Why is customer retention rate essential for business and UX?

Before we can ask this question you need to understand what retention rate stands for. This is the key when it comes to determining how good your business is concerning customer experience.

What does customer retention rate mean?

In a nutshell, it can be defined as a metric that represents a number of customers that are “loyal” to your business in one way or another. Now the reason why I placed the word loyal between quotation marks is that it doesn’t mean that these clients are crazed fans or are in love with your brand. It’s more like that they’re satisfied and decide to stick with your business for a while. Since we’re talking about a metric, it has a formula that gives you a certain number. This number is given in percentage and can be calculated weekly, monthly or annually.

Since retention rate is used on multiple fields, there is no such thing as THE exact formula, but here’s one that meets the expectations in our case:

Retention Rate = ((CE-CN)/CS)) X 100

Where CE stands for the number of customers at end of a period. CN indicates the number of new customers acquired during the time. CS stands for the Cheap Stuff you’re trying to sell to the people and measures the time it takes them to realize it and start fleeing. If you’re lifting your eyebrows at this point, it’s completely normal and indicates that you’re listening so far. So CS is the number of customers at the beginning of the particular time period you’re measuring.

Unfortunately, some tend to confuse this with Attrition rate. Retention rate is all about satisfied customers, where the other one represents those who leave your business for whatever reason. So if you’re having an 80% customer retention rate, then A) most of your customers stick with you, B) you’ve lost 20% of the customers in that period of time.

In fact, there is a saying:

“You’re only as good as your last customer.”

So what’s the magic number?

It totally depends on your industry, your market, your goals and your business model overall. So if you prefer focusing on the newcomers rather than caring about the existing users — like when you sign some contract with some ISPs or when you’re buying the newest game of a video game producer — your customer retention rate can, in fact, below 80%. But let’s say your goal is to reach and maintain a high value. Generally speaking everything above 90% should be considered impressive. There are, of course, some really extreme situations where even 90% is considered low but those are mostly niche markets, or business models involving luxury at a high level. Regardless of your decision according to statistical data existing customers are 50% more likely to try new products and spend 31% more when compared to new customers.

Acquisition is just the first step

It might sound strange but most of the new users who try out a certain app — regardless of the source — simply uninstall it after a couple of days. This isn’t just plain coincidence. When users act like this there’s something behind the scenes that trigger such action. The main problem, in this case, can be, for example, the lack of value that the product presents on the early stage.

Even the most appealing products will experience loss of users in the first couple of days/week of usage, but that’s part of the game. The key question is where can you stop the remaining users from leaving the ship early on.

The following curve represents the issue:

source: amplitude.com

If we take an example period of Day 0-N, the first interaction between the potential users and the product will happen on Day 0. In the case of an app, this can vary between downloading through opening and actual usage.

Now, this is a very simplified way of showing how retention works. Let’s add another variable to the picture. This will be the product/market fit.

source: amplitude.com

As you can see, as soon as you represent marketable value towards your users — the sooner the better — you may stop the plunge effect before your product loses too much. This will give a stronger base to your positive WOM (Word Of Mouth). The benefits of a higher retention rate are real according to a study by Bain & Company. If you succeed in increasing customer retention rates by only 5% it can result in 25% to 95% gains in profit.

When should you consider the retention rate?

When companies find themselves asking this question, it’s usually too late and here’s why.

A pleasant user experience will lead to lots of HAPPY CUSTOMERS!


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