What is Retention 101: Consumer and Customer Retention
.jpg)
Retention in digital products is more than just a buzzword; it’s a key indicator of your business’s success in the modern digital marketplace. Understanding how often users return and pay for services is vital for driving sustainable growth and building long-lasting customer relationships.
In this article, we will explore what retention means in digital products and how to measure it effectively. We will discuss active customer retention, net revenue retention, and monthly active consumers. We will define key elements and best practices to ensure our measurements reflect the true health of our product.
What is retention?
When we talk about digital products, retention refers to the metric that indicates the recurrence in the use of the product or payment over a period of time. For example:
- Monthly Active Customer Retention: Number of people who made at least one successful payment per month.
- Monthly Net Revenue Retention: Percentage of recurring revenue retained from existing customers over a specific period, considering upgrades, downgrades, and cancellations.
- Monthly Active Consumer Retention: Number of people who used our product at least once per month.
These definitions help us understand three key aspects of retention:
- Action measured: Use of the product or payment for the product.
- Frequency measured: Daily, weekly, or monthly, depending on the cadence of use or payment. We will explore this further in this article, as defining the frequency is fundamental for a good retention reading.
- Definition of Active: The difference between someone who performed the action at the indicated frequency and someone who is registered in the product but does not perform the measured action.
In summary, measuring consumer retention tells us how many people continue to use our product. On the other hand, customer and revenue retention reveals how many people pay us recurrently, which is crucial for the business's sustainability.
Another way to look at it is by answering the following questions:
What are the key elements and definitions to consider before measuring retention?
To measure retention effectively, we must be clear about some fundamental elements and definitions, including the type of calculation, identifying what we consider an active user, and differentiating between new and retained actives.
- Define the type of calculation
- Define Actives
- Differentiate between New Actives & Retained Actives
1. Define the type of calculation
- Day-N: Measures the percentage of users who return to the app on a specific day after the account creation or registration.
- Rolling: Measures the percentage of users who return to the app on a particular day or any subsequent day.
Retention measured using "Rolling Retention" will always be higher than that calculated with "Day-N." We will use "Day-N Retention" as a reference in this reading.
Examples of retention calculations using Day N Retention for CR & NRR
2. Define "Actives"
As an instrument, every product has a cycle of adoption and retention in both “use” and “payment”. This is because people learn to use or pay for our product, which we call adoption, and then make it part of their lives, generating a habit of use, which is retention. If we think of it this way, we can see the importance of internalizing the context and steps of how a person learns, uses, and benefits from our product.
That's why defining what we consider an active user is vital.
Active Consumer = Someone who performed the action considered as "use" of the product over a given period (Daily, Weekly, Monthly)
Active Customer = Someone who performed the action considered as "payment" for the product over a given period (Daily, Weekly, Monthly)
Let's imagine we are responsible for measuring retention in Netflix's video product.
Here, we could define:
- Use = Watch a TV Series or Movies
Note: When we say "Watch a TV Series or Movies" it implies measuring when we consider someone has watched the Series or Movies, which can be a specific time range. Avoid marking these events as "sessions" or falling into the trap of measuring the buttons that start the video playback.
- Payment: Making a successful payment for the subscription.
With this information, we could visually map the product's adoption cycle.
Let's look at the definitions of the different states for the consumer in the adoption and retention cycle:
- Visitor: A person who visits or interacts with our promotional material but does not register.
- Registered User: A registered person who has yet to use the product.
- Activated User: A person who uses the product according to the assigned frequency for measuring retention.
- Active User: A person who regularly uses the product according to the assigned frequency. This includes new, retained, and resurrected active users.
- New Active User: A person who uses the product for the first time.
- Retained Active User: A person who has used the product in at least two-time intervals.
- Resurrected User: A person who stopped using the product and has returned to use it in the current time interval.
- Dormant User: A person who has stopped using the product.
💡 Pro-tip from a product leader:
Consumer retention and customer retention are connected because for someone to pay for the product or continue paying for the product, they must first use it and enjoy the benefit for which it was designed. If this happens, there is a chance that the person will continue to use the product regularly and thus become a retained consumer and customer over time.
For example, Netflix:
If we only measured the number of people paying for the service per month without measuring the number of people watching TV Shows or Movies per month, we would be measuring customer retention.
In this case, when we have a decline in recurring customers, we could act reactively because we only see how many people are about to cancel their monthly payment by analyzing how many have stopped watching TV Series or Movies. This is just a use case to represent the importance of measuring both metrics and understanding how the "use" helps execute the "payment."
3. Differentiate between New Actives & Retained Actives
It is important to separate new actives from retained actives to avoid measurement errors. We often end up adding both, giving us the illusion that we are growing. However, in reality, we may only be acquiring more new users and often increasing our CAC.
- New actives: People who use or pay for the first time.
- Retained actives: People who use or pay regularly; this is marked by the frequency we decide to measure (daily, weekly, or monthly).
To illustrate this better, let's look at an example of consumer retention.
For example, in the analysis of Product Alpha, we can see in section A that each month we have 1k New Actives, but only 5% to 1% Retained Actives per month. This tells us that our product has a retention problem.
However, if we look at section B, where we add New Actives and Retained Actives, this gives us Total Actives per month, but it gives us the illusion that our numbers are growing per month when, in reality, we have more New Actives per month but fewer Retained.
Now, let's look at an example of Revenue Retention.
In the following example, we can see a revenue retention analysis where we separate user cohorts using the first month of payment as the starting point and the average revenue per user (ARPU) as the value for each month. This will help you see if you retain revenue and have revenue contractions or expansions over time.
Let's dive deep into the example:
In the cohort of April 1, we can see that 80 people made a payment in our product for the first time. Note that this does not mean they used the product or registered; remember, we are measuring payments here. Therefore, depending on your product's monetization model, this reflects that April 1 was their first successful payment. If your monetization model is freemium or based on trials, try to avoid measuring that time and measure when the person actually pays for the product.
Continuing with the example, in the fourth month, we can see the total MRR from this cohort is $3.8k, giving us a Retention Rate of 50%. This will help us understand how much revenue we have from the initial cohort of April 1.
If we keep monitoring this cohort and make a weighted average of the revenue, we can see how we are retaining our revenue, which will help us track Revenue Retention. For example, if in Month 4 we have $4.1k MRR, this will give us a Retention Rate of 53%.
Retention is a key metric that indicates how often users return to the product. It helps product managers understand if users find enough value to come back. The way to calculate retention is to divide the number of returning users in a given period by the number of users at the beginning of the period. Retention rates can be calculated for various intervals like daily, weekly, or monthly.
💡 Pro-tip from a product leader:
For example, a product with a high retention rate means that users are consistently finding value and choosing to continue using the product, whereas a low retention rate might indicate that users do not find the product useful or engaging enough to return.
To effectively measure customer retention, it is crucial to define what constitutes an active user and distinguish between new and retained users. Through examples, we have demonstrated how to analyze revenue retention and identify patterns of expansion or contraction. Measuring both consumer and revenue retention provides a comprehensive view of product health and, ultimately, sustainable growth.
In general, if our retained user curves show growth or stability, we are on the right track!
