Retention rate is an important metric that calculates the percentage of users who continue using your product or service over a given time period. A high retention rate means your current customers value your product and are providing a sustainable source of revenue. A low retention rate means you have a leaky bucket. No matter how many users you add through your acquisition strategy, they’ll keep churning, and you’ll keep losing money.
Some attrition is inevitable. Existing customers stop using your product for reasons beyond your control. However, calculating your product’s retention rate is the first step toward turning saveable churn-destined customers into delighted brand enthusiasts.
- Retention rate is a metric that measures the number of users still using your product or service after a given period of time.
- Retention rate calculations are based on either users or time.
- Companies looking to improve their retention rate should appeal to at-risk customers ahead of their churn date, pay attention to their customer feedback, and use product data to guide UX improvements.
What is a retention rate?
A retention rate is used to project profits and growth. If the rate of retention exceeds the rate of acquisition, your product gains users (and revenue) over time. Alternatively, a retention rate that’s lower than the rate of customer acquisition equates to a net loss of customers.
Retention isn’t important just from a pure revenue standpoint. Businesses often take the rate of retention into account when determining how satisfied customers are with a product. Companies use retention rate to understand four things:
- How loyal their customers are
- How good their customer experience is
- What value their users get out of their product
- Whether they have a sustainable base to maintain their business
Alternatively, some companies track the exact opposite of retention by calculating their attrition rate. If a company has a 30-day retention rate of 90%, it has an attrition rate of 10%. For obvious reasons, companies should aim for high retention rates and low attrition rates.
Why maintaining a good retention rate is important for businesses
Companies are most often motivated to calculate their retention rate for one purpose: making more money. More customers equate to more subscriptions which bring in more revenue. It’s commonly thought it costs at least five times more money to attract new customers than to retain existing ones. Ultimately, a business needs to at least make back their cost of acquisition before those customers churn to stay afloat.
Businesses may think they have time to reveal the true value of their product to their customers. However, the average mobile app loses 90% of its users within 30 days of download. No one wants to replace the majority of their users every month, and the first step to improving retention is by establishing your baseline retention rate.
Methods for calculating retention rates
There are two aspects of your product that you need to nail down in order to define retention for your company.
- Your product’s critical event. This is the action a user takes that determines whether or not they have been retained. This event should be something that indicates value for both your customer and your business. It should be tied to an activity that generates revenue for you and indicates that a customer is getting what they need out of your product as well. For example, Airbnb’s critical event might be to “make a reservation.” Netflix’s would be to sign up or renew a subscription. Candy Crush: play a game level.
- Your product’s usage interval. This is how often you expect a customer or user to perform the critical event action. Choose a time period that makes the most sense for your product. Airbnb customers should be considered retained after they make their second reservation within 18 months after their first reservation. Netflix users are retained when they renew their subscription each month. Candy Crush players are retained each day they play a game.
Generally, retention rate formulas look at the number of users who were present on Day 1 compared to how many of those users were present on a period thereafter. There are several ways to calculate this formula, depending on how you define “active users” and how you set the period of time. You need to determine both according to what makes the most sense for your business.
Calculating retention rate based on users
- Customer retention rate measures what percentage of your paying subscribers or users are retained. Focusing on this segment prioritizes the needs of the users who pay for your product, and their retention has a direct impact on your bottom line.
- User retention rate measures the retention of your entire user base, whether they are free or paid users. Focusing on this kind of retention can help you learn how to keep all of your users happy and engaged but may not help you become profitable. Alternatively, user retention rate is the right measure for you if your business relies on advertising rather than a subscription model.
- A cohort’s retention rate measures retention according to specific user segments or groups that share a characteristic. This helps you zero in on how certain user segments behave and what makes them happy.
Calculating retention rate based on time
- N-day retention rate measures how many users were retained on a specific day after they signed up, such as Day 5 or Day 30. You can determine each day according to strict calendar rates or rolling 24-hour windows. N-day retention rate is valuable if you expect people to use your product every day, like a mobile game.
- Unbounded retention rate measures how many users came back on a given day or any day after. This retention rate makes sense when you don’t expect people to use your product every single day. This number is the inverse of your churn rate.
- Bracketed retention rate measures retention within custom periods specific to your product’s usage cadence, such as Day 1, Day 3, Day 7, Day 14, Day 31.
You might use different retention rates at different times, but if you are going to compare rates, make sure you only compare retention rates that are measured in the same way. Lining up your unbounded customer retention rate with your N-day user retention rate is an apples-to-oranges comparison that doesn’t give you meaningful information when measuring user retention.
3 strategies for improving your retention rate
If calculations reveal that your retention rate is not as high as you’d like it to be, don’t fret. These three simple retention strategies can help boost your rate:
1. Don’t count canceled customers as churned customers
“Canceled” and “churned” seem like different words for the same status, but they’re not. Churned customers have stopped paying a company and are no longer using the service. They’re gone gone. Meanwhile, a canceled customer has notified a company of their intent to stop using a service and will be churning shortly—that is, unless the customer’s mind can be changed.
Companies who give up on canceling customers miss out on a chance to retain business. A reported 32% of customers leave a brand they love after just one bad experience. This means saving a sizable number of canceling customers may come down to rectifying a single error and making the customer happy again.
Customers may cancel for more minor reasons as well. Perhaps a user never properly onboarded and simply doesn’t know how to best use the product. You should offer assistance to these problems to assert the value of your product and potentially get the customer to reverse course.
2. Gather customer feedback
You can’t fix retention issues if you don’t know what’s causing your customers to churn. Only 1 out of 26 customers who have a bad experience with a company go out of their way to voice a complaint. The other 25 customers simply sit with their unhappiness and may even use it as a justification for terminating services when the time comes.
Companies who commit to systematically gathering customer feedback stand a better chance of correcting points of friction in the user journey. Criticism from customers should be collected, analyzed, and ultimately acted upon to prevent frustration on the part of the customer in the future. For example, if users complain about your confusing onboarding process, you can create different workflows and A/B test them to determine which performs best.
Every change you make to your UX will result in new opinions of your product. This means the customer feedback process shouldn’t be a one-time event. You must actively seek feedback and increase customer satisfaction if you wish to maintain a high retention rate. Methods for gathering customer feedback include:
- Customer interviews
- Usability testing
3. Engage with product data
One of the best ways to know how customers react to your product is to study your product analytics. A look at your customer’s behavioral data will reveal what features drive engagement. For example, analysis of your music streaming product’s data may reveal that creating a playlist within the first week of onboarding doubles the rate of 30-day retention. You should use in-app messaging, email campaigns, and any other tool at your disposal to drive new users to the playlist feature.
Customers create product data at each interaction with your product. The key to taking advantage of such a vital source of information is to find an analytics tool like Amplitude that affords product teams easy access to their own data. Amplitude customers can pull reports and analyze data quickly instead of lodging requests with other teams and waiting for them to respond. They can also use Amplitude Experiment to test potential changes and maximize their positive impact on customers.
Examples of retention rate in action
You can’t expect improvements to your retention rate simply by measuring it. Your rate should be used as a benchmark for building a focused customer retention strategy to decrease customer attrition. Luckily, the real world is full of companies doing retention right, including:
Daily meditation app Calm was looking for ways to improve their retention. They used Amplitude to examine the retention rate of different cohorts to see if certain behaviors correlated with higher retention. They discovered a small portion of users set meditation reminders, a feature that was buried in the settings, and that group had very good retention.
Calm ran an experiment on a small portion of new users to see if prompting them to set daily meditation reminders right after onboarding led to increased retention. The result was a 3x jump in N-day retention. Calm then rolled out the updated reminder feature across their entire user base.
Kwit is a health and fitness app with a unique interest in customer retention. Their goal is to help people quit smoking and stay that way. Analysis by the Kwit team revealed that customers who quit smoking while using their app for a year had a 15% chance of picking up the habit again. However, they noticed that those who stuck to the program for two years only had a 3% chance of relapsing.
The team at Kwit made two-year retention their ultimate goal. They looked to personalization to increase their retention rate, asking users to fill out details about themselves during the onboarding process. Kwit then used this data to tailor the user experience to better suit each customer’s preferences, driving product adoption and retention by focusing on UX improvements.
Fishbrain is a leading app for sport fishing, which enables users to record data and take photos about catches, and share them publicly via social media or privately via the app.
Fishbrain got in touch with Phiture and jointly developed a strategy to boost customer retention rates, while using Amplitude and Braze to undertake a comprehensive analysis of their current retention.
While Amplitude was used for diagnosing the areas of improvement, Braze helped them act on the insights derived from the Amplitude platform. Using Braze & Amplitude in combination became a powerful tool in improving customer retention rates. Over the course of 5 months, 40-50 experiments were conducted to enhance retention rates.
The results were phenomenal, since Fishbrain saw an increase in weekly retention, peaking at Week 6 with an uplift of 50.6%.
- New data shows losing 80% of mobile users is normal, and why the best apps do better. Andrew Chen.
- Experience is everything. Get it right. PwC.
- How to reduce churn with segmented churn analysis. Vitally.
- Prescription for cutting costs. Bain & Company.
- The Value of Keeping the Right Customers. Harvard Business Review.
- 50 Important Customer Experience Stats for Business Leaders. Huffpost.
Now that you know more about retention rates, learn how you can go one step further with our Mastering Retention playbook.