I’m officially 3 weeks away from completing my Growth Marketing Mini Degree from CXL. What a journey! This week's content touched on my favorite aspect of growing a SaaS business — retention. It’s a challenging problem to solve which makes it all the more intriguing.
The cost to acquire a customer is increasing year on year. Now imagine spending all that money to acquire them only to have them churn. High churn is catastrophic for any business because you’re spending so much to acquire users who don’t end up staying long enough for you to recover the cost of acquisition. Customer acquisition is often heralded as the metric to chase and proclaim as evidence of a business doing well but we know that that is not the entire story. You might have 1m users but are you able to over 30% of them is the question. Your freemium users are technically not ‘acquired’ users yet because there’s no guarantee they’ll pay.
Because of this, this has led companies (especially SaaS) to look more into what they can do to acquire these customers in a more sustainable way and more importantly — how quickly these customers can see the value and stay on board.
The Importance of Retention
Retention is a natural extension of onboarding that seeks to encourage engagement that builds loyalty for your product. Retention is underrated because it’s not shiny like acquisition but if done right, it can be another marketing channel because these happy customers create a ripple effect of growth for you. Acquisition cannot increase revenue if those acquired don’t see the value of your product and end up churning; it’s like trying to fill a raffia basket with water. There are too many holes that causes the water to escape from the basket. You stand a much higher chance of converting an existing customer into a paying customer than a new lead into a paying customer. So rather than only focusing on getting new leads, put some more focus on engaging the customers you already have.
“increasing customer retention by 5% can create an uplift of 25% in revenue.”
Calculating Retention Rate:
Retention is great but how do you know what a good rate is for your business? You can decide to benchmark against yourself (based on historical data), against others or against industry standards from companies like MixPanel. On average, after 8 weeks most apps have a retention rate of 6–20%. The rate of retention is the % of customers who are still with the company after a specific period of time. It is also based on if these customers are taking the “action” required to put them in this bucket.
Ideally, cost of acquisition (CAC) should not exceed LTV (lifetime value). The lifetime value of a customer is the sum of gross margins from all payments you expect to receive from a paying user. Various sources suggest a viable ratio LTV:CAC is 3. So your LTV should be 3 times your CAC (which should ideally be recovered within 12 months especially for an early-stage startup).
According to Ankur of Thoughtlytics, he addresses in this article how context is very important when talking about the ratio of CAC & LTV. For an early-stage startup where funds are tight, it is much better to begin with a small CAC of less than 3 months' worth of ARPU (average revenue per user). So with a $99/month plan, your CAC should not exceed $297 (3*99). This allows you manage your unit economics more sustainably as well and not run out of cash in a bid to acquire customers. Brian Balfour also explains here how your revenue model determines your CAC channel — channel model fit. For companies with a lower ARPU, you want to look into lower-cost acquisition channels to driver signups.
Using Jobs To Be Done To Retain Your Customers
The problem retention aims to solve is to get customers to their ‘aha moment’ quickly enough for them to see the value and keep using it enough to view it as an indispensable tool — as a habit almost. This then means that for them to get to the ‘value’ quickly you have to understand what this ‘value’ looks like for them by understanding what they do, what their needs are, and most importantly — what pain they wanted to be solved when they came to your product.
Retention is not an effort you deploy when you see your churn numbers rising, but one you deploy from Day 0. It usually starts with onboarding where you use emails, in-app messages to get them to carry out certain actions so they see the initial value of your product. Jobs To Be Done is a process that seeks to help you get a better picture of the different emotional and social aspects influencing a customer’s decision. According to Val Geisler,
“it also helps you determine the forces at play so you can identify the ones pulling the customer back and the ones driving them forward.”
When conducting Jobs To Be Done interviews, you want to ask questions along these lines:
- When did you first realize you needed something to solve the problem?
- Where were you?
- Where you with someone?
- What were you trying to do when this happened?
- Did you have anything about the purchase that made you nervous?
You want to be thinking about:
- What events or situation led up to the problem they wanted to solve?
- How do people decide to solve that problem right now?
- What’s still not working about existing solution?
- What common events or situations trigger this pain point?
Conducting these interviews will help you understand what your customers’ definition of success is and also helps you find patterns. By understanding their definition of success, you’re able to figure out how your product helps them achieve this. With the data from these interviews, you’re also able to map out the customer’s lifecycle and how they move from stage to stage.
So how is this relevant to retention? Because when you map out their journey, you identify how they transition from one stage to another allowing you to see where the gaps are in the transition that makes it harder for them. If friction is present when transitioning from one stage to another, it can cause them to churn.
Using Segmentation to Retain Your Customers
By segmenting your users, you’re able to create unique messaging tailored to them and increase long term retention. To segment your customers, you’ll want to look at their buying attributes as well as behavior. Their attributes will give you factual information about them while their behavior helps you analyze what their actions tell you.
These images from CXL, provide a great overview of how to think about your customer segments. With this in mind, you can determine how best to communicate with them. For example, a customer who is in the hibernating segment, they are obviously not interacting with your app as much so sending an in-app message to engage them is the wrong way to reach them because they’ll most likely not see it. Your segments overview will give you an idea of which segments need a lot of hand-holding and high touch points and which segments you can automate their communication. At the end of the day, retention is an ongoing effort of building a habit around you product. There are indeed various strategies you can come up with and tactics you can deploy, but make sure you’re doing what works for the customer and what they deem as valuable.
