GrowthPad

Fundamentals of Retention Economics

Retention economics are straightforward: keeping more customers active for longer and encouraging them to spend more increases LTV, driving revenues and profits. This is achieved through two primary levers:

1. Reduce Churn.
2. Increase Average Revenue per User (ARPU).

Key Metrics:

• LTV = (ARPU x Profit Margin) x Membership Duration
• Membership Duration = 1 / Churn Rate
• Therefore: LTV = (ARPU x Profit Margin) / Churn Rate

Additional Retention Metrics

• Transaction Revenue: The primary source of revenues for e-commerce businesses. Transaction Revenue = Average Order Value x Frequency.
• Average Order Value (AOV): Driving a high AOV is particularly important in e-commerce with high fixed per transaction fulfillment costs.
• Frequency: The number of transactions per time period. Frequency is also an engagement metric, reflecting how often a customer engages with your platform.
• Number and Percent Active Subscribers: Tracking the active versus inactive or lapsed subscribers provides insights into churn and engagement.
• Segment, Cohort & Customer-Level Retention Metrics: E-commerce businesses benefit from tracking customer and transaction data at segment, cohort, and customer levels for meaningful insights.

Customer Experience

The approach to “Customer Experience” (CX) has become more holistic, encompassing the end-to-end experience across all touchpoints and channels. This shift is driven by the rise of digital, omni-channel retailing, data tracking, and personalization. A customer-centric approach is essential for strong business results, as loyal customers stay longer, spend more, and drive strong business outcomes. Metrics like Net Promoter Score (NPS) and various studies (see: Bain & Company’s insights on loyalty) illustrate the importance of customer loyalty.

Customer Lifecycle & Lifecycle Marketing

Understanding the Customer Lifecycle is critical. Retention Marketing focuses on existing customers post-acquisition. The lifecycle phases include onboarding, growing, engaging, keeping customers engaged, and intervening at key points to optimize the experience, reduce churn, and drive engagement.

The Customer Lifecycle (Post-Acquisition):

• Enroll: Customer signs up.
• Onboard: Customer starts using the service.
• Engage: Regular usage.
• Grow: Customer increases usage.
• Lapse: Usage decreases.
• Cancel Attempt: Customer tries to cancel.
• Churn: Customer leaves.
• Re-Engage/Save/Re-Enroll: Efforts to win back the customer.

Tactical Advice for Retention Projects

Retention projects are often harder than acquisition projects because they involve existing members. Identifying retention projects involves diving into retention and engagement data, spending time understanding members through interviews and surveys, and focusing on qualitative and quantitative metrics.

Reasons Retention Projects are Challenging:

1. Unlike a signup funnel, fixing retention lacks a single dashboard, requiring deep dives into data and member understanding.
2. Retention improvements take time to ideate, execute, and measure, often requiring smaller sample sizes for statistically significant results.
3. Small improvements can have a large impact; for example, a tiny 10 basis point improvement in monthly churn for Apple’s subscription base could save 4.7M members per year.

Tactical Steps:

1. Inform members their credit is available.
2. Help them find an audiobook to use their credit.
3. Encourage them to listen to their chosen audiobook.
4. Provide a replacement if the audiobook did not meet their expectations.

Focus on these measurable initiatives to improve leading indicators, leading to better retention metrics.

Top 5 Takeaways:

1. Don’t forget about Retention! The adage “It costs X times as much to acquire a new customer than it does to retain an existing one” holds significant truth. Studies suggest the cost can be anywhere from 5 to 25 times more! Companies often focus heavily on acquisition because it’s easily measurable, investments produce immediate results, and it’s rewarded by investors. However, losing sight of retention can be detrimental. Even small improvements in retention metrics can drive significant changes in the business.
   
2. Quantify the upside: To highlight the value of Retention & Customer Experience (CX) in discussions, stick to numbers, even if they’re hypothetical. Use back-of-the-envelope math to demonstrate impact, such as “decreasing churn by 0.5pts is worth $10MM” or “for every +1pt increase in Net Promoter Score (NPS), a customer spends $100 more per year.”
   
3. Go 80/20 on customer analysis: Direct-to-consumer companies have an advantage with customer-level transaction data. However, many businesses still use legacy tech systems, resulting in siloed data and analysis paralysis. Focus on insights rather than striving for data perfection; some insights are better than none.
   
4. Live Your Customer’s Experience: If you don’t already subscribe to your own product, sign up ASAP! Go through ordering, delivering, shipping, unboxing, and onboarding. Email Customer Service with a question and try to cancel your subscription online. Follow your brand on social media. It may sound obvious, but many people skip this crucial step.
   
5. All the retention efforts in the world won’t save a flawed value prop: If your churn numbers are terrible, reevaluate your fundamentals. Membership works when the customer will pay for premium benefits. If the value proposition doesn’t make sense, a poor fit will show up in poor retention metrics. For a laugh, check out some of these subscription businesses, which perhaps shouldn’t all be subscriptions!

Validating Hypotheses Faster

Validate hypotheses faster, even if not at scale. For example, Amazon tested moving to 1-day shipping from 2-day shipping for Prime members, hypothesizing it would increase ARPU and retention. This type of initiative involves significant investment and testing on a smaller cohort to measure impact. Prime’s move to 1-day shipping likely improved retention, as evidenced by Amazon’s retention rates (93% in year one, 98% in year two) and their earnings call after the shift (Amazon’s earnings call).

In conclusion, retention and engagement strategies are critical for subscription businesses. Understanding the customer journey, using data-driven insights, and focusing on small, impactful improvements can significantly enhance retention metrics, driving long-term success.