User Retention Rate: From Measuring to Improving

What’s customer retention rate & who needs to measure it

Let’s do a bit of a memory jog. Retention measures the percentage of users who remain engaged with a product or service after a certain period. This metric is essentially the mirror image of churn — the rate at which customers discontinue their use of a service or product. Retention is especially relevant for gauging user behavior in SaaS UX since these products are subscription-based. Understanding the delicate balance between retention and churn is crucial for any business aiming to sustain and grow its customer base.

Initially, it may seem that not every business needs to worry about retention. Here are a few examples:

• One-time products: Items that are typically purchased once due to their durability or unique nature. A dining table or a one-time-purchase software is a good example.
• Seasonal products: Goods that are relevant only during certain times of the year, such as holiday decorations or seasonal apparel.
• Luxury items: High-end products like those offered by Zillow, where repeat purchase frequency is naturally lower due to the product's nature and price point.

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Indeed, why bother with retention in this case? – The answer is simple. Long-term, it’s much more lucrative. One-time-purchase products can only grow as the market grows. And no market grows forever.

Whenever your product is used rarely (less than once a month), you risk getting yourself into a forgettable zone. So what do you do if you find yourself there?

The answer lies in creating additional use cases for your products or services. By expanding how customers can engage with what you offer, you also expand the number of users and give them reasons to return.

A good example is Zillow. The product expanded its platform beyond traditional real estate listings by introducing new services such as Zillow Offers for direct home buying and selling, Zillow Rentals for rental listings, Zillow Mortgage for mortgage services, and Zillow Home Improvement for renovation planning.

These provided users with utility beyond the initial property search, helping Zillow overcome the forgettable zone and become a comprehensive destination for various real estate needs.

Now that we’ve established that any long-term-oriented business needs to measure retention, let’s talk about how you can do it.

Measuring retention metrics

Understanding and improving customer retention is a multifaceted challenge that requires a nuanced approach to measurement. The fundamental formula is as follows:

Retention Rate = ((Customers on day X - New Customers)/Customers on day 1)*100

This may look less scary when presented visually.

Now here comes the tricky part. Below, we’ll list a few considerations to make this formula work.

• Time frame: the appropriate time frame depends on the nature of your product or service. Short-term and long-term retention rates may vary significantly.
• User segmentation: analyze retention rates for different user segments. Those segments may include new users, returning users, or users from different acquisition channels. This can shed light on where retention efforts are most effective.
• Definition of "active": define what constitutes an "active" user for your context. It could be logging in, making a purchase, or engaging with key features. This helps make your calculations more accurate.

And, on top of that, you also need to have a good grasp on:

• Churn: understanding why users churn is crucial for improving retention efforts. Again, those are mirror metrics.
• Cohort analysis: this activity helps track the retention rates of groups of users who started using your product or service around the same time. That’s how you identify trends and patterns over time.

Depending on how you define these aspects, your retention rate will vary. This is why it’s important to:

1. Have a consistent tracking system
2. Make decisions based on your own benchmarks and dynamics

Additionally, other metrics can offer additional insight. In isolation, metrics are easy to manipulate. It’s much harder to do that with a holistic view. Daily/monthly active users and lifetime value, in our experience, complement the retention rate well.

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Average retention rate metrics

Well, it’s tricky. One way to see how you measure up against competition is through benchmarks. These are industry-specific averages or norms that provide a context for your metrics. For instance, a retention rate that's considered healthy in the highly competitive social media app industry might be deemed low in the niche B2B SaaS market. Therefore, establishing relevant benchmarks within your industry is a must.

Here are a few examples of retention rates based on the industry:

These numbers come from Gecko board.

However, benchmarks are just the beginning. They give you a snapshot comparison but don't tell the whole story of your user engagement and business health. What's more informative is the trend over time. Is your retention rate improving, declining, or remaining stable? An upward trend in retention, even if the absolute numbers aren't industry-leading, indicates positive momentum. Conversely, a downward trend is a clear signal that it's time to reevaluate your approach to user engagement and retention.

So how do you know if the retention rate is good?

• It meets or exceeds the industry benchmarks
• The trends are positive
• When it positively impacts revenue and other key metrics

In the next chapter, we'll explore strategies and tactics to improve retention, ensuring your metrics not only look good on paper but also drive meaningful business success.

Ways to improve user retention

There are a bunch of ways to improve retention. The top three we employ the most for our client projects are as follows:

• Optimizing onboarding & activation
• Organic loops
• Churn analysis

Sometimes, to implement the activities we're going to outline, you need major structural changes. In other words, an app redesign. However, it's often the case that gradual UX tweaks will take you a long way.

Let’s break down each.

Onboarding & Adoption

Here, alongside retention, there is adoption. Adoption is essentially the initial retention. The goal of onboarding is to provide users with all the knowledge they need to get the most out of the product and help them reach the "aha moment."

Designing an onboarding experience, however, is easier said than done. Below, we’ve listed a few approaches we commonly use and the best use case for them.

Keep in mind that some onboarding approaches work well in pairs. You don’t have to just choose one and commit to it.

How do you know if your onboarding is well-designed? – The answer lies in activation. For different products, what’s considered an active user is different.

For instance, when it comes to Slack, an activated user is the one who invited at least one person to communicate with. For a SaaS solution, an activated user could be the one who purchased a subscription. For the UX of a banking app, an aha moment entails opening an account and using it to purchase something. In all cases, a good metric would be a ratio of users who signed up to those who became active.

Habit Loops to Drive Retention

Good retention indicates that users come back time and again. In other words, such a product manages to build a habit around itself. How does one build a habit? – Enter, habit loops.

Habits loops essentially come in three kinds: organic, manufactured, and environmental. Let’s break down each of those.

Organic loops

An organic loop consists of three major components. Those are as follows:

• Organic Trigger: This is the initial stimulus that sparks a user's interest or engagement without external prompts. It is rooted in the user's environment or internal state, which nudges them towards your product.
• Action: Following the trigger, the user takes an action. This step involves the actual usage of the product, where the user engages with its features as a natural response to the trigger.
• Reward: The final step is the reward. This is what the user gains from taking the action.

Here's how Reforge visualized this with a flywheel.

Let’s take a look at a few examples:

Uber

We’re sure you’ve heard of Uber, which makes it a great example. Here’s how the loop works:

• Trigger: The need to travel within a city.
• Action: The user orders a ride via the Uber app.
• Reward: The user experiences the convenience of good service and cashless payments.

This, in turn, increases the likelihood of using the service again.

Aceplace

Another good example is a project we've completed recently - Aceplace. It's a platform for booking yachts in the UAE.

• Trigger: The desire to rent a yacht during a vacation in Dubai.
• Action: The user searches for and books a yacht on the Aceplace platform.
• Reward: The user enjoys their water experience

These examples illustrate the importance of focusing habit loops around core customer problems. When triggers are closely aligned with what is significant to the users, there is a higher probability that they will take action.

Moreover, the action must directly address the user's core problem to ensure that the reward feels satisfying. Only then is the loop likely to encourage repetitive behavior, turning a one-time action into a lasting habit.

Manufactured habit loops

Manufactured habit loops offer a strategic way to increase user engagement by actively triggering user actions. Unlike organic habit loops, which occur naturally, manufactured loops involve deliberate actions on the product’s behalf.

Such actions may include triggers through various channels, allowing greater control. Typical channels include emails, push and browser notifications, text messages, etc.

Let’s go through a few common types of manufactured loops and their respective examples.

Environmental habit loops

Unlike organic and manufactured habit loops which focus on internal triggers or externally induced triggers, environmental habit loops are shaped by the physical or social context. These loops reveal how external settings and conditions can prompt behaviors automatically.

Here are a few key features of environment habit loops:

• Context-Driven: These loops are triggered by specific environmental conditions or changes, making the behavior highly dependent on external factors.
• Automatic Response: The actions in these loops often occur subconsciously, as users respond to their environment naturally.
• Reinforced by Surroundings: The reward in environment habit loops often comes from the environment itself, either through alleviation of discomfort or by providing a more immediate gratification.

Imagine wrapping up a sprint planning session right on time (trigger), you casually tab over to your project tracker to tick off completed items (action). That little checkmark is oddly satisfying, isn't it? It’s like a mini high-five to yourself (reward).

Knowing these little cues and routines can help you, and by extension, your team, slide into productive habits almost without thinking. It's like setting up invisible dominoes that knock out tasks as you go about your day.

Combining habit loops & Finding meaningful rewards

Successfully implementing habit loops involves combining different types and reinforcing them to enhance their effectiveness. When an organic habit loop is already powerful and yielding results, it's beneficial to strengthen it using other types of loops.

Creating habit loops that revolve around solving the user’s primary problem – the very reason they come to your product – is the key to making these loops truly effective. The core action of the user should be directly linked to the product's retention metrics. In essence, we want the user's actions to have a direct and positive impact on product retention.

To ensure that real habits are formed around our product, the rewards must be meaningful and significant to our users. We can categorize rewards into three types based on their nature and how they affect the user experience:

• Extrinsic Rewards: These are tangible benefits such as time or monetary savings. For example, reminding users about the time they have saved using the product, or offering financial incentives for referrals.
• Intrinsic Rewards: These rewards are internal and self-fulfilling. Achieving 'inbox zero', reaching a new level in a game, or encountering a particularly delightful feature are all intrinsic rewards that motivate users from within.
• Social Rewards: These involve gaining acknowledgment and esteem from peers. Social rewards can range from getting a new friend request to earning bragging rights with a leaderboard rank or a digital badge of honor.

We've additionally visualized the distinctions with an infographic.

Designing habit loops is a crucial process and should be considered from the very first days of product design. It plays a fundamental role in how users will continue to engage with the product over time.

However, not all necessary information will be available from the start. It’s imperative to experiment and try applying different habit loops, learning, and iterating based on user feedback and behavior. This is an iterative process after all.

Churn Rate & Retention Analysis

The last major way to improve retention we’ll cover is churn analysis. This activity entails making sense of why customers leave. Now let’s see how it works.

Proactive Feedback Solicitation

Gathering feedback is essential to understand why customers leave. Here are a few methods that can help:

Surveys: Simple yet effective, surveys can gauge customer satisfaction and discontent. If you’re struggling with participation rates, consider offering meaningful incentives.

Open-ended Questions: These allow customers to express their thoughts in their own words, providing deeper insights than multiple-choice questions. An open-ended question is the one that doesn’t encourage short / yer-or-no responses.

Liker Scale Questions: These help quantify the intensity of customers' feelings on specific issues and can be easily analyzed for trends.

Qualitative Interviews: Although more resource-intensive, speaking directly with churned users yields invaluable insights. While it's crucial to have a structured approach to these interviews, allowing the conversation to flow naturally and practicing active listening can lead to unexpected and valuable revelations.

Reengagement and Reactivation Strategies

When a customer is lost, it doesn't necessarily mean that they're lost forever. There's a variety of techniques you can employ to win them back. Most of them boil down to either deals or staying in touch.

Offering special promotions or discounts can lure back former customers. Additionally, regular updates, whether through email newsletters, social media engagement, or personalized outreach, keep your brand in customers' minds and can encourage them to reactivate. Reactivation calls can also uncover why customers left, and running a quick carrier lookup before the campaign helps confirm the phone numbers on file are still valid.

By employing these strategies, businesses can better understand the underlying factors contributing to customer churn and develop effective methods to retain more customers, ultimately leading to increased loyalty and long-term success.

Conclusion

In conclusion, mastering user retention is not only about maintaining customer relationships but actively enhancing them through strategic measures. By understanding and integrating various types of habit loops-organic, manufactured, and environmental-you can create a dynamic and responsive strategy that caters to the nuances of user engagement.

Proactive measures like engaging feedback mechanisms and personalized reactivation strategies are critical in mitigating churn and boosting retention rates. As demonstrated through the array of methods discussed, from sophisticated onboarding techniques to intricate churn analyses, the goal remains consistent: to build a sustainable business model where customer longevity is as pivotal as acquisition.

By aligning these strategies with the inherent needs and behaviors of your user base, your efforts in retention will not only reflect in reduced churn rates but also amore robust, engaged, and loyal customer base, driving both profitability and growth.