Retention Analysis: Improving Your Products and Process
Your business needs two things to survive: to bring in new customers and to keep existing customers. Most strategies focus on the first part, emphasizing ways to draw in new customers and acquire a progressively greater percentage of their target customer bases over time.
That goal is okay. But it’s not what most businesses actually need to thrive. In fact, stable businesses that already have a core audience should arguably focus more on retaining existing customers. To do that, they’ll need to perform retention analyses to improve their products and processes.
Let’s break down what exactly a retention analysis is and how it can help any business looking to achieve long-term profitability.
What Is Retention Analysis?
Retention analysis means looking at two things: how frequently your customers are becoming “defectors” or discontinuing use of your product or service, and why they choose to do so. It’s an analysis methodology you can use to determine key insights that can help you retain customers over the long-term and that you can use to improve your returns overall.
More specifically, retention analysis looks at:
- What specific aspects of your brand or brand experience cause customers to defect from your brand or otherwise stop purchasing your product
- When customers are likely to leave relative to others
- How frequently customers leave relative to your new customer acquisition rate
- How much money you lose for every lost customer
- How you can improve your retention strategies to minimize the above metric
It’s easy to see how performing in-depth retention analyses can benefit your business in the long-term and help you survive in even the most volatile economic climates. Performing retention analysis involves using a formula while also understanding key aspects of retention as a broader topic.
How Does Retention Analysis Work?
When you perform a retention analysis, you’ll essentially ask yourself three questions: where customers leave your business (as in, where over the course of your conversion funnel), why customers leave your business, and how you can get them to stop leaving in the future.
Let’s take a closer look at each of these aspects one by one.
Where Customers Leave or “Churn”
A key topic related to retention analysis is “churn”, which is a term that describes how quickly a customer converts from a paying or regular customer to a “lost” or non paying customer.
The easiest example of this can be seen with subscription services, like Netflix. “Churn” in this sense describes a customer that has ceased paying for Netflix streaming and has either moved on to another service or has stopped seeking streaming services entirely.
It’s important to identify where customers succumb to churn over their relationship with your brand, as well as why. If you can identify a particular point in your conversion funnel or a particular aspect of your brand or business model that is causing greater than average churn, you can alter those parts of your brand and increase your business’s retention rate overall.
It’s all about discovering which part of your target customer’s journey is the most volatile and stabilizing it for long-term success.
For example, say that you have a subscription service providing one or more products to regular customers. Retention analysis can help you determine that, after the second month of subscription, customers find that your brand offers significantly less value due to most of your high-quality products being frontloaded to the first month of subscription.
In the future, you might change the product spread for your subscription months so that more of the best products are spaced out over multiple months instead of providing most of your brand’s value over the first subscription month.
This is just a hypothetical example but it illustrates why retention analysis can help with this aspect.
Why Customers Churn
Next, retention analysis will help you analyze why your customers churn or stop paying in the first place. This, in turn, can help you identify weak spots in your marketing strategy or in your brand overall.
Sometimes you can gain valuable customer churn feedback from surveys or other customer feedback messages that they may leave your brand voluntarily or upon request. But retention analysis can go even deeper and identify certain brand behaviors or themes that may cause a greater than average amount of churn.
You can then adjust your business strategy to eliminate or at least combat some of the most common reasons for customer churn, improving retention rates overall.
How You Can Improve
Above all else, retention analysis is about determining ways in which you can improve your products or your greater brand.
When you notice a problem in your marketing campaigns or in your greater brand presentation, you can immediately take steps to correct these issues and see higher than average returns than if you floundered wildly, improving random things in an attempt to stem customer churn rate.
For example, imagine that a business performs a retention analysis and finds that most of their customers leave after contacting customer service. This immediately shows that the customer service aspect of the business – whether it’s because of the customer service agents in person or because of the wait times or something else entirely – needs work.
Taking steps to correct and improve the customer service side of the brand should immediately show lower churn rates and higher retention rates.
Or you might find an issue with your products. Determining that your branded products need help connecting with customers could help you find a solution, such as contacting a dedicated branded product design agency.
By improving its retention rate, a business will:
- Spend less money retaining customers in the future
- Boost its revenue as a result
- Improve the brand’s reputation and relationship with its customers
- And so on. The benefits are almost endless
Given that most of your income will be from customers you already have – or “retained” customers – it’s vital that you learn to master retention analysis for the long-term health of your brand. While acquiring new customers is also important, retention is arguably even more so.
Conducting Retention Analysis
Given that retention analysis is key for long-term business success, let’s break down how you can conduct retention analysis by using a basic formula.
First, you’ll need to determine your overall customer retention rate. This is the starting point for your retention analysis. It tells you how many customers are staying compared to how many customers are leaving. Even if your retention rate is fine for your business right now, you should still perform a retention analysis to make sure that any future moves don’t disrupt this vital balance.
It may also be helpful to calculate the revenue retention alongside your customer retention rate. This can tell you whether a few big customers are responsible for most of your brand’s revenue or if it is more evenly distributed.
Next, divide all your customers into different personas or cohorts. A cohort or persona is a collection of customers that share the same basic characteristics. These can include:
- Spending habits
- Demographic features, such as sex or age
So-called time-based cohorts are customers that signed up for your services or purchased products at nearly the same time. Naturally, studying these groups can give you time-sensitive data about when people are more likely to buy from or leave your brand.
After separating your customers into different groups, you should then track their behavior from the time of acquisition (when they first spent money at your brand) to attrition or churn. You can do this by measuring a handful of key metrics or KPIs.
Key metrics to focus on include:
- Churn rate, which shows how many customers leave after subscribing from your business within a set timeframe (as this is nearly 100% for most businesses eventually)
- Customer lifetime value or CLV, which is the total actual or projected amount of money the customer will spend on your product or brand
- Net promoter score, which can be gathered by seeing how many new customers you get after your brand is recommended to them by an existing customer
- MRR churn rate, which measures your lost revenue due to lost customers
Taking Data and Improving Retention
Take your favorite of the above metrics and perform your analysis:
- Determine customer retention rate
- Then divide your customers into different groups
- Apply the above metrics to your customer groups
- Analyze the information you find
Once you do this, you’ll have much more information about how to improve your products and processes across the board and locate weak spots in your brand.
The bottom line is that customer retention is far more important than customer acquisition rate, especially if a business wants to survive for years to come. Therefore, executives should focus primarily on mastering customer retention and lengthening their lifetime value more than acquiring new customers after achieving basic business stability.
Need help analyzing ways to retain customers through branded or private label products, or do you need assistance reinventing your production processes? In either case, Harper+Scott is here to help. Contact us today and get the world’s top design and sourcing studio working for your brand.