What is Customer Retention?

What is customer retention?

Customer retention is your company’s ability to retain its customer base. (No duh, right?) But it's much more complex than that. It’s not just a measure of how many new customers you’ve acquired, or how many upsells you’ve made. It’s also making sure that few of your existing customers leave, abandon their carts, or simply complete their commitments and move on.

You may already know that it’s cheaper to retain an existing user than to acquire a new one. So retaining customers over time is imperative. A good customer retention program will build brand loyalty by eliminating customer complaints, increasing the number of customers and improving your customers’ experience. Being able to accurately express this as a score is crucial to know if it's working.

The measure you want is called rate of retention—a percentage expressing how many customers are on board at the end of a given time period.

How can my business focus on improving customer retention?

This article will help you understand why customer retention is important, how to quantify it, and how to improve it. You may want to learn how to calculate your retention rate, or you may be looking for better benchmarks, marketing strategies, customer loyalty programs, and tools to measure them. We’ll look at the three stages of retention, where users drop off and why, and hone in on customer expectations and the actions that predict long-term retention. 

Let’s go!

How is customer retention different from customer acquisition? 

There are basically two ways for a company to sustain revenue and profitability: acquisition and retention. Acquisition focuses on bringing new customers in, and is mostly the realm of marketing and sales. Retention, on the other hand, focuses on keeping customers happy, so they keep on paying you. It’s the realm of customer success, often alongside product teams.

Both are important. Acquisition is crucial, because new customers have to come from somewhere. But renewals, expansions, referrals, recommendations and customer loyalty only happen when users continue to find value in your product.

That’s why it’s often said that acquisition it’s anywhere from 5 to 25 times more expensive than retention! In general, a poor retention strategy puts unnecessary pressure on your marketing and sales departments. (Because if you’re not keeping your customers, you have to bring in more new ones to continue to sustain revenue!) From a product perspective, retention is usually considered the best measure of product-market fit. 

What is Product-Market Fit? How can you take a data-driven approach? Learn more in our complete guide!

How can you measure customer retention?

Having in-product behavioral data is key to improving customer retention. Here are a few important metrics to get you started.

Customer Retention Rate (CRR)

This is the percentage of customers who stick around:

(# Customers at End of Period – # Customers Acquired During Period) x 100 / (# Customers at Start of Period)

Customer Churn Rate (CCR)

This is the percentage of customers who are leaving:

Customer Lifetime Value (CLV)

This is the total monetary value of a customer to your business. Calculating CLV accurately can be exceedingly complicated, but here’s a very simple formula:

(Annual profit per customer X  # of years they remain a customer)  –  Their initial acquisition cost

What is a good customer retention rate?

When it comes to rates, there really is no “good” or “bad”, so you’ll need to be specific. Retention rates vary widely by profession, so the key is to know what your industry's retention benchmarks are. There are two ways to benchmark: against yourself, or other companies that do what you do. 

Here’s a sample of industry averages:

Retail: 63% – Relatively low. Lots of competition and easy switching = little loyalty. 

Banking: 75% – Relatively High. Users are tied to location, and stay for personal service.

Telecom: 78% – Relatively High. More about complex contracts than satisfaction.

IT Services: 81% – High. Reputations hinge on getting fast results for the customer. 

Insurance: 83% – High. It’s laborious for customers to switch.

Professional services: 84% – Highest. Relationships and personal service matter most. 

Media: 84% – Highest.  Marketing budgets and client volume keep numbers high.

When it comes to managing retention and churn in the first place, we can recommend some good strategies for product teams.

What are the three stages of retention?

Typically customer retention maps to three stages. Here’s what typical retention chart looks like:

Fun Fact: On average, a mobile app loses 80% of its users after just one session!

Three Stages of Retention

Three Stages of Retention

1. Initial use

The honeymoon phase. Trials are high and new users are enthused about the product. Don't get too excited though—this number can drop precipitously. 

2. Sustained Use

Engagement levels off into a more standard user rate. This number is generally what you’ll use as your baseline as you run experiments designed to increase retention rates. This number can also be helpful for forecasting revenue

3. End of cycle 

The final significant drop occurs at the end of the year, when the majority of users still in the product or using the feature drop off entirely.

*Notice how user numbers indicate slow but steady churn over the course of the year. PMs should know the retention rates at each of these stages and develop hypotheses around improving them.

If you’re looking to increase retention, it can help to map out each of these stages, to see where you experience the most drop-off. Then you focus your efforts at improving that stage.

What are some tools that help improve customer retention?

If you have a digital product, what matters most for retention is making your features easy to use, as well as effective. So you need to know what aspects of your product your customers gravitate towards, as well as where they tend to get stuck during their lifecycle. And don’t overlook what they ignore—the greatest feature in the world is useless if users can’t find it! That's where a great product analytics tool proves its value, from first-time users to follow-up with repeat customers.

Whatever analytics solution you choose, you want to make sure it offers the following capabilities:

Automatic Data Capture is a must for getting the most use out of any retention analytics effort. Only the automation of data collection will give you a complete dataset, which is necessary for improving retention by retroactively analyzing data in order to reveal insights. If you don’t have this ability, you’re stuck with manually pursuing insights—basically attempting to guess in advance why your customers quit...before they even do! Autocapture can show you their behaviors in real time. (We think autocapture may even help with internal retention, because now your engineers can spend time doing what satisfies them—building the product, not tracking events.)

Segmentation sorts users according to their preferences, characteristics or behavior and looks for patterns among groups. Product teams, marketers and support teams can see which user traits correlate with better engagement and retention, so they can modify product or strategies accordingly. 

Integrations allow you to incorporate your analytics platform with your entire tech stack. Since retention is about making things easy to use, if you can integrate with other tools, you make it easy for your customers to integrate your tool with the other tools they're already using. The more sources you can pull behavioral data from, like Stripe, Shopify, Marketo, and Optimizely, the more accurate your picture can be of your customers and their journeys.

CS and CRM tools such as Gainsight, Salesforce, Zendesk and the like will help you monitor adoption and continued usage at both user and account levels. When you sync them up with Heap, you can understand the patterns that indicate success, identify potential churn risks, and arrive to conversations equipped with facts about an account's usage.  Understanding all the ways users interact with your product throughout their journeys leads to insights that help drive high-level strategic decisions. And the deeper you integrate your stack, the harder it can become for your customers to leave.

How can Heap help my business improve customer relationships and customer satisfaction?

When it comes to retention, the bottom line is, customers who get what they want have no reason to leave! 

And the best way to figure out their desires is to see what they do. Heap automatically captures everything that users are doing in your product, at all times, so you have complete and predictive insight. Heap lets teams look at multiple metrics, iterate on them over time, and run experiments to improve different parts of the product. For example, our cohort analysis feature allows you to deep-dive into behavioral data to boost retention and lifetime value.  And only Heap allows you to see how specific Salesforce accounts are using your product successfully—or more important—where they are failing to use it successfully.  Using Heap to prioritize efforts and leverage insights allows you to quickly turn them into customer engagement and give users what they want most. 

Want to learn how to use cohort analysis to reduce churn? Read our complete guide!

How are top companies using Heap to improve customer retention?

Here are some case studies and testimonials with top-performing product and SaaS companies. See what they say about using Heap to improve their customer retention and associated metrics with the insights from their data:

Thinx increased conversions by 5x and upped customer retention to 90%

“We want to create a digital experience, where people can find what they need and are convinced that our product is for them. Heap is super important in that process because we’re able to identify the data that we need at every step to inform our decisions throughout.”  -Elise Mortensen, UX Researcher

Read the full Thinx story here.

Huel increased new conversions by 30% and decreased cancellations by 15%

“Our ‘cancellation saves’ functionality suggests other options besides canceling, like postponing your next delivery, or trying different flavors. The real value is looking for untapped potential.” - Mario Tarantino, Senior eCommerce Manager

Read the full Huel story here.

PocketSuite decreased paid churn by 30%

“In our case, a “Rising Star” is a new user who has processed $1,000 in payments through PocketSuite. To create more Rising Stars, the team is now prioritizing a revamp of the app’s onboarding flow, and is adding a new dashboard for users.” —Dan Mark, Product Manager

Read the full PocketSuite story here.