Retention rate is one of the most important barometers of your company’s success.
A high retention rate means your customers are happy; they value your product and are providing a sustainable source of revenue. A low retention rate means you have a leaky bucket: no matter how many users you add through your acquisition strategy, they’ll keep churning, and you’ll keep losing money.
Without retention, your chances of making it big are slim to none.
What Is the Definition of Retention Rate?
Retention rate is defined as the percentage of users who continue using your product or service over a given time period. How companies measure retention depends on their product.
There are two aspects of your product that you need to nail down in order to define retention for your company.
1. Define your product’s critical event. This is the action a user takes that determines whether or not they have been retained. This event should be something that indicates value for both your customer and your business. It should be tied to an activity that generates revenue for you and indicates that a customer is getting what they need out of your product as well.
For example, Airbnb’s critical event might be to “make a reservation.” Netflix’s would be to sign up or renew a subscription. Candy Crush: play a game level.
2. Define your product’s usage interval. This is how often you expect a customer or user to perform the critical event action. Choose a time period that makes the most sense for your product.
Use these worksheets to figure out your product’s critical event and usage interval.
Airbnb probably expects people to take one to two vacations per year. Netflix subscriptions renew monthly. Candy Crush wants you to play their game every day.
Once you’ve defined these two areas, you should have a better idea of what retention means for your business. Continuing our examples, Airbnb customers should be considered retained after they make their second reservation within 18 months after their first reservation. Netflix users are retained when they renew their subscription each month. Candy Crush players retain each day they play a game.
What Formula Should You Use to Calculate Retention Rate?
Generally, retention rate formulas look at the number of users who were present on Day 1 compared to how many of those users were present on a period thereafter. There are several ways to calculate this formula, depending on how you define “active users” and how you set the period of time. You need to determine both according to what makes the most sense for your business.
Calculating Retention Rate Based on Users:
- Customer retention rate measures what percentage of your paying subscribers or users are retained. Focusing on this segment prioritizes the needs of the users who pay for your product, and their retention has a direct impact on your bottom line.
- User retention rate measures the retention of your entire user base, whether they are free or paid users. Focusing on this kind of retention can help you learn how to keep all of your users happy and engaged but may not help you become profitable. Alternatively, user retention rate is the right measure for you if your business relies on advertising rather than a subscription model.
- You can also measure a cohort’s retention rate to track retention according to specific user segments or groups that share a characteristic. This helps you zero in on how certain user segments behave and what makes them happy.
Calculating Retention Rate Based on Time:
There are three main ways to measure retention according to time.
- N-day retention rate reflects how many users were retained on a specific day after they signed up, such as Day 5 or Day 30. You can determine each day according to strict calendar rates or rolling 24-hour windows. N-day retention rate is valuable if you expect people to use your product every day, like a mobile game.
- Unbounded retention rate shows you how many users came back on a given day or any day after. This retention rate makes sense when you don’t expect people to use your product every single day. This number is the inverse of your churn rate.
- Bracketed retention rate measures retention within custom periods specific to your product’s usage cadence such as Day 1, Day 3, Day 7, Day 14, Day 31.
You might use different retention rates at different times, but if you are going to compare rates, make sure you only compare retention rates that are measured in the same way. Lining up your unbounded customer retention rate with your N-day user retention rate doesn’t give you meaningful information; it’s apples to oranges.
How Do Companies Use Retention Rate?
Companies use retention rate to understand four things: how loyal your customers are, how good your customer experience is, what value your users get out of your product, and whether you have a sustainable base to maintain your business. Zeroing in on your retention rate helps you run targeted experiments to improve it and, therefore, grow.
Daily meditation app Calm was looking for ways to improve their retention, so they used Amplitude to examine the retention rate of different cohorts to see if certain behaviors correlated with higher retention. They discovered a small portion of users set meditation reminders, a feature that was buried in the settings, and that group had very good retention. Calm ran an experiment on a small portion of new users to see if prompting them to set daily meditation reminders right after onboarding led to increased retention. The result was a 3x jump in N-day retention. Calm then rolled out the updated reminder feature across their entire user base.
Le Monde, France’s leading newspaper, needed to increase the retention rate of their monthly subscribers. With Amplitude, they identified if certain articles or kinds of articles correlated with higher retention. Then they can promote those “sticky” articles and categories or recommend them to readers to keep them happy and engaged and, therefore, more likely to retain.
Retention Is the New Growth
Retention rate is one of the most important metrics for your company to track and improve. Find over 40 resources on retention in The Amplitude Guide to Customer Retention or sign up for our email series on Retention 101 to learn more.