
Retention Is the Key - smu
http://jacquesmattheij.com/retention-is-the-key
======
nxb
Here are my problems with retention being the star metric:

What if you have a customer lifetime value far higher than your acquisition
costs per customer, and a very wide addressable market, but low retention
rates? E.g. I acquire users for $5 each and same-day convert them to $15
profit each, and they rarely come back unless I return some of the profits
back into the funnel to acquire them again.

You may ask - Shouldn't we assume that that growth channel will quickly
collapse? -- Well, what if it doesn't? Something is very wrong with the trend
of assuming that retention is everything, particularly in the case where
there's a high immediate return on investment for each acquired user.

My second problem with retention is the time-span. Consider an ecommerce site
for basic household necessities that may be accessed 20 times per year by a
100% retention user that always uses your service to his problem that your
service solves. That return frequency is so low though, that if you're growing
at 40%+ month over month, your retention may appear to be near zero, even
though your retention is near 100%! Most of your users are new users and only
a tiny percent returning, all due to your high growth rate. The compounding
growth combined with the long expected time between visits just makes 100%
retention look like 0%.

~~~
brudgers
The current value of such a company will still be in future cash flows. Any
realistic financial model will project flattening growth at some point. This
means that retention dominates the long term -> dominates future cash flows ->
dominates present value.

A good financial model captures the scenario you describe. The examples in the
article should be seen as illustrative, not exhaustive.

~~~
nxb
To clarify, the problem is that most people are only talking about "organic
retention" when they say "retention", and ignore any "paid retention".

So in my example, I can get a very high percentage of people to return if I
continue to spend money. But if I stop spending money to acquire users, they
mostly stop coming back.

------
Dorian-Marie
Soon, retention hackers:

    
    
        - Prevent people from unsubscribing
        - Prevent people from canceling their orders
        - Discounts if buy every day/week/month
        - Sending tons of emails with fake site activity ("somebody sent you a message"-style)

~~~
duggan
No "soon" about it, this is already how companies behave.

If you have a Spotify subscription, try to cancel it.

As I've been trying out various companies for different (B2B) services over
the last few months, I've noticed the wonderful "sign up in a few seconds with
your credit card!" onboarding paired with "contact our customer service team
if you want to cancel," which inevitably leads to a protracted discussion with
a retentions team.

If there was any chance I'd have recommended them (or at least not actively
recommended against them), that ship sails when I have to invest more time
into offboarding than onboarding.

~~~
probably_wrong
> No "soon" about it, this is already how companies behave. If you have a
> Spotify subscription, try to cancel it.

I remember closing my account for a certain online dating site. I was
presented with three different screens asking me whether I was _really_ sure
about canceling, and after that I was greeted with a message that read (more
or less) "We've closed your account. Sometimes things in life take a bit of
effort, you know?", which was the first time ever a website called me lazy.

The fact that it played like a bitter breakup was not lost on me.

~~~
TeMPOraL
A certain dating website was featured in an article which ended up on HN some
time ago. I vividly recall a comment[0] that encouraged to make an account
there and see what tactics they use to keep you there. It was a most
enlightening experience for me (and an expensive one).

[0] -
[https://news.ycombinator.com/item?id=3274218](https://news.ycombinator.com/item?id=3274218)

------
frade33
For Small business, growth even could kill their business. that's where wisdom
comes in, sometime you have to slow the pedal of sales, to focus on customer
retention. my current strategy has been to pile enough funds before the next
stage growth., and dividing growth into stages, we deliberately don't sale,
just to manage current customers. It's slow but for sure.

~~~
brudgers
The context is startups, not small business...though the same maths apply, a
small business will at best vary between the first and second examples.

------
odonnellryan
I think this is true for a lot of things!

1) It is very important to retain relationships with people. Friends from four
years ago can help you so much today. But, that means you need to help them at
times, too, of course! :) 2) It is important for companies to retain their
staff. They have knowledge and connections. Loyalty is hard to buy, if a
person wants to help their company because they are loyal, that is the
difference between adding that case/test/log/whatever and "just forgetting
about it." 3) It is important for people to build strong relationships with
companies, just as it is important for companies to retain relationships with
clients.

------
martijndeh
I think it's very hard to say that one metric is key for every product. Teams
should think careful about their metrics and figure out what matters most.
Retention is not always the key. Think about a dating website for a second.

Personally I feel focussing on growth is focusing an all pirate metrics, but
one or two at a time. You shouldn't solely focus on acquisition or activation.
Especially if your retention is too low. But sometimes your retention is good
enough so you can focus on other things.

~~~
jacquesm
For a dating website retention is _extremely important_. After all, if the
dating website is to be a commercial success the last thing you want with a
subscription model is to have everybody use the site once on their trial
period and then cancel. Successful dating websites all bank on being able to
extend their customer life-cycle as long as possible.

If your retention is good enough (> 98% month-to-month) then you can focus on
other things but if it isn't then you're likely going to burn through a lot of
cash faking growth when you really should be focusing on why people are
leaving and fixing that first before you spend the big marketing bucks.

~~~
michaelt
All other things being equal, a plumber or mechanic isn't better because
his/her customers are returning every 3 months instead of every few years.

Likewise, I'd rather use a dating website to meet a long-term partner (and
cancel my subscription) than go on a bunch of unsuccessful dates leading to
short term relationships (keeping my account open).

A dating website that is delivering what customers want /should/ have low
retention. A dating website with excellent retention has probably decided
retention is more important than getting their users into long-term
relationships.

~~~
brudgers
In the context of the article, all things aren't equal because:

    
    
      new business != startup
    

Startups in the sense the author describes do not include ordinary plumbing
and mechanical companies because such companies lack a capital structure that
could allow growth to a publicly traded entity. The second example company is
in a good business and it's owner can buy a boat. It could never IPO.

------
TeMPOraL
Many startups focus on growth because acutal profitability is largely
irrelevant - just show enough sustained growth and you'll get bought by Apple,
Google or whomever. Focusing on retention would require them to actually
_care_ about people using the product, and not only about bringing more of
them to increase the metrics that lead to the Big Payoff.

------
reasonnw
The math doesn't sound realistic to me. He use a percentage for the churn rate
but not a percentage for the number of new users, he is comparing an
arithmetic progression with a geometric progression. As is well known, a
geometric progression always beats an arithmetic progression.

~~~
jacquesm
The math is pretty realistic for a given starting point. Of course in practice
there will be other factors that might compound the churn braking the growth
or that might allow a larger marketing budget based on the increasing growth
in absolute terms leading to more turnover (I devoted a paragraph to that at
the end of the article).

But for the purposes of illustration it is the easiest to keep all the numbers
fixed and let only one of them vary.

~~~
reasonnw
The Matthew Effect.

The herd behaviour.

Word of mouth.

People like to see an application has a lot of good reviews and users to buy,
so your growth is a percentage of your users.

It would be interesting to know when the number of users is increasing as a
percentage or as a fixed number depending of the sector. Is there available
data for the growth of users by sector/product/industry?

------
EGreg
It's simple:

Nail retention before virality and you won't be a fad.

~~~
sokoloff
That has two possible readings:

1\. Do well on retention before doing well on virality and you build a long-
standing business (facebook).

2\. Focus first on retention, ignore virality, do poorly on both and never
build something worthy of even being called a fad (many, many, many startups).

