50.87|
|Next 50 Apps||100||64.85||60.31||54.13||49.48||44.81||39.60||34.50|
|Next 100 Apps||100||48.72||42.96||35.93||30.79||25.45||21.25||18.98|
|Next 5000 Apps||100||34.31||28.54||21.64||17.43||13.62||10.74||8.99|
Referencing the data, we know that the average retention rate for the apps on D1:
- CraftBox = 75%
- RockGear = 65%
Now let’s figure out what the average daily conversion rate is for each set of apps. For this we can use the quarterly e-commerce study from Q3 2015, which places it around ~3% globally.
Assume the average purchase in both apps is $18.07. Taking these factors into account, we have the following formula:
(D(N) retention * conversion rate) * average purchase = total revenue for day
Let’s assume each app acquired 100 new users on a given day. :
|D1 Retained Users||75 users||65 users|
We also need to take user acquisition costs into account. Let’s say we got 50% of our users via paid acquisition. Since we stated that we have 100 users for each app and the cost of acquiring users is $4.04, it will cost us $202 to get 50 users for each app.
Now let’s take this example even further and compare D1, D3, D7, D14, D30, D60, D90 revenues ((D(N) retention * conversion rate) * average purchase).
As you can see, over the course of 90 days, Craftbox (the top 10 app) generated ~$240 in revenue, while RockGear (the next 50 app) generated ~$189. So in 90 days, Craftbox generated about 22% more revenue than RockGear.
Having more users in your app leads to more revenue –not exactly earth shattering. But what if we looked at the company’s bottom line after 90 days? Remember, both companies spent $202 to acquire that first cohort of users.
Let’s take into account cost of user acquisition for both apps and see how this affects the company’s profit after 90 days:
Total Revenue after 90 days – Total User Acquisition = Total profit
|Total Revenue after 90 days||Total User Acquisition||Total Profit||Profit as % of Costs|
CraftBox has generated $37.94 or 19% of profit after 90 days, whereas RockGear is generating revenue but is still down -$13.52 or -7% after 90 days. They still haven’t earned back the money they spent to acquire those users.
What does this mean? Focusing on driving higher user retention directly translates to quicker profitability. To remain competitive and become profitable, RockGear should probably take a closer look at their own retention strategy.
You may be thinking these numbers are small and do not reflect real world users. This is absolutely true; real world numbers are magnitudes higher due to the chasm around installs, retention and activation rates between an app that is top 10 and one that is not. Thus, the absolute revenue difference between apps with these retention rates would be even more profound!
Great, now what should I do?
If you are truly serious about tackling retention there are two things you need to do:
- Understand the current state of affairs for your web or mobile app. If you don’t know where your product stands you won’t know what direction to take it in!
- Make sure you have an analytics tool in place to understand how different user behaviors affect retention.
First, to get started with the current state of affairs for your product (web or mobile app), you should look at:
- Early user behavior (D1 to D7)
- What is causing users to drop off
- What is causing users to retain
- Who are your power users
- What features are the using
- What features are they not using
- What is your retention for D1, D3, D7, D14, D30
Once you have these findings, you now have to put together a plan that reviews how users behave in your app. These key user behavioral aspects will also impact retention.
This plan should review:
- How you onboard users
- How you currently activate users
- How they go from being downloads/account sign-ups to actual users
- How you deliver value to your users
- What makes them want to come back? This could be a core feature of your product.
- What user feedback loops you plan to use
It is critical to have these 4 pieces defined, as they are the fuel for the retention engine that powers your applications.
So… is retention is like teenage sex?
As I asked at the beginning of the post, is retention is like teenage sex? Yes, in the sense that people are aware of it and everyone thinks they are doing it right, but the data shows only a few actually are. Hopefully, after reading this post you have a better understanding of what retention is, why it matters, and how you measure where your product stands.
Retention is absolutely critical to every company’s success, but it’s often overshadowed by user acquisition or virality. Over the next few months, we will dive deeper into retention, bring in some experts to consolidate best practices, and provide you with an actionable guide to help you move the needle on your retention.
Here are a few of the topics we will cover over the coming weeks:
- The Three Levels of Retention
- Pirate Metrics: Actionable Ways to Measure Retention
- The Scientific Method to Retention
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