The difference between a healthy, growing business and one that does not scale comes down to your customer retention. Retention reinforces monetizations, helps acquisition and is the real secret to true growth. Below, we share how to calculate your customer retention rate along with three strategies that will increase your customer retention.
How to Define Customer Retention Rate
The first step to improving your retention rate is to define how it should be calculated. Very rarely the right way to measure retention is looking at how your users are “active” in your product period over period. Any activity is overly broad, and it says nothing about whether these users are getting value from the product. So before diving into the numbers, make sure you define:
- your critical event
- and your product-usage interval.
The critical event is an action that signals true engagement with your product, and is also aligned with your business goals. For a gaming app, for example, your critical event might be “game completion,” rather than simply “logging into the account.”
The product-usage interval assesses the most frequent usage interval that your users are using your product. Whether it is a daily, weekly, or monthly usage product will significantly change how you calculate your customer retention rate.
[Related: 6 Worksheets to Understand, Improve, and Calculate Retention Rate]
How to Calculate Customer Retention Rate
There are three different ways to measure retention rate:
- N-day retention: how many users return to your product on the Nth day
- Unbounded retention: % of users that return to your product on the Nth day or after
- Bracketed retention: a more generalized version of N-day retention, allowing you to define the custom intervals of multiple days, weeks, or months, such as active on Day 0, Day 1-3, and Day 4-7
While it is easy to think of retention rate as N-day retention, for some business models it might not be the best approach. For an ecommerce platform, for example, you might not care whether a customer comes back to complete another purchase on exactly the seventh day after initial registration. Unbounded retention might be a better approach.
Regardless of which one you choose, we can break down retention into 3 parts and discuss strategies in each:
- New user retention
- Current user retention
- Resurrected user retention
1. Improve New User Retention and Activation
Create an Onboarding Experience Around “Aha” Moments
As Chameleon’s CEO, Pulkit Agrawal, wrote on our blog, “A massive amount of churn occurs in the onboarding phase of your product.” This is largely because of the learning curve involved with most products. It’s rare that someone will try a new product and immediately understand the value of it. If you can reduce churn while customers are in the onboarding phase of your product, your customer retention rate will logically increase.
Improving your onboarding process goes beyond proactive customer service and help documents; you should also invest in more self-serve product-led onboarding that minimizes friction. One of the tactics that works more often than not is a product tour.
You likely ran across a product tour when you first started using another product. Product tours automatically walk new users through using your product.
Take Slack as a prime example. Their onboarding product tours are legendary. With experiences like this, customers can get to your aha moment quicker because the tours guide new users to the most valuable parts of your product. But first, make sure you understand what the key behaviors during onboarding are that lead to long-term retention, so that you can optimize your onboarding experience accordingly.
The best part is that you don’t need to devote hours of engineering time to put a product tour into place. There are many third party tools built around this common use case.
2. Current User Retention
Understand and Focus on Specific Personas’ Needs
Not all users are created equal. Make sure you understand what different types of users you have, what their characteristics are, and what behaviors drive retention.
In general, each product might have three groups of users:
- Power Users: Use the product at a very high frequency and depth, using advanced functionalities that other users might not know how to use. They often create and distribute content
- Core Users: Use the product at a normal frequency without too much depth; create content but not too much
- Passive Users: Do not use the core features as much as core users; often passively consume content
Effective features to improve retention of each customer group might look very different. Which one to focus on depends on the stage of your company, resourcing, and strategic priorities.
To improve the retention of power users, you can implement a customer loyalty program, or continue developing advanced features that would further increase the depth of their usage.
For Core Users, double down on making the core feature sets easy and delightful to use; nailing just a few common use cases can produce great yields. Instagram in the early days decided to focus on just photo sharing and invested in making the photo sharing experience fast and seamless, driving the growth of their core user base.
For Passive Users, you might want to pay attention to what content these users like to consume and invest in making this easier. For example, if you are a consumer credit reporting app, your majority user base might be only using the product to monitor credit score over time, rather than proactively seeking out help to improve this score. Alerting them of significant changes in their credit score would definitely attract them to come back to your product.
3. Improve Resurrected User Retention
Understand Why Users Churn and Return
Developing effective resurrection strategies depends on how well you understand why your users churn and the leading indicators of churn so that you can try to prevent it before it happens. For example, if you have a social product and you might find a user’s network size is the leading indicator for churn. Features that encourage users to connect to more people on the platform, which could be at various stages of the user life cycle, might be helpful to prevent churn.
When it comes to notifications and re-engagement campaigns to resurrect users, more is not necessarily better. For a video streaming app, a personalized email campaign recommending similar movies as the ones you watched a few months ago is likely to work better than a notification that simply lists new releases not tailored to your interests. For an ecommerce site, an effective re-engagement campaign may be alerting a user of a price drop on an item that they have viewed but not yet checked out.
Better understanding of why users churn would help you craft effective resurrection tactics. And then the critical step is getting them to form a habit again, making sure they re-experience the aha moment as they re-engage with your product so that you don’t easily lose them again.
There Are No Shortcuts in Customer Retention
Improving and maintaining a high customer retention requires proactive investment and deep understanding of your users. Analytics is usually the very first step, and then user research can help you develop more vivid personas and develop more concrete ideas on tactics that might work for a specific persona during a certain stage in their lifecycle.
There is no one size fits all solution. To achieve this long-term retention, you must understand what your customers value and then continuously improve your product to delight.