The Product Leader’s Guide to Increasing Customer Lifetime Value
- Product Led Growth /
- Product Metrics /
- Product Strategy /
Customer retention stands as the lifeblood propelling revenue, profitability, and growth for digital products. Considering that acquisition costs can be up to 7 times higher than retention costs, prioritizing customer loyalty yields substantial dividends throughout the relationship’s lifespan. Remarkably, even a modest 5% improvement in retention can elevate long-term profits by 25% to 95%. Given this outsized business impact, digital product leaders must position customer retention as a strategic priority rather than merely a metric to track.
Yet, optimizing retention demands a nuanced, customer-centric approach tailored to each phase of the journey, eschewing one-size-fits-all tactics. As relationships progress from awareness to loyal retention, customer needs and the bedrock of trust and confidence in your product undergo transformations. Leaders must attain a granular understanding of what influences retention at each step, from initial value demonstration to ongoing outcome delivery, in order to delight users and solidify enduring bonds.
In this article we delve into the intricate nature of customer retention for digital products, shedding light on its driving forces at each major relationship stage. We will also present actionable strategies to predict churn risk, fortify engagement, and ultimately optimize retention rates to maximize customer lifetime value. With the right customer-centric focus and a metrics-driven approach, product teams can effect transformative business results by enhancing retention by just a few percentage points.
Customer Retention Drives Lifetime Customer Value
In a recent article about lowering Customer Acquisition Costs, I wrote about how product leaders need to consider two major factors to lowering the cost of customer acquisition. The first is understanding the customer value of addressing the articulated or unarticulated need, the solution to the problem, or the access to a new opportunity. The second factor is understanding the value exchange that defines what the core customer is willing to trade (i.e. money, time, access, etc…) in return for the product or service that fulfills their needs.
When you look at things in this way you can see that your customer retention rate directly correlates to the promise you make to your customers, and the value they experience as they evaluate, adopt, and use your product or service over time.
Customer retention and cost of acquisition drive lifetime customer value. To better understand this let’s break down how customer retention is often predicted and measured.
Customer Satisfaction is Only Part of the Story
A common approach is to evaluate customer satisfaction as a predictor of customer retention. While this is a common practice, it doesn’t tell you the entire story, and can often lead to skewed data forecasts, and a false sense of security. Customer satisfaction is helpful in understanding a customer’s sentiment related to a single moment or transaction, but does not illuminate the relationship completely. For example, satisfaction surveys can often be biased since not everyone will respond. Often mildly satisfied and unsatisfied customers are less likely to respond.
Although satisfaction is extremely important and should be measured, it should be evaluated within the context of the customer journey. For example what needs have to be met and what is the necessary outcome for the customer to be satisfied and continue forward? Within the context of the customer journey, it is essential to also evaluate every job the product or service has to perform to deliver value, the cost of adoption and expansion, competing solutions, and user support. You can start by evaluating the current state of your product broken down by user flows, tasks, and their intended outcomes.
Customer Satisfaction (CSAT) is calculated by dividing all the positive responses by the total number of responses and multiplying by 100. This results in your CSAT percentage.
Customer Satisfaction (%) = (#) positive responses / (#) total responses X 100
Churn Rate as a Predictor of Retention
Now let’s look at churn rate, also known as customer churn or the rate of attrition, which is the rate at which customers stop doing business with you over a given period of time. This is another common practice for predicting customer retention. It’s critical for businesses to understand what is transpiring throughout the customer experience and why their customers may be churning. It is also worth noting that there are different types and associated causes of churn. Some of the common causes of Churn are:
- Attracting or targeting the wrong customers.
- Poor onboarding experience.
- Customers aren’t achieving the desired outcomes and don’t see the value in continuing to do business with you.
- Customers find it difficult to continue to do business with you in some way. For example not having a process in place to get updated credit card information to fulfill auto-renewal.
- Product performance challenges, bugs, and lag time in communicating or addressing the issues.
- Inadequate levels of customer support.
Churn is calculated by taking your total number of customers at the beginning of a time period and subtracting the total number of customers at the end of that time period and then dividing by the total number of customers beginning of a time period.
Customer Churn Rate (%) = (Customer Beginning of Month - Customer End of Month) / Customers Beginning of Month
Averages typically range from 3% to 9% annualized churn rate for mature products. Some of the major variables that influence churn rate are customer segment, market conditions, competitive landscape, and a business’s stage of growth. If your product has more than 10% churn it should be a key strategic priority to start identifying areas of opportunity for improvement.
Evolution of Customer Retention Strategy and Tactics Along the Customer Life Cycle
The relationship you have with your customers evolves over time. In order to increase retention, you need to build long-term relationships that address their needs at each stage of the customer journey.
First, let’s address the different levels of commitment that shift as your relationship with customers evolves. At each level of a relationship, people have different needs and expectations. Think of your own personal relationships and how they evolve from when you first meet someone to calling them a trusted friend, colleague, or lifelong partner. Through this lens, you can analyze the customer journey differently from the initial stage of awareness to evaluation, to making a commitment, through adoption and renewal.
|Levels of Commitment
|Customer Trust and Needs
|Baseline relevance that needs can be met
|Could this product help me accomplish my goal? Is it credible and can I depend on this information? Does it seem to have my best interests at heart?
|Interest and preference over other options
|Do I choose to use this product for this job? Is it better than other options? Are the value proposition and proposed value exchange equitable and fair?
|Confidence that the job at hand can be accomplished and the intended outcome achieved
|Is this product’s offering valuable enough to justify the time and effort to register/demo? Do I trust the product with my information?
|Commitment and consensus to investing the time and resources needed to adopt the solution
|Do I trust this product to deliver continuous benefits? Do those benefits outweigh any potential risk? Can the product adapt and scale to our evolving needs?
|Willingness to recommit to an ongoing relationship and continuous investment of time and resources
|Is this product delivering on expectations and continuing to meet our needs? Is the value exchange fair and equitable?
These needs aren’t always explicitly articulated. The customer journey is complex as they work through the tasks of defining the scope of their challenge, exploring possible solutions, mapping essential requirements, and then selecting a solution or provider. Throughout this intricate process, customers are continuously validating their learnings, the promises associated with products and services, all while working to build consensus with all the stakeholders involved.
Each level of commitment and necessary value that needs to be delivered by your product requires a different type of retention strategy to fully optimize your customer experience.
It is for this reason that customer satisfaction and churn rates should be evaluated at each stage of your customer journey (i.e. relationship). Cumulatively, this gives you a holistic picture of where customers are struggling and where you can focus to drive impact.
Measure Customer Retention Across the Customer Lifecycle
Improving retention by even a small percentage can yield significant impacts on profitability and growth for digital products. A detailed, customer-centric strategy empowers product teams to pinpoint and address the specific factors influencing retention at each major phase of the customer journey.
The crux lies in ongoing tracking of satisfaction, churn risk indicators, and other behavioral metrics to regularly assess relationship health and identify potential vulnerabilities early. This approach, coupled with an unwavering commitment to delivering outcomes and value at every stage, along with efforts to reduce friction through smoother onboarding, in-product guidance, and proactive support, forms a robust retention strategy.
While the retention optimization process is undoubtedly multifaceted, two overarching areas offer the most impactful returns. First, invest in understanding and streamlining early onboarding and ramp-up, as the initial delivery of value solidifies the foundation for enduring bonds. Second, utilize usage data and feedback to identify pain points and obstacles hindering customers’ goals. Eliminate ongoing barriers to adoption, ensuring your product remains cherished.
With the right retention metrics providing insights and a customer-focused culture driving action, digital product organizations can fortify revenue streams by creating more engaging user experiences. Retain just a few more customers each month, and growth will compound over the long run.