Many marketers focus primarily on the acquisition of customers and they often don’t worry about the 'quality' of a customer. As I will explain in a bit, the quality of a customer is way more important than many people think. To generate sustainable growth, you should consider the entire lifetime of a customer.
“For most marketers the job is done when a customer is in, for Growth marketers this is just the beginning”
The key here is, getting a customer is one part of the job, making them happy is even more important.
What makes a happy customer so much better than a non-happy customer?
Well, here are three reasons to get you started (besides that they’re more fun to work with):
- Happy customers tell their friends about your product (cough virality cough)
- Happy customers give way more constructive feedback
- And most important of all, happy customers stick with your product, they are loyal
Why is the latter so important? If you retain your customers longer (retention), you will be able to earn more for every customer.
In short...
Retention increases lifetime value
After that I will show you that the effect of retention is even bigger than you expect. Let me illustrate with an example:
So for a company like Netflix it is easy to see that retention increases LTV, the longer you pay for Netflix, the more you have paid. But for companies like Facebook or Dropbox, the reasoning is the same:
- The longer you use Facebook, the more ads they can show you.
- The longer you use the Dropbox free tier, the more likely that you’ll buy the premium option, at some point.
This stuff holds true for almost every company. Happy customers stay around longer, and people that stay around longer make you more money (doh!). So far, so good.
But wait, there’s (much) more!
Retention causes exponential feedback
Retention has a direct effect on the LTV of your customers. But what makes the effect of retention on Growth literally huge are, what we call, second order effects.
Remember the three reasons that happy customers are great? Retention is the main reason and thus the first order effect of having happy customers. This first order effect causes positive feedback on other factors, which we call second order effect. So what are this second order effects:
- The higher the retention the higher the LTV
- We already talked about this direct effect of retention, but let’s take it one step further. If your customers have a higher LTV, this means you can spend more to acquire them (a higher CAC). So if you couldn’t afford those expensive sales guys before, maybe you can now. You can now use these new (more expensive) channels, that bring in leads of even higher quality. These leads have a higher LTV, and the cycle is round (and exponential).
- The longer customers stay on board, the more likely they are to invite their friends
- Of course happy customers are the best ambassadors for your product and will tell their friends about it. But the fact that they are on board longer, only increases this likelihood. The friends that will come aboard will tell their friends easier afterwards and virality has begun.
- Better retention mechanisms decrease payback period
- If you have great retention build in your business, the many businesses that means higher upsells/more upgrades/etc. This decreases the payback period of your acquisition costs. You are then able to put that money back into your acquisition channels and start bringing in new customers faster. The ‘cycle time’ of your business has just decreased, thus growth has increased.
Like the Growth Master Brian Balfour has said himself:
“Retention is the 'King of Growth.”
How to increase retention?
There are many ways to increase retention and most of them boil down to one simple life lesson: Try to make people happy!
It turns out that by far the biggest factor to increasing retention, is to increase your onboarding. If you fix onboarding, you’ll massively impact retention. Onboarding is actually a whole set of ideas, designed to get your users ‘on board’ as easy as possible. Most of the drop-outs happen right at the start, if it takes too much effort to get to know your product, people chip out. Here is a good post that breaks this down to the bone. Also we cover it in our email course, for which you can subscribe below!
Working to increase retention rates is a great way to increase your growth that many people forget about. For the records: working on retention is also one of those areas where growth is clearly different from traditional marketing, and produces an outsized impact on the success of a business.