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Strategy

Winning at Customer Survival: The Importance of Retention Rate Analysis

Don't leave your marketing team screaming into the void. Performing a customer retention analysis is crucial for any business' survival

Keith Loria
October 24 2018

It doesn’t matter what sort of product you’re marketing for sale, successful recruitment of new customers will only be successful if the customers seek you out in their next purchase. This is termed as “customer retention” and is one of the primary metrics that influence revenue. Thus, performing a customer retention analysis is crucial for any business and survival analysis is based on tracking a cohort of customers over time.

Craig Smith, founder and CEO of Trinity Insight, says without these insights, your marketing team will feel like they’re screaming into the void.

“They have no idea whether the leads and customers they’re driving actually provide value to the company or end with one-and-done purchases,” he says. “Retention rate analysis helps marketers guide their budgets to the most effective long-term acquisition and loyalty efforts, not just short-term sales. That’s healthier for the company in the long-run.”

Ian Su, a data scientist at Infinity Venture, which acquires data from potential investment, and checks user behavior metrics like retention, says if a user repeatedly goes back to your product, he or she would eventually form a habit of using your service.

“And since the user is so familiar with your service, he would lower his alert when interacting with your product and be more price insensitive, though this doesn’t mean one can abuse this trust,” he says.

Beat the Churn

Depending on the industry, the amount of time customers remain active before churning (ceasing a relationship with the company) varies greatly.

For instance, if you’re promoting an app, Smith says the window is really short, as 77% of customers abandon an app within three days of downloading it. However, some people will return to a brand several times per year for decades if they continue to offer quality service and products.

That’s why you need to track your retention rate to make sure there aren’t decreases.

“It almost serves as a health barometer for your company. If your acquisition rate is stable and your retention rate is stable, there’s no reason to believe that your brand will do well over the next few quarters,” Smith says. “However, if your retention rate is decreasing, then you’re not going to have the sales you want in the future. You better hope that your acquisition rate is increasing in the short term to cover those lost sales while you boost retention again.”

You Mon Tsang, founder and CEO of ChurnZero, a customer success software that helps subscription businesses fight churn, notes churn is the scourge of subscription companies. It impacts growth and profitability, which affects a company’s value.

“A one-percent decrease in churn will add 12 percent to a company’s valuation in five years,” he says. “Most companies worship entirely at the altar of new sales; ignoring churn comes at great risk to morale, profitability, and value.”

He notes it is imperative to watch for change (in usage, sentiment or communications) and set alerts for such changes.

Tsang says the two most common methods is customer churn (which is the count of customers) and revenue churn (which follows total churn, contraction and expansion), and explains to calculate customer churn you would take all the customers you lost during a time frame, such as a month, and divide it by the total number of customers you had at the beginning of that same time period. You will not want to factor in any new sales from that month but only focus on existing customers.

To determine the percentage of revenue that has churned, take all of your monthly recurring revenue (MRR) at the beginning of the month and divide it by the monthly recurring revenue you lost during that time minus any upsells or additional revenue from existing customers.

“Losing a customer is a real punch to the stomach and takes its toll on the morale and mojo of the company,” Tsang says. “No one wants their product or service to not bring value to a customer. There is an actual quantifiable impact of churn but don’t forget its qualitative impact.”

Improving Retention Activities

When it comes to retention, a company can choose to be proactive or reactive. Smith says that to be reactive, you can look at why customers are leaving and try to bring them back. As an example, he cites MoviePass and what happened after they angered customers after trying to change its unlimited movie policy. It ended up changing its model to lure them back.

“You can also be proactive,” Smith says. “This is why so many companies have extensive loyalty plans and send dozens of retargeting and abandon cart emails. They want to keep you focused on their brand as long as possible to expand their CLV (customer lifetime value).

For acquisition, he notes, the key is to attract quality customers. You might get a lot of customers by placing a half-off Groupon, but how many are going to return? Or stay loyal to you for the next few years? You’re better off using that ad money to bring in new customers at full price, who will pay full price every time moving forward.

Tracking Cohorts

Tools like Google Analytics can help you understand your demographics and return customers.

Smith notes you can also track audiences by analyzing internal data through customer accounts.

“This is why so many retailers ask shoppers to create an account instead of continuing as a guest,” he says. “They want to analyze that buyer and their behavior.”

Tsang notes to choose the unit of time that corresponds to your sales cadence, which is likely monthly or quarterly as you’ll want each cohort to be big enough for analysis to be interesting.

Analyzing Retention Rates

If you want a surefire way to analyze retention rates, Smith says there’s no better way than to look at your sales numbers.

“This is easiest in an eCommerce setting,” he says. “Some companies create anonymous customer IDs and assign them to customer names or email addresses —whatever they can use to tie behavior to a customer—that way their data team isn’t exposed to sensitive information. These analysts track the number of purchases on average per year and the average ticket. They may even look at the items they buy.”

This is where big data can really come in handy and help you build detailed audience personas for your most loyal customers. This information goes to the marketing team and the cycle continues.

For example, Smith explains that a lot of eCommerce retailers are preparing for the holiday season right now, and have been since March. They are likely going to base their customers into two groups: Shoppers who bought from them for the first time last year and never returned and loyal customers who returned several times throughout the year.

“Knowing the difference between these two audiences can help marketing teams lure loyal customers with deals on their favorite brands and unique rewards while setting aside a certain chunk of the budget for one-and-done buyers,” he says. “When you’re trying to hit your holiday sales goals, you’ll take any buyer.”

Sure, in a perfect world, every new customer would stay loyal for years after they buy, but that doesn’t always happen. Knowing the difference between a quality customer and short-term buyer can help you focus your marketing efforts for the long-run.

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Keith Loria

A graduate of the University of Miami, Keith Loria is an award-winning journalist who has been writing for major newspapers and magazines for close to 20 years, on topics as diverse as sports, business and healthcare. You can view some of his recent writing at keithloria.contently.com.

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