How To Measure Customer Retention To Understand Your Customers, Create More Value, and Stand Above Your Competition
- Product Led Growth /
- Product Metrics /
- Product Strategy /
Understanding what value drivers, behaviors, motivations, and outcomes lead to ongoing customer retention is critical to short-term and long-term success.
Loyal customers promote brand value, increase market awareness, provide social proof of the benefits your product or service provides, all while increasing profits and setting the foundation necessary to scale up and across market segments.
It’s clear that customer retention should not only be an important metric but a core strategic priority for almost every business.
So let’s look at how you predict, measure, and need to look at customer retention throughout the customer life cycle.
Customer Retention Drives Lifetime Customer Value
In a recent article, I wrote about how product leaders need to consider two major factors to lowering the cost of customer acquisition. The first is understanding the customer value of addressing the articulated or unarticulated need, the solution to the problem, or the access to a new opportunity. The second factor is understanding the value exchange that defines what the core customer is willing to trade (i.e. money, time, access, etc…) in return for the product or service that fulfills their needs.
When you look at things in this way you can see that your customer retention rate directly correlates to the promise you make to your customers, and the value they experience as they evaluate, adopt, and use your product or service over time.
Customer retention and cost of acquisition drive lifetime customer value. To better understand this let’s break down how customer retention is often predicted and measured.
Customer Satisfaction is Only Part of the Story
A common approach is to evaluate customer satisfaction as a predictor of customer retention. While this is a common practice, it doesn’t tell you the entire story, and can often lead to skewed data forecasts, and a false sense of security. Customer satisfaction is helpful in understanding a customer’s sentiment related to a single moment or transaction, but does not illuminate the relationship completely. For example, satisfaction surveys can often be biased since not everyone will respond. Often mildly satisfied and unsatisfied customers are less likely to respond.
Although satisfaction is extremely important and should be measured, it should be evaluated within the context of the customer journey. For example what needs have to be met and what is the necessary outcome for the customer to be satisfied and continue forward? Within the context of the customer journey, it is essential to also evaluate every job the product or service has to perform to deliver value, the cost of adoption and expansion, competing solutions, and user support. You can start by evaluating the current state of your product broken down by user flows, tasks, and their intended outcomes.
Customer Satisfaction (CSAT) is calculated by dividing all the positive responses by the total number of responses and multiplying by 100. This results in your CSAT percentage.
Customer Satisfaction (%) = (#) positive responses / (#) total responses X 100
Churn Rate as a Predictor of Retention
Now let’s look at churn rate, also known as customer churn or the rate of attrition, which is the rate at which customers stop doing business with you over a given period of time. This is another common practice for predicting customer retention. It’s critical for businesses to understand what is transpiring throughout the customer experience and why their customers may be churning. It is also worth noting that there are different types and associated causes of churn. Some of the common causes of Churn are:
- Attracting or targeting the wrong customers.
- Poor onboarding experience.
- Customers aren’t achieving the desired outcomes and don’t see the value in continuing to do business with you.
- Customers find it difficult to continue to do business with you in some way. For example not having a process in place to get updated credit card information to fulfill auto-renewal.
- Product performance challenges, bugs, and lag time in communicating or addressing the issues.
- Inadequate levels of customer support.
Churn is calculated by taking your total number of customers at the beginning of a time period and subtracting the total number of customers at the end of that time period and then dividing by the total number of customers beginning of a time period.
Customer Churn Rate (%) = (Customer Beginning of Month - Customer End of Month) / Customers Beginning of Month
Averages typically range from 3% to 9% annualized churn rate for mature products. Some of the major variables that influence churn rate are customer segment, market conditions, competitive landscape, and a business’s stage of growth. If your product has more than 10% churn it should be a key strategic priority to start identifying areas of opportunity for improvement.
Evolution of Customer Retention Strategy and Tactics Along the Customer Life Cycle
The relationship you have with your customers evolves over time. In order to increase retention, you need to build long-term relationships that address their needs at each stage of the customer journey.
First, let’s address the different levels of commitment that shift as your relationship with customers evolves. At each level of a relationship, people have different needs and expectations. Think of your own personal relationships and how they evolve from when you first meet someone to calling them a trusted friend, colleague, or lifelong partner. Through this lens, you can analyze the customer journey differently from the initial stage of awareness to evaluation, to making a commitment, through adoption and renewal.
|Levels of Commitment||Customer Trust and Needs|
|Baseline relevance that needs can be met||Could this product help me accomplish my goal? Is it credible and can I depend on this information? Does it seem to have my best interests at heart?|
|Interest and preference over other options||Do I choose to use this product for this job? Is it better than other options? Are the value proposition and proposed value exchange equitable and fair?|
|Confidence that the job at hand can be accomplished and the intended outcome achieved||Is this product’s offering valuable enough to justify the time and effort to register/demo? Do I trust the product with my information?|
|Commitment and consensus to investing the time and resources needed to adopt the solution||Do I trust this product to deliver continuous benefits? Do those benefits outweigh any potential risk? Can the product adapt and scale to our evolving needs?|
|Willingness to recommit to an ongoing relationship and continuous investment of time and resources||Is this product delivering on expectations and continuing to meet our needs? Is the value exchange fair and equitable?|
These needs aren’t always explicitly articulated. The customer journey is complex as they work through the tasks of defining the scope of their challenge, exploring possible solutions, mapping essential requirements, and then selecting a solution or provider. Throughout this intricate process, customers are continuously validating their learnings, the promises associated with products and services, all while working to build consensus with all the stakeholders involved.
Each level of commitment and necessary value that needs to be delivered by your product requires a different type of retention strategy to fully optimize your customer experience.
It is for this reason that customer satisfaction and churn rates should be evaluated at each stage of your customer journey (i.e. relationship). Cumulatively, this gives you a holistic picture of where customers are struggling and where you can focus to drive impact.
Measure Customer Retention Across the Customer Lifecycle
Predicting and measuring customer retention and knowing your churn rates by customer segment will help you not only succeed but thrive. The key is to not just look at what customers are doing but understanding why they’re doing them, how they make decisions, and what is influencing their actions. By understanding these metrics you will have actionable insights that will help you develop a deeper relationship with customers, provide a better experience, and deliver more value across your product offering. Top performing organizations focus on customer retention to identify incremental and transformational opportunities to meet customer needs and continuously strengthen market fit.