Episode 1 - Where to Focus Your Customer Retention Efforts

Introduction  

Welcome to this very first episode of the Retention Blueprint Newsletter. This Newsletter promises to transform your Retention Impact in just 5 minutes per week. Digestible retention content for subscription businesses that adds value every time. 

In Subscription Businesses, Retention Is Crucial to Growth

The math is simple: if you meet your retention targets, your acquisition targets don’t move. Miss your retention targets, and your acquisition efforts and associated media costs skyrocket, reducing profitability. The most successful subscription brands (think Amazon, Netflix, Spotify, and Apple) prioritise protecting Annual Recurring Revenue (ARR), which hinges on successful retention. 

The Problem - Lack of Focus 

While working within and consulting to subscription brands, one of the key challenges I have observed is a real lack of understanding of where to focus retention efforts. There can be a desire to optimize all customer interactions for all customer types and this would be fine with infinite resources, but I have never encountered an organization that has infinite resources. So what ultimately transpires is a very haphazard approach to customer retention efforts, with teams often differing to HIPPO syndrome (the highest paid person's opinion). 

Where to Focus Customer Retention Efforts 

There are two key aspects to focus: 

1. Focusing on the right customers 

2. Focussing on the right moments 

Focusing on the Right Customers 

In most subscription businesses, if you accurately calculate Customer Lifetime Value (CLV) you will understand the majority of revenue is generated by around 20% of your customers. If you correctly measure customer value, you will be able to identify the highest value customers who you need to be extremely attentive to, your growth cohort in the middle and your lowest value customers, who you probably still need, but who you only need to provide acceptable CX too. 

If you place your focus on protecting and serving the needs of the highest value customers and developing products and experiences to support the middle growth cohort you will be more successful with your retention initiatives, because they will directly create value and this will be observable in the P&L.  

Specifically you are looking for ARPU (Average Revenue Per User0 Growth in the mid value cohort and churn reduction in the highest value cohort. This is what your CEO and CFO needs to see from Retention and CX efforts, activities that are directly impacting the P&L.  

Focusing on the Right Moments 

Focus also means focussing on the right moments. In any subscription business, there are key moments in the relationship; the first 90 days, or in life when usage drops, an important service issue, the cancel journey - these are all often key moments of truth which require the most focus. Other aspects of the experience matter much less. 

The key is to understand what the most important moments of truth are for your subscription business. You can do this using analytics and data science to understand what happened immediately before a churn event or to identify which types of interactions, experiences or behaviours have led to improved retention. You can also understand these moments through experiential NPS tracking or qualitative research. 

The Path Forwards 

Once you have identified both the right customers and the right moments, you must obsess about those customers and moments in order to drive the most optimum retention and therefore P&L outcomes. This means extensive experimentation and a program of always on optimisation, ideally at a sub-cohort level. As you do this you will see ARR (Annual Recurring Revenue) grow. 

But to do this properly you cannot become distracted by an idea that involves focus on non-core customers or non-core moments, because if you do your impact will reduce, since you will lose focus. 

Case Study - Amazon Prime

One of the best examples of a brand prioritising its best customers comes from Amazon Prime. In 2005, when Jeff Bezos launched Amazon Prime he said “I want to draw a moat around our best customers. We’re not going to take our best customers for granted” and Prime was formed with that mission in mind, to enable the best customers to get the fastest delivery possible. There was a lot of concern at Amazon that this would be a margin reducer and indeed when it first launched it absolutely was. Jeff even acknowledged this at the launch: “We expect Amazon Prime will be expensive for Amazon in the short term. In the long term, we hope to earn even more of your business..” Almost 20 years later Amazon Prime customers are worth 5X more than the rest and the company has grown 30X since the Prime launch, all as a result of protecting the highest value customers and prioritising the moment that mattered most to them, the delivery window.  

Final Thoughts

You must focus your efforts strategically to drive customer retention in subscription businesses. This begins with accurate CLV (Customer Lifetime Value) analysis, do this wrong and you won’t understand who your highest value customers are or mid value growth cohort are. Then it’s about focussing on the moments that matter to those customers to firstly, protect, and secondly, to grow revenues. 

By concentrating on these high-impact customers and moments, you can significantly influence your company's profitability and growth. This focused approach ensures that your retention strategies directly contribute to your P&L, meeting the expectations of your CEO and CFO.