As a startup founder, you have created a fantastic product, have the backing of some marquee investors, figured your go-to-market strategy, and your business is on track. Only yesterday, you got the sales/marketing team report that your acquired customers are increasing by 10% week-on-week. Your startup life seems to be good so far, and all you need to grow is to scale this acquisition channel to fulfil your Unicorn dream.
However, there is a high chance that your startup may fold up within the next two years, and there could be multiple reasons. Maybe you have never really achieved the hallowed “Product/Market fit.” Or it may be any of the other thousand reasons, such as a lousy hiring strategy or you have just spread yourself too thin. But let’s focus on Product/Market fit first.
In this article, I want to cover retention- a leading indicator of Product/Market fit. In layman’s terms, it is the degree to which a product satisfies strong market demand, and it is the first step to building a successful venture.
But then what has product-market fit to do with retention? If a great product instantly fits the customer’s needs, the latter sticks to it for a longer time. Companies that have witnessed phenomenal growth in a short time have all had the right product that resonated well with their customers. These companies grew because their customer retention was high.
Retention is vital for a business (especially for an online business) because:
- The cost of retaining a customer is generally five times lesser than acquiring a new one.
- You are 40% more likely to sell a new product to an existing customer vs. selling to a new customer.
- Older customers are more likely to spread word-of-mouth and thus to save you the CAC.
- Repeat customers = Repeat revenue = Repeat profit.
How To Calculate Retention
Companies can start by identifying the ‘north star metric’ that measures the product’s value to the customer. North Star Metric means guiding metrics that companies need to identify, choose, and focus on to build a valuable business effectively. For example, Razorpay is a payments gateway and transaction platform. Their ‘north star metric’ would be daily transaction volume.
The middle column in the chart is the metric that the companies mentioned need to follow in the frequency mentioned in the left column.
Similarly, Oyo Rooms need not track its bookings daily but monthly or annually to understand if the business is growing.
Companies such as Airbnb, Netflix, Snapchat, Facebook, and Uber, must monitor their own North Star Metric to keep track of the health of their business. Some of the metrics to monitor are Revenue (ARR, GMV), Customer growth (paid users, market share), Consumption growth (messages sent, nights booked in case of hotel industry), Engagement growth (MAU, DAU in case of telcos, apps) Growth efficiency (margins) User experience (Net Promoter Score)
But what are these metrics that companies need to follow to calculate retention better? The chart below explains famous Indian startups, and I have tried to capture some metrics and parameters that companies need to track regularly to have better customer retention.
Table: Interpretations of the metrics that the companies could be tracking. The reality may be more nuanced.
|Zerodha (Consumer)||Assets Under Management(AUM)||Daily|
|Razorpay (B2B)||Transaction Volume||Daily|
|Sharechat (Consumer)||Active Users||Daily|
|Flipkart (Consumer)||Gross Merchandise Volume||Daily|
So, once companies can identify their North Star Metric for their product, they need to start measuring retention. Calculating retention is nuanced yet straightforward.
Retention Rate = Continued active users at the end of the month / Total active users at the beginning of the month.
The more the retention rate, the better is the performance of the company and the lesser is the acquisition cost.
Some Benchmarks For Retention Rates? (6 Months)
- Consumer Social (Instagram): ~25% is GOOD, ~45% is GREAT
- Consumer Transactional (AirBnB): ~30% is GOOD, ~50% is GREAT
- Consumer SaaS (Spotify): ~40% is GOOD, ~70% is GREAT
- SMB / Mid-Market SaaS (Slack): ~60% is GOOD, ~80% is GREAT
- Enterprise SaaS (Salesforce): ~70% is GOOD, ~90% is GREAT
Hence, retention is one of the critical metrics that companies/startups need to focus on religiously. It indicates if you really have the product/market fit and if your startup will still be around two years down the line. I hope this has proven helpful to your business and increases the chances of being on your way to being the next unicorn. So, what’s your retention that will help you sleep well at night?