At the end of 2019, I presented Eventbrite’s product plans to the board for 2020. These plans included a lot of the goals you likely have in your company: improvements in acquisition, activation, and retention. One of our board members asked: “I understand these goals for the year. But long term, how high could we push this retention number? What would great retention be for Eventbrite?”
I actually didn’t have a great answer. Soon after, I was chatting with Lenny Rachitsky, and we decided to embark on a holistic study across the industry to ask “what is great retention?” across business models, customer types, etc. Lenny surveyed a lot of the top practitioners in the industry across a variety of companies, and we’re happy to share the results here. You can see the raw data below, but I recommend reading Lenny’s analysis here. Done? Good.
Why is retention so damn important?
Why are Lenny and I spending so much time researching retention? Because it is the single most important factor in product success. Retention is not only the primary measure of product value and product/market fit for most businesses; it is also the biggest driver of monetization and acquisition as well.
We typically think of monetization as the lifetime value formula, which is how long a user is active along with revenue per active user. Retention has the most impact on how many users are active and lengthens the amount of time they are active. For acquisition, retention is the enabler of the best acquisition strategies. For virality or word of mouth, for example, one of the key factors in any virality formula is how many people can talk about or share your product. The more retained users, the more potential sharers. For content, the more retained users, the more content, the more that content be shared or discovered to attract more users. For paid acquisition or sales, the more retained users, the higher lifetime value, the more you can spend on paid acquisition or sales and still have a comfortable payback period. Retention really is growth’s triple word score.
What are effective ways to increase retention?
Okay, so you understand retention is important and want to improve it. What do you do? Well, at a high level, there are three types of efforts you can pursue to increase retention:
- Make the product more valuable: Every product is a bundle of features, and your product may be missing features that get more marginal users to retain better. This is a journey for feature/product fit.
- Connect users better to the value of the product that already exists: This is the purpose of a growth team leveraging tactics like onboarding, emails and notifications, and reducing friction in the product where it’s too complex and adding friction when it’s required to connect people to the value.
- Create a new product: Struggling to retain users at all? You likely don’t have product/market fit and may need to pivot to a new product.
We discuss these strategies in a lot more depth in the upcoming Product Strategy program coming soon from Reforge, and if you really want a deep dive on retention, we build the Retention & Engagement deep dive.
Why does retention differ so much across categories?
One question you might be asking yourself is why does retention differ so much by different categories? This was the impetus for the initial research, and why I couldn’t give a great answer to our board. Every company has a bunch of different factors that impact retention:
- Customer type: For example, small businesses fail at a much higher rate than enterprise businesses, so businesses that target small businesses will almost always have lower retention.* This does not make them inferior businesses! They also have many more customers they can acquire.
- Customer variability: Products that have many different types of customers will typically have lower retention than products that hone in on one type of customer very well.
- Revenue model: How much money you ask from customers and how can play a big role in retention. For example, a customer may be more likely to retain for a product they marginally like if it costs $30 vs. $300,000. A product that expands revenue per user over time can have lower retention than ones that have a fixed price.
- Natural frequency: Many products have different natural frequencies. For example, you may only look for a place to live once every few years (like my time at Apartments.com), but you look for something to eat multiple times of day (like my time at Grubhub).
- Acquisition strategy: The way a company acquires users affects its retention. A wide spread approach to new users may retain worse than carefully targeting users to bring to your product.
- Network effects: Network effects may drive retention rates up more over time vs. businesses that do not have these effects. For example, all of your friends on Facebook or all of your co-workers on Slack makes it hard to churn from either product whereas churning from Calm or Grammarly is entirely up to you.
* In those businesses, the business failing and churning as a result is called “involuntary churn”, though that can also mean a payment method not working for someone who wants to retain in other models.
BONUS: Why are Casey’s benchmarks for consumer transactional businesses lower than others?
For the demand side of transactional businesses, where the retention graph flattens is more important to me than the six month retention rate. And unlike other models, these businesses can take longer than six months to have their graphs flatten. Also, for marketplaces, one of the two common models along with ecommerce in this category, a healthy demand side retention rate is very dependent on what supply side retention looks like and acquisition costs. For example, since Uber and Lyft have to spend so much time and money acquiring drivers due to a low retention rate, in order for their model to work, demand side retention either has to be high or demand side acquisition has to be low cost. For a business where supply side retention is high and acquisition costs are low, demand side retention can be lower, and the company can still be very successful. Etsy and Wag I imagine fit more into this model.
Currently listening to We All Have An Impact by Boreal Massif.
How exactly is retention defined here? Retention at 6 months might mean:
– % of users that visited *up to* 6 months after visiting the first time
– % of users that visited in 6-7 months after visiting the first time
– % of users that visited *at least* 6 months after visiting the first time
– something else?
Monthly retention in month 6. So, if a person signed up and used a product, that six months later they are active in that month. That means they could have been active every month in the first six months, or only active in the first and last month. But usually it’s the former. And generally, we don’t think of visit, but actions. So for a marketplace, that would be ordering something, a social network browsing, a SaaS product using the core utility, et al.
So helpful, I’ve been asked this same question numerous times and never had a great answer.
Would love to dig into this
Consumer Transactional: ~30% is GOOD, ~50% is GREAT
This includes companies such as Airbnb, Lyft, and TurboTax that are generally supported by one-off purchases. The denominator in this category are users who have made at least one transaction.
Regarding 2 side market places for demand side.
1. What is time of this grouping? I see above it’s 6 months and 1 month but I don’t see it mentioned for this section.
2. To clarify (made 2nd, 3rd, or more transaction/made 1 transaction) correct?
3. We have a business where people normally book 2-3 times in their first interaction – would you suggest grouping the 2-3rd purchase as the denom?
Lovely work and now this ranks 1st on SEO 🙂
You would need to do separate work for low frequency businesses. TurboTax will basically have a year long retention cycle due to it being an annual use case product. Lyft is much more frequent than that, monthly or more. You are correct transactions is the Y axis, so yes multiple transactions.
If you book more than once in first transaction, can do one of two ways. if it’s an experience that occurs at a time in the future (like Eventbrite tickets to events), can map the frequency to date of experience not purchase. If it’s someone bundling a bunch of items for consumption all at once (like an Amazon order), consider t all one transaction.
Awesome material; kind of stuff that gets one super excited.
Quick question – in marketplace, what is a good retention rate for suppliers like say thumbtack service providers.
Thanks lots in advance.
This is where you want to break it down by type of supplier. SMBs have a high failure rate, so you have two types of churn: voluntary (they leave the platform) and involuntary (they shut down their business). So, in the case of Thumbtack, by targeting professionals, they’ll have higher retention rate, but lower volume, where as if Shopify only targeted people starting new online businesses, they would have incredibly high volume, but a very high churn rate due to business failure. This is why on the supply side, many companies look at net revenue retention, which means for businesses that do survive, do we make more money from them as they grow.
At Grubhub, because we worked with local restaurants, we focused on monthly churn, which we got below 2%, but half of that was involuntary churn.