Episode 3 - The 3 Most Important Customer Retention Metrics

Welcome to this third episode of the Retention Blueprint. This newsletter promises to transform your retention impact in just 5 minutes per week, providing digestible retention content that adds value every time. This episode focuses on retention measurement. 

Common Retention Measurement Problems 

Most brands are either overflowing with reporting and data and have no idea where to focus or they focus on aggregated metrics, which means they cannot see underlying trends. Commonly, senior leadership does not understand the drivers of trends and makes decisions based on high-level information, which can sometimes contradict what the team at the coalface knows about what is happening. In some cases, brands also measure key retention metrics, like CLV or churn rates, incorrectly or in ways that don't allow for accurate data-driven decision-making. Some common problems include

• Focus on short-term transactional metrics OR big-picture financial metrics only

• Not undertaking customer accounting at all 

• Not measuring relationship metrics or doing so incorrectly  

• Not breaking out early life churn (<90 days) from in-life churn (>90 days) 

• Not measuring the incremental impact of retention initiatives  

• Not measuring earned growth rates 

• Measuring cost per acquisition without measuring value per acquisition  

• Not measuring CLV at all or are mis-measuring CLV    

• Not celebrating customer heterogeneity (aggregated, one-size-fits-all approach) 

• Not measuring CX at all OR measuring CX for everyone (a losing game since it is not cost-effective to design optimal customer experiences for everyone) 

In reality, only three retention metrics matter should matter to leadership: 

1. Churn rates 

2. Customer Lifetime Value (CLV) 

3. Incrementality 

All other metrics (NPS, earned growth, value per acquisition, retention decay curves) should still be measured as inputs into the three core retention metrics, viewed intermittently by leadership and monitored regularly by teams at the coalface, but the 3 key retention metrics are all leadership need to understand business health (churn rates), customer value (CLV) and the impact of your retention initiatives (incrementality). 

The three key retention metrics are also all relatively easy to set up (although when correctly calculated, CLV requires some relatively complicated calculations).

Churn Rates 

Of course, if you are reading this newsletter, you should have a pretty good idea of what churn rates are: 

#Customers lost in period/ #Open balance customers in the period. 

If you are a brand with high customer turnover, you might measure the adjusted churn rate: 

#Customers lost in period/ #Avg customers in period (opening balance + closing balance/2)  

The key is to understand that aggregated churn rates are generally poor indicators of business health and, frankly useless for driving action. To be effective, churn rates need to be analysed by tenure, cohort, and value. 

Tip 1: Split In life and Early Life Churn Rates 

For example, if you launched a new product, you might see a big spike in your aggregated churn rate; this may immediately make leadership conclude that the new product has yet to be successful and re-evaluate the product strategy. However, this is because churn is always the highest in the first 90 days. Therefore, it is critical to separate churn rates in the first 90 days from churn rates post 90 days and analyse your new product's first 90-day churn rate vs your existing product's first 90-day churn rate. When you do this, you will likely find your product more successful than the existing one since new customers for new products often have the closest product-market fit. 

Tip 2: Split Churn Rate by Value Cohort and MRR 

The days of top-line subscription growth to drive higher valuations are over; markets are now extensively focused on profitability. While your aggregated churn rate may be high, the business may be very healthy if your high-value customer churn rate remains low and your Monthly Recurring Revenue (MRR) churn rate is low. In this scenario, you will be losing low-value customers. It is therefore critical to understand how your churn rates split by both CLV value cohort and MRR.

To have a proper understanding of business health, subscription leaders should look to delve deeper than aggregated churn rate and break churn down as follows:

Customer Lifetime Value

Many Retention Marketing, Service, and CX teams need to prove the impact of their work. Even campaign metrics (like incremental impact) or NPS are only helpful if they are plugged into the P&L. The key is to ensure that measurement frameworks are based on a holistic view of the financial impact of Retention Marketing, Service and CX actions and that those frameworks are built with the finance team.   

Done correctly, Customer Lifetime Value (CLV) provides both the tool to justify retention actions and the framework to optimise business outcomes for short, medium, and long-term business value.  

The problem is that most brands measure CLV incorrectly. According to an unofficial source at Forrester Research, 80% of brands claiming to measure CLV do so incorrectly. 

If you ask ChatGPT to provide the CLV calculation, you get this:

This equation is wrong because: 

1. It bases customer lifespan on churned customers 

2. It bases purchase frequency on historical behaviour 

3. It bases average value on historical purchases

4. It does not include network impact

CLV is a forward-looking, predictive metric that measures the present value of future revenues attributed to your existing customer base. It should not be confused with historic profitability per customer. While historical profitability and future predicted profitability are included in a current customer's individual-level CLV metric, at any moment, commercially, all that matters is the predicted future value of the current customer base. 

Correct CLV measurements include: 

1. Tenure: How long the customer relationship has lasted and is predicted to last

2. Volume: Number of transactions previously and predicted in future 

3. Value of transactions (ideally margin*, can also be revenue)

4. Non-direct behaviours can result in transactions from other customers or prospects, primarily referrals, but can also include other metrics like posting reviews or content consumption in some businesses. 

Incrementality 

Simply put, incremental impact is an action's effect on behaviour vs. the likelihood for that behaviour to happen anyway. Systematically understanding the impact of every action you take on customer behaviour is critical to driving retention—helping you grow tenure, reduce churn, increase upsell, cross-sell, or NPS. This is done by leveraging control cells not exposed to your retention action and comparing the outcome metric in both those exposed to your action and those in your control group. 

Final Thoughts 

The key is to understand that customers are born to you with a baseline Estimated Customer Lifetime value (ECLV), based on the fit of your product or service to the customer's needs. The ECLV baseline will vary based on other things in their life (which you have no control over - more on this in future newsletters). You will also have different customer cohorts with varying levels of baseline ECLV based on customer-product fit. The key is to understand what your baseline ECLV is (accurately!), understand how your actions impact it to grow CLV (incrementality) and ultimately, what that means for business health (churn rates).   

References

(1) Fader, P. (2020) Customer Centricity. Wharton School Press. 

(2)  Fader.P. & Toms.S,  (2018) The Customer Centricity Playbook. Wharton School Press.