The secret to staying resilient in these unstable times? Hint: it’s not about attracting new investors and raising more capital. While focusing on product development, lead generation and market expansion is crucial, these avenues for growth are often affected the most by economic volatility. The real secret is finding new ways to shift your attention back to your customers, according to one founder and experienced business investor.
Building a business is about nurturing the customers who love you and remain loyal to your brand, Elizabeth Yin, Hustle Fund co-founder, serial investor and founder of ad-tech platform Launchbit, shared during a recent NetSuite virtual event. It’s about keeping the customers you have and earning the same kind of commitment from new ones. In other words, customer retention is a company’s bread and butter, especially now.
For most young companies, customer retention is nothing new. Your first customers are often your most cherished. What is new to most founders, however, is measuring their customer retention rate.
What is Customer Retention?
Customer retention is the ability to drive customers to continue buying. Conversely, churn is the rate at which customers stop buying. Yin notes that churn is inevitable—“customers don’t stay with you forever.” The key, however, is reducing your churn rate and increasing your customer retention rate as much as possible. Easy to say, hard to do.
Despite the immense impact that customer retention can have on a company’s bottom line, businesses still often struggle to measure and optimize it. As a first step, Yin recommends taking the time to build a “marketing machine.” Specifically, focus on creating multiple customer acquisition channels – i.e. SEO, paid social ads, virtual events, etc. – so there are multiple ways to analyze how customers are interacting with the brand. Not all customers behave the same.
Once the machine is built, find out how to “de-bug” it. By this, Yin means developing an idea of what you expect each marketing channel to produce. Ask: Which channels are prompting my customers to buy or engage more? This is the first step in determining why customers are returning to the brand and will ultimately form the lens through which you measure retention.
It may seem backwards to begin with building stronger customer acquisition channels. Shouldn’t businesses determine which customers are coming back first before analyzing what channels are bringing them back? While that may seem logical, Yin says having an idea of what each channel will produce before calculating the retention rate allows businesses to determine where to improve. The goal of calculating retention is to optimize it. Businesses can’t optimize retention if they don’t have a baseline expectation of what the “marketing machine” is producing.
According to Yin, the easiest way to calculate customer retention rate is through a technique called cohort analysis. She cited Visible, which created the figure below, and defines cohort analysis as “a study of activities for a certain segment of customers or users.” The chart shows how cohort analysis tracks the retention of each customer segment over a period of time. Before beginning any cohort analysis exercise, Yin recommends first determining what area of retention is most important to the business and to be precise in determining what you are trying to retain over time.
For example, if you’re a media company, engagement numbers by content channel is probably the biggest driver of revenue. Therefore, it’s logical to track the number of visitors to the website, blog or YouTube channel by quarter, month, week or other period. For SaaS businesses, revenue—how much customers spend on your products or upsells—is the biggest factor affecting the bottom line, and filter cohort analysis should evaluate how much customers spend with the brand.
Yin also points out that gaining a comprehensive understanding of retention often requires a cohort analysis of each marketing channel to gain a full view of customer behavior and which areas need to be improved. There may be customers that only engage and return to one channel while other customers engage with multiple channels but consistently only return to one.
The way in which businesses slice and dice the customer base is key in determining what the retention rate is – and ultimately how to improve it. Theoretically, a media company could segment its customer base by the amount they spend in the online store, but that isn’t the primary source of revenue. To begin, focus on the most important aspects of the business and analyze your customers’ behavior through that lens.
In the above example this company is tracking the number of total customers retained by quarter. It is important to note, as Yin mentions, that each customer group listed on the vertical axis should be treated as its own separate group. In this example, the analysis seeks to determine how many of the 37 customers that arrived to the brand in Q1 2017 were returning customers in Q4 2018. This is tracked on the horizontal axis. Of the 37 customers that arrived in Q1 2017, about 19 of those customers returned in Q8. Likewise, of the 23 customers that arrived in Q3 2017, about 13 of those customers returned in Q6.
Cohort Analysis Tools
Businesses can conduct a cohort analysis by manually tracking the number of new customers, readers or subscribers over a period of time in a spreadsheet. And for startups and pre-seed companies with relatively small customer bases, this might be the most cost effective and simple method for implementing cohort analysis – but it will take a lot of manual effort.
To learn more about the cohort functionality, watch the full virtual event with Elizabeth Yin.