What’s a good retention rate? There’s no one-size-fits-all answer. Every product is unique and its retention rate is best compared to similar companies, industries, and go-to-market strategies. Yet product teams are often under immense pressure to decide on the proper retention rate for their business because a low rate can be a business killer.
How should product teams measure retention?
Even the definition of retention varies from business to business. No two are alike because no two products, customer bases, or methodologies are precisely the same. Sometimes, this difference is obvious. For example, an enterprise video hosting software and a consumer music app have very different customer acquisition methods. The video software relies on multi-year contracts whereas the music app requires no commitment. If the video software sees no activity for several months, it may not be a bad sign. But if the music app’s users don’t return after one day, they may be in danger of churning. Sometimes, differences are very slight. On the outside, two marketing software companies may appear identical and have exactly the same number of customers won and lost. Yet one may have an 80 percent retention rate and the other a 92 percent simply because they define retention differently. To understand whether their own product’s retention rate is good or bad, each product team should define retention as it relates to the health of their business.
How to calculate retention
A retention rate is the percentage of customers who are still with the company after a specified time period. It asks, in essence, “Did a user perform any action, leave, and then come back and perform another action?” If yes, the user has been retained. If not, they’ve churned. This requires product teams to define three things:
What is an action?
By default, most companies define “action” very loosely as any event the user takes within their platform, including simply opening it. To get a more refined sense of whether they’re actually measuring users’ likelihood to return, some product teams may tighten up that description to include only valuable events, such as purchases, sign-ups, profile completions, shares, or others that make sense for their business.
What is the period over which retention will be measured?
Next, product teams must determine the period over which they’ll measure retention. For many consumer apps, it’s common to track several, such as one day, one week, and two week retention. Product teams should base the period length on where they see drop-offs in returning users. For example, according to research by Mixpanel, most apps and software have a 6-20% eight-week retention rate depending on their industry. Product teams with this range should work back from this point. It is typically where the percentage of users drops below the point where the revenue they generate covers the acquisition cost of all those users acquired at the beginning of the period.
How many actions within that time period constitutes retention?
Finally, product teams must choose whether their threshold is one action, three actions, or some combination of valuable actions such as making a payment or converting to a premium user. With these pieces, they can calculate retention. Here is a sample equation for retention rate:
That is, if there were 100 customers at the start of the period, and only 27 have taken an action in the past 14 days, then the retention rate would equal 27 percent. Product teams that use a product analytics platform will find that the software can calculate their retention rate for them as well as break it down into an easy to understand dashboard. The graphic below is an example of retention rates for every day for a two-week period. With a handle on what their retention rate is, product teams can turn to determining what constitutes a good retention rate.
How to benchmark retention
There are two ways for product teams to benchmark retention: against themselves, and against other companies. Measuring against their own performance week after week and month after month is called retention analysis and reveals trends. For example, if retention is trending down, the product team should be concerned and try to isolate the causes. If up, product teams should try to isolate the correlated feature changes, marketing campaigns, and cohort behaviors that may have led to it, and capitalize on them. To measure retention against other companies, product teams need competitors’ performance statistics which generally are not publicly available. The next best resources are industry benchmark studies such as Mixpanel’s 2017 Product Benchmarks Report which analyzes anonymized data from over 1.3 billion unique users to reveal the following trends. For most industries, average eight-week retention is below 20 percent.
WEEKLY RETENTION BY INDUSTRY
For products in the media or finance industry, an eight-week retention rate over 25 percent is considered elite. For the SaaS and e-commerce industries, over 35 percent retention is considered elite.
ELITE RETENTION BY INDUSTRY
Product teams can use these benchmarks to approximate their own company’s retention rate, and adjust according to the unique realities of their business. They can raise it if they have services that are considered utilities, lower it if users only need to access it infrequently, and so on. Based on this rough estimate and their trend in performance over time, product teams can establish a good retention rate.