Five years ago, the slogan was “Retention is king.” Now it’s “Retention is the new growth.” Yet companies still tend to spend six to seven times more on new customer acquisition than keeping existing customers coming back.
That isn’t to say that you can ignore acquisition, of course. But the best way to drive sustainable growth for your company is to focus on customer retention. And the best way to improve your retention rate is to build amazing customer experiences. The most successful companies know this. In fact, an Incept Results study found that enterprise businesses that invested in customer experience made an additional $700 million within three years.
So we’re here to explain what retention rate is, why retention and customer experience (or CX) go hand in hand, and how companies use product analytics to build great customer experiences
What Is Retention Rate?
Retention rate is a measure of how many of your customers continue using your product over time. It’s a signal that your product is valuable enough to customers to keep them coming back (and keep spending money). Customers who already see the value of your product are more likely than new users to buy more of it, use it again and again, or renew their subscriptions.
How to Calculate Retention Rate
To calculate your retention rate, you need to define (1) your critical event and (2) your product-usage interval.
Your critical event is an action a user takes that tells you they are retained. It could be making a purchase, renewing a subscription, or completing an activity in an app. You should pick something that has a connection to your business goals, indicating that their behavior will lead to monetization on your end. It should also be something that shows the user is receiving value on their end as well.
Your product-usage interval is how often you expect people to use your product. If you make mobile games, you probably want users to play every day. Airbnb, on the other hand, likely operates on the assumption that people will take one or two vacations a year.
The Methods for Measuring Retention Rate
Once you’ve defined these terms for your own business, there are three common ways to measure your retention rate:
- N-day retention tells you the proportion of users who came back to your product on a specific day–for example, the percentage of users who came back on the third day after sign up.
- Unbounded retention tells you the proportion of users who came back to your product on a specific day or later–for example, the percentage of users who came back to your product on day three or any day after.
- Bracketed retention, as the name suggests, lets you define a custom window and tells you the percentage of users retained within it.
To know what type of retention analysis to use, you first have to understand what kind of value your users get value out of your product and how often. We wrote an entire playbook on retention that can help you do this type of analysis. Or you can peruse our compilation of 40+ resources on the subject or take our Retention 101 email course.
Why Retention Rate and CX Are Linked
The experience you create for your customers—both good and bad—may be the single largest determinant of your retention rate. Customer experience represents a summation of how customers feel about your brand, the experience they have within your product, their interactions with your company, and every point in the customer journey. By understanding the overall customer experience with the product, teams can identify what changes should be made to improve that experience in the customer journey, and consequently the retention rate.
The Zendesk 2020 Customer Experience Trends Report found that 74% of customers feel loyal to a particular brand or company, and 57% of respondents said that customer service influences their loyalty to a brand. That means that the experience you create for your users has a big impact on whether they will retain. Qualtrics also found that customer experience correlates with loyalty, and loyal customers are five times more likely to make a repeat purchase and seven times more likely to try a new product offering.
In short: good customer experience creates loyalty, which drives your retention rate, and higher retention drives growth.
Meanwhile, a negative customer experience can also have a huge effect on your retention—in the opposite direction. In the same Zendesk study, 58% of customers stopped buying from a company after a bad experience, and 52% switched to a competitor’s product or service. For B2B companies, it’s even worse: 66% stopped doing business with a company after a bad experience.
So how do you improve your customer experience and, therefore, your retention rate? To achieve good CX at scale, you need insights from product analytics to help you understand the full customer journey and make informed decisions about how to improve your product. Just check out the real-world examples below.
How Real Companies Improved Their CX with Product Intelligence
The companies in the case studies below have one thing in common: they used product intelligence to drive their CX and retention strategies. Data is more important than ever for shaping your product strategy and getting a 360-degree view of the customer journey. Once you gain insights from your customer data, you can make informed decisions to build an excellent in-product experience. As customers experience delight and gain value from your product, you’ll see your engagement and retention rates go up. Per Zendesk, companies that leverage the most data (defined as those in the top 25% of managing data relative to other similar companies) see a 79% reduction in customer wait time and solve four times the number of customer requests.
Here’s how some real companies used product intelligence to build great customer experiences and improve their retention rates.
Microsoft was creating a new set of productivity features for Office365: MyAnalytics. They used product intelligence with Amplitude to streamline and simplify the user experience. First, Microsoft identified distinct groups of customers that engaged with MyAnalytics differently. Then, they looked into which features each “customer persona” gravitated to. Finally, they used those insights to promote relevant sets of features to the right customer persona. The result was a 4x increase in user engagement and big boost to their retention rate.
Postmates wanted to find ways to engage their users and make their product more sticky without turning customers off. With product analytics, they tested campaigns with push notifications, email, and in-app messaging to see which efforts led to increased engagement and retention. Postmates was also mindful of observing whether any of their campaigns had a negative effect on the customer experience. Using Amplitude and Braze, Postmates monitored marketing campaigns in real time to manage their ad spend efficiently while delivering unique and creative customer experiences, such as a tie-in with The Bachelorette on ABC.
Iflix is a leading entertainment service in Southeast Asia. They needed to increase their retention because only a small proportion of their users were returning to the platform. Iflix used product intelligence to create seven customized onboarding experiences for their users, instead of one generic onboarding flow for everyone. Product intelligence allowed iflix to better understand what content resonated with which users, based on the user’s unique interests and behavior. From there, iflix continued offering personalized recommendations for their customers to boost their retention rate.
Iflix also improved the customer experience when they discovered that the subscription sign-up was too high a barrier for new users. So they decided to offer all videos for free in the user’s first 24 hours. That led to more video views, more ad revenue, and more conversions. Getting users to their “aha” moment quickly, where they discover the value of your product, is the first step on the way to long-term retention.
Focusing on CX leads to higher retention and better business results. Product intelligence—a combination of product analytics, data management, and behavioral targeting— gives your team the tools you need to understand your customers and create amazing customer experiences.
Learn more about how you can improve your retention rate with our Retention 101 course.