Mastering Customer Retention Strategy
You've invested time and money into acquiring new users—but are you keeping them? With a deliberate focus on customer retention, you can improve retention at all stages of the user lifecycle to reduce churn and boost lifetime value.
Why you should care about user retention
The internet now has over 5 billion global users and counting, increasing steadily year over year. Today’s consumers use digital products across devices more than ever. And although digital adoption is positive for software companies, it’s also increased market competition for acquiring and keeping users.
Although this trend affects all software products and digital services, it significantly impacts the mobile app industry.
And although the average mobile user has over 40 apps installed, they typically only access nine to 10 daily. Many apps are considered “dead on arrival.”
FACT
More than 8 million apps now exist on ioS and Android app stores.
So how do you build a mobile app product that can acquire and keep users to sustain real growth? It starts with understanding why retention is so critical to growth.
Acquisition isn't the whole answer
Pour enough dollars into user acquisition, and your app might temporarily land on an App Store top chart. But attracting users is not enough. Our analysis of over 500 million mobile devices has shown that, on average, 80% of new users stop using an app just three days after downloading.
This behavior extends beyond mobile. If your product—mobile or otherwise—doesn’t bring value to users early and often and turn them into habitual users, your product will struggle.
Filling the top of your funnel doesn't matter if you’re leaking users; the long-term growth of a product and the health of a business depends on how well you retain users. Your retention demonstrates your product’s real value.
“Return on” retention shows how many users return after a number of days. In this example, users return on day 2 and again on day 5 and 6, but the downward trajectory doesn’t level out, indicating an issue with product-market fit.
Shifting focus to user retention
Return On
The percentage of users who return on the “Nth” day after first use.
Retention curve
A line graph depicting the average percentage of active users for each day within a specified timeframe.
At a high level, retention measures how many users return to your product over time. Even the best products lose most users in just a few days. But if you make retention your primary growth metric, you can change the trajectory of your company from one that stalls or gradually loses users to one that sustains actual growth.
Increasing user retention and minimizing churn is the key to building a base of loyal, engaged users and driving sustainable growth. A business that retains its users increases its revenue and becomes profitable faster than one that does not. Retention impacts every critical business metric you and your investors care about—active user count, engagement, customer lifetime value, payback period, and more.
“Every improvement you make to retention also improves all of these other things: virality, LTV, payback period, etc. It is literally the foundation to all of growth, and that’s really why retention is king.”
When measuring “Return On” Retention, Day 0 typically refers to the first day a new user uses the product. First-day use can include anything from downloading and opening a mobile app to completing a specific action. Following that, retention on Day N is the percentage of users who started on Day 0 and returned and remained active N days later.
A good way of visualizing your retention rate is by plotting a retention curve, as shown on the left. Let's say this is a retention curve for an app, and we're looking at users who started using this app for the first time.
According to this retention curve, of all of the users who first used the product on Day 0, 13% returned and were active on Day 7. You can also quickly visualize the drop-off from Day 0 to Day 1.
When should you start thinking about retention?
A common misconception is that retention only matters once your company reaches a particular growth stage. Once some users return to your product regularly, you have enough information to optimize retention.
Remember that how you approach your retention may change over time. What doesn’t change is the need to continuously improve retention rates to grow and become consistently profitable.
Let’s look at how retention analysis can benefit companies at all stages of growth.
Before product-market fit
Retention can indicate if you have a product-market fit problem; if you plot out your retention numbers as a percentage of active users over time, and you have a flat line that reaches zero instead of a curve that stabilizes at a percentage of retained users. This indicates no user base regularly uses this product, which indicates you need to solve for product-market fit.
Building a habit-forming product
How do you think about retention when you don’t have users? At the early product development stage, you should consider what retention ultimately boils down to: Why will users get hooked on your product? Building a habit-forming product is the crux of retaining users long-term.
Getting a baseline of users
Once you have early users, it’s time to start optimizing retention. Test out and resolve factors affecting app performance and clean up bugs—users have little patience for apps that crash. Then start understanding what value your users derive from your product. Figure out what your power users are doing and try influencing your user base to adopt those behaviors. Get your retention to a healthy baseline before spending on acquisition.
Ongoing product iteration
Diagnosing and improving your retention should be an ongoing process. As you iterate on your product experience—to develop a more habit-forming, sticky product—you also have to measure retention. You may hypothesize why some users churn and others retain, but you must continuously assess your retention metrics to understand how users experience your product. Making retention the central focus of growth might sound daunting, but it doesn’t have to be. This playbook can help.
How this playbook will help
Although there is no magic formula to improve your retention, this playbook provides a framework to diagnose your product's retention and develop strategies to improve it. Returning to the retention curve, Brian Balfour describes two “levers” that can improve retention. At a very high level, these are:
1. Shifting the retention curve up
Optimize your first-time user experience and immediately demonstrate your product’s core value to encourage users to stay around longer instead of churning in the first few days.
2. Flattening the curve
Increase your baseline level of users by consistently delivering a solid product experience. Following both concepts, this playbook offers a novel framework for diagnosing and systematically improving user retention.
Throughout this playbook, we’ll reference six accompanying worksheets, which walk you through various activities to support you in mastering retention.