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Why businesses should prioritize customer retention

Proper customer retention can help businesses grow, save money and better understand consumers. Its benefits can lead to better customer experiences and greater business success.

To define and achieve product-market fit for your offering, acquiring customers is an obvious priority. However, solely focusing on top-line revenue growth neglects customer retention, which impedes your ability to durably scale the business.

Knowing customer retention is important for your business isn't news, and neither are the trends shaping it. The experience economy, a term coined by B. Joseph Pine II and James H. Gilmore, accelerated this construct. The term started gaining traction in 1998 due to Pine and Gilmore's Harvard Business Review article titled "Welcome to the Experience Economy."

In today's service economy, many companies simply wrap experiences around their traditional offerings to sell them better. To realize the full benefit of staging experiences, however, businesses must deliberately design engaging experiences that command a fee. This transition from selling services to selling experiences will be no easier for established companies to undertake and weather than the last great economic shift, from the industrial to the service economy. Unless companies want to be in a commoditized business, however, they will be compelled to upgrade their offerings to the next stage of economic value.

Customer experience isn't nebulous. It affects desired outcomes more than acquisition at the mid- to late stages of growth, including customer retention. Providing the experiences your customers desire and to which they are entitled has never been more compelling.

It's easier than ever to deploy software and subsequently discard it, and the influx of readily available consumer social platforms lets us communicate our experiences easily. Additionally, acquiring customers generally costs more than retaining them. An effective retention strategy offers a functionally better ROI than acquisition efforts as customers become more valuable the longer they're retained.

As customers' needs evolve, so do their expectations. As you scale your acquisition efforts, you should prioritize customer retention. Whether you're an operator within a consumer app or an SaaS product, your ability to endure at scale depends on effectively encouraging customers to stick around and ensuring acquisition efforts aren't rendered meaningless.

Explore three key reasons why customer retention is important for businesses to invest in.

1. Retention enables growth

Retention-focused growth lets you reap the benefits of stable, defendable growth. Net retention rate doesn't tell you all about your product, but it is a significant indicator of product-market fit. A net retention rate above 90% is considered exceptional.

The correlation between net retention rate and annual recurring revenue (ARR) at different stages is worth examining too. Your retention rate dictates the rate at which you grow, although it varies per business unit and product. However, once product-market fit is achieved, the net retention rate tends to improve as ARR increases. Conversely, ARR tends to decrease as retention decreases. This is most common for SaaS products, but the concept is relevant to other revenue models, including per-use, per-product or subscription.

In public markets, recurring revenue drives higher multiples -- meaning the earnings are higher than competitors -- which makes retention a more valuable form of revenue. Surpassing 100% net retention by expanding customer accounts or upselling can help a brand grow over 40% annually. This indicates that your firm generates more revenue from existing customers compared to the revenue lost from churned customers.

Businesses that achieve higher ARR likely have stronger customer relationships and a more viable product-market fit than their peers. These factors contribute to higher net retention. Focusing on and optimizing retention from the beginning of the customer journey can improve the business's top and bottom lines.

2. Retention enables success -- even with a small budget

Significant layoffs are being rolled out across many industries. Marketing staff and budgets are down. Businesses are implementing austerity measures -- economic policies used to manage debt -- but customers are no easier to acquire.

If you're looking to subsidize your next product launch, a focus on retention is necessary. Unit economics -- which is an organization's revenues and costs from a single unit -- for an individual customer is an important metric if you're lobbying for buy-in for resources, including mindshare.

3. Retention unveils insights on products

Retention is a sticky topic with many influences -- most notably, churn. Understanding churn helps a business create more practical product iterations. This is essential to understanding your product and to the health of your retention.

To truly understand churn, you should examine it in a granular way. Broad churn metrics don't paint a comprehensive picture of user behavior. Inaccuracies are exacerbated when we attempt to use retention figures to calculate critical metrics like return on customer acquisition cost.

Drivers of churn are opportunities to improve users' experiences. These can include issues in onboarding or trouble with UX, CX or messaging, on which the product under-delivered. Business can improve these strategies and significantly enhance product quality.

To grasp the intricacies of customer behavior, we need a more nuanced approach. While a basic churn calculation gives us a starting point, it fails to uncover the underlying patterns and fluctuations in how customers interact with a product or service. If we examine retention across various touchpoints and track the customer journey, we unveil the sources of attrition.

A cohort analysis -- where a group of users is analyzed based on shared traits -- can help dissect churn. Be sure to determine each type and rate of churn, and prioritize by revenue impact and cost to correct.

Final thoughts

These strategies present an opportunity for organizations with expertise in retention strategy to think more about how they can create extraordinary experiences for customers throughout their journeys.

Marketing, product, finance, customer support and every other team in the business has a responsibility to drive retention. Use customer data to drive product iterations, and take churn as seriously as paid acquisition. It takes just as much effort to learn how to retain your customers and unlock your growth potential as it does to justify why you lost them.

About the author

Keith Goatley helps firms develop and execute comprehensive growth strategies to drive user acquisition and retention. He is an expert in early to late-stage growth strategy, go-to-market strategy, product marketing management and brand strategy. His primary industry experience lies in financial services, real estate and consumer technology.

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