During our last post of the PMs & Metrics series, we covered the details of the conversion rate. In today's post, we'll be going over another important metric that PMs should be familiar with - the customer retention rate.
The customer retention rate measures the proportion of customers that have continued to use your product over a period of time. There are two key phrases here to pay extra attention to - "continued to use" and "period of time." Let's break them down further.
"Continued to use" refers to customers that have been using your product, and does not include brand new customers. Keep this in mind because we'll be seeing this concept again when we discuss the formula to calculate retention rate.
"Period of time" indicates that retention rate can be calculated weekly, monthly, or annually. It's important to figure out what period of time a given retention rate refers to since that rate can be different based on the time of year, time of month, etc.
Customer retention is an important metric to measure because good customer retention denotes a good product and good customer support. It makes a lot of intuitive sense to ensure that your existing customers continue to use your product or service. Here are several more reasons why customer retention is so important:
- A 5% increase in customer retention can increase profitability by 75% (Bain & Co)
- It is 5-7 times more expensive to find new customers than it is to keep a current customer (Client Heartbeat)
- 80% of revenue comes from 20% of current customers (Gartner Group)
In short, having a high retention rate is a hugely efficient and beneficial way to grow the business. Measuring the customer retention rate helps benchmark your performance and allows you to identify and fix areas of improvement.
To measure the retention rate, refer to the following formula:
(All customers at end of period of time - New customers acquired during period of time)/All customers at the beginning of period of time
To illustrate, let's say we started with 100 users at the beginning of the month. During the month, 20 users left and 10 new users joined, which means there are 90 users at the end of the month. We plug this into the retention rate formula: (90-10)/100 = .80 - so our retention rate is 80%.
What retention rate should product managers aim for? Similar to the conversation rate, the retention rate in question varies depending on the industry. There are two action items product managers can take when looking at retention rate - they should be tracking improvements over a period of time, and they should be identifying and prioritizing features and improvements if the retention rate has been declining.
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Another useful benefit of knowing the retention rate is that the flip side also gives the attrition rate - the rate at which users leave during a given period of time.
To close, we've covered two important key performance indicators (KPIs) that should be part of any product manager's tool - the conversion rate and the retention rate. I've mentioned before that as data becomes easier to gather and all-the-more important in decision making, PMs should constantly be aware of how to make data-backed decisions.
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