Embracing existing customers makes good business sense – in good times and bad. Customer loyalty can help drive repeat business and create upsell and cross-sell opportunities. In more challenging operating environments, when new customer growth is uncertain, the ability to retain and grow existing customer relationships becomes even more critical.
We believe effective retention analysis – using data to highlight which customers are likely to stay with your business, for how long and with how much benefit – is critical to understanding your customer base. Getting the mechanics right with sound data and statistics is essential (we’ve all heard of “garbage in, garbage out”), but it’s also important to think creatively about where and how to apply retention analysis to your business. Here, we share four considerations to help leaders build a more effective, holistic approach to retention analysis.
Consider Constituents Beyond Customers
Many leaders are familiar with the process of analyzing and understanding customer retention rates, but fewer understand the benefits of applying those same techniques to other constituents. We often encourage growth company leaders to expand the scope of their retention analysis to include employees, suppliers, partners and other groups who may be equally critical to driving the growth of your business. For example, a two-sided marketplace should consider retention analysis for both vendors and customers. Healthcare companies need to understand and account for provider turnover in addition to focusing on the quality of their product and services. Measuring retention across many different relevant parts of the organization can provide your leadership team with a more holistic understanding of the factors that contribute to success and help to identify areas for improvement.
Measure the Metrics that Matter
At its core, retention is about understanding how something changes over time relative to an initial point. Customer retention analysis typically considers the number of customers that remain after a certain length of time and measures how much of the revenue they originally generated continues after that time. In our experience, there’s often value in going one level deeper in your retention analysis. For customers, consider, measuring the number of products a customer is using or that customer’s cumulative spend over time (also known as lifetime value or LTV). For employees, we recommend understanding retention in the context of other metrics such as hours of work performed or sales bookings attained in order to provide a more holistic view of an employee’s value to your business. In analyzing suppliers or partners, consideration of units delivered, margin contributed or leads referred may be appropriate. Across constituents, leaders and their teams should think broadly about the measurements that best reflect the value constituents bring to the business.
It is also crucial to incorporate the cost of acquisition in your retention analysis. The cost of acquiring a new customer, hiring a new team member or developing a productive new partnership will increase when the population or opportunity set to draw from is more limited. This can, in turn, meaningfully impact the value of a retained customer or other constituent. Consider a short-term property management business, for example. In a location with high tourist demand but low property supply, it may be difficult and expensive to find and onboard new properties, thereby increasing the importance of retaining existing properties.
Watch Out for Limitations
We also recommend considering the limitations of your measurements. Many metrics reach a ceiling (i.e., cannot grow indefinitely); in this situation, it may be more crucial to “optimize” than “maximize.” For example, a streaming subscription business may measure monthly active subscribers as a retention metric and focus on increasing streaming hours per subscriber to help increase stickiness. However, pushing customers to spend more time on the product could cause burnout and sudden churn as there are only a finite number of hours in a month. While metrics can be valuable in measuring progress, it’s important to consider the optimal balances between achieving goals and avoiding potential negative impacts.
Focus on the Highest Points of Leverage
Once you have established an approach to retention and a baseline performance metric, we recommend taking a thoughtful approach to segmentation in order to gain deeper understanding of retention drivers. Often, teams will begin by segmenting based on readily available attributes, irrespective of usefulness. We recommend thinking more deeply about what drives behavior and what insights can realistically be addressed in your business processes. For example, considering behaviors such as frequency and recency of interaction can help identify opportunities for personalization, which is especially useful for ecommerce or retail businesses. Demographic segmentation is often important for B2C businesses looking to understand the persona of their customer base; this approach may be less useful for B2B companies and can create concerns around privacy or bias for employee segmentation. For mobile products, it may be helpful to segment your users based on platform or operating system; this data may be less relevant for other businesses.
In addition to identifying potential segments with controllable levers, confounding factors should also be carefully considered in order to control potential variables that can impact the analysis. These variables are typically not part of the segmentation criteria but can affect the interpretation of the results. For consumer businesses, seasonality, such as holidays or a major cultural event, may influence customer behaviors across different demographics. Correlated variables, such as age and income, can also confound segmentation results. For example, a business may find older customers or customers using iOS instead of Android devices, to have higher retention rate. However, this may actually be due to their higher income levels, which is the true driver for retention.
A thoughtful, comprehensive approach to retention analysis can help companies develop tailored responses to maintain and improve retention. This may include offering personalized incentives, improving the quality of customer service; or launching new products, services, training, or other benefits. By expanding the aperture of your retention analysis to include customer, partners, employees and other key constituents, focusing on the metrics that matter, and segmenting according to where you have leverage, your team will be armed with important data inputs for your broader retention strategy.
Don't delete this element! Use it to style the player! :)
The content herein reflects the views of Summit Partners and is intended for executives and entrepreneurs considering partnering with Summit Partners. For a complete list of Summit investments, please click here.
Stories from the Climb
At Summit, it’s the stories that inspire us – the problems being solved and the different paths each team takes to grow a business. Stories from the Climb is a series dedicated to celebrating and sharing the challenges of building a growth company. For more Stories and other Summit perspectives, please visit our Growth Company Resource Center.
Subscribe to our newsletter to stay up to date on our partners, portfolio, and more.