LAW
28

Retention is the King of Growth

Higher retention and better engagement is the most fundamental driver of faster growth, because retention impacts acquisition in four fundamental ways:

  1. Higher retention means new revenue is additive, rather than just replacing last month’s revenue. Less pressure on acquisition channels, so higher ceilings to scale.
  2. Higher retention leads to more revenue per customer. Which means you can afford to spend more to acquire such customers. This, in turn, can unlock new channels that would not have been profitable before.
  3. Higher retention generates more referral opportunities. Customers that stay longer tend to have more opportunities to tell their friends.
  4. Higher retention typically means you earn back your acquisition costs more quickly. If you recoup your CAC faster, that means you can spend it again earlier to acquire even more users.

Tips

  • The most fundamental requirement for retention is a continuous exchange of value between the business and the customer. You’ll retain users to the extent that you continue to provide value to them.
  • Improved retention makes acquisition easier. Dan Kennedy famously said that “whoever can afford to spend the most to acquire a customer, wins”. If you can provide more value to customers, you’ll have opportunities to capture more of that value. If you can capture more value, you can also justify spending more to acquire more such customers.
  • A lot of marketers don’t know how to read and interpret retention tables or a retention graph. This is not rocket science (look it up on Youtube), and a helpful tool in your analytical tool belt.
  • It is useful to break retention down into three distinct phases: short-term, mid-term and long-term retention. If retention was like dating, short-term retention would be about turning a first date into more dates, mid-term retention about turning dating into a relationship, and long-term retention about how to maintain a happy marriage.
  • For most companies, to improve short-term retention problems (activation and onboarding) has much more impact than trying to salvage long-term churn.
  • Remember: if there is no continuous value exchange, there is no basis for retention.

In Practice

Over the last years, there has been a massive trend to turn almost any product into a subscription business of some sort. Whether it’s SaaS, your razor blade subscription, weekly food packages, or agency service retainers, there is a huge incentive for almost any business to turn customers into regulars. Subscribers are much more sticky than one-off buyers. That stickiness allows these businesses to out-earn and then subsequently out-spend their competitors, and take over the market.

Pair with

next
Onboarding is the biggest retention lever
The 38 laws of growth