Startup Lesson 4: Obsess Over Retention

Make retention an absolute priority. Arguably, this is one of the most important lessons I’ve learned in four years at StackAdapt. Build a cult of retention. Worship it. Celebrate it. Retention is your path to hyper growth.  

Before we dive in, let’s clarify what retention is. More often than not, it’s a metric to define the percentage of customers that you acquired in a given time period that are still with you today. If you acquired 10 customers in January and 8 of them are with you in February, then your monthly retention is 80%. The inverse metric is called ‘churn’. Of the number of customers you acquired in a given time period what percentage of them left? In the example above, the churn rate is 20%.

Why do we focus on retention versus churn? Partly, it’s about keeping customers happy. Of course, we want to do more of what makes them stay with us.

For me, the day I saw the visualized impact of poor retention numbers was the day I realized how important customer retention truly is. Let me walk you through this little exercise and I promise at the end you will feel the same way I do.

Suppose you launch a start-up and begin by acquiring 10 new customers every month, and every month you lose 1 customer from that cohort.

Look at that! At the end of month 6 you already have 45 customers and the trajectory looks pretty good! Time to raise a ton of money and take over the world.

Not so fast. Let’s not look at the totals but rather a graph of what each cohort of new customers looks like:

You can now see how each new cohort of customers deteriorates as the time passes.

What will happen if you continue graphing the chart further out? Let’s see what happens 12 months in:

The picture starts to look a lot sadder. The growth stalled and you have plateaued at just above 50 customers. That’s bad.

An 18-month chart would look exactly the same. You may as well call it a lifestyle business:

What can you do to fix it?

There are two ways: get more customers in each cohort or fix retention. Let me say, that I think you should be doing both but you should put the majority of your effort into retaining customers and reducing churn. The problem with always chasing new customers is that you can create a bad reputation because many customers are leaving (likely because they aren’t happy) and because you can simply run out of customers to acquire in your target market! Just look at Twitter – they literally have none left to acquire in North America.

Customer acquisition isn’t the topic of this article, so let’s think of some of the strategies we can employ to fix retention. Here is what I can recommend:

Start reporting on it first. However you define your retention (for example, we care about 4-week and 12-week retention numbers in the context of people who spent with us 12 weeks ago who spend today). Figure out what works for your business. Put the retention number on the wall and go over the numbers at all staff meetings.

Ask for customer feedback. NPS surveys can be good but they tend to skew towards people who are actively engaged with your company. Many customers that churn are very disengaged and won’t bother providing feedback. Give them a $20 Starbucks card for their time and ask for a favour to help you make your product and service better. Make sure you document the feedback. It might be tough to find patterns in the beginning but eventually you will see the answer. Just make it a habit of never having a customer leave without providing feedback as to why they didn’t stay.

What should you be striving for? You should be striving not only for 100% retention but also for high referral rates. Imagine that instead of losing one customer a month, every cohort refers one new customer. The numbers compound very quickly and soon you will find yourself in exponential hockey stick growth. Now is the time to raise some of that VC dough and take over the world!

Every business is very different and it’s hard for me to tell you exactly what you should be fixing to increase your retention. Right now, I want you to start reporting on it, interview customers that are leaving, and perpetually find small (or big!) ways to make your customers happier.