Episode 43: Retention Economics

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📰 Top Story The Economics of Retention

Gaining buy-in for retention investment and demonstrating your impact are two sides of the same coin.

But ultimately, exco members want to see that what you're doing either is driving the P&L or will do so in the future.

To do this, there are essentially three steps:

1. Identifying where your retention initiatives can or do have the most impact

2. Identifying KPIs to measure and forecast impact 

3. Extrapolating KPI impact to the P&L 

Identifying where your retention initiatives can or do have the most impact

Retention is driven by the retention hierarchy of needs (see episode 20): your product proposition, what you offer to whom at what price, who you attract, and how you handle retention at moments of truth.

Often, retention teams aren't responsible for the core product offer or acquisition but must focus on driving retention within these parameters. 

In this context, the most effective way to improve retention is to identify and optimise customer retention moments of truth. 

These are key moments in the first 90 days, when usage drops, when customers experience service issues, or when customers enter the cancel journey. You can identify these moments by:

1. Analysing interactions common to customers who aren't retained

2. Researching how customers realise value in your product/service

Read more on moments of truth in episode 37. 

Measuring/Forecasting Impact

Once you've identified moments of truth, you must build a measurement framework to prove how your initiatives have moved or will move the retention dial:

1. Identify which KPI you're improving for each moment

2. Prove the impact by removing noise to demonstrate results (e.g. by comparing like-for-like cohorts) 

Different moments will have different KPIs. For example, the first app open is a key moment where you want to reduce bounce rates and get customers to complete their first mission. 

For streaming apps, how quickly users find something to watch is critical, which is why Netflix focuses on personalisation.

Once you have identified your moments of truth and the KPI you are seeking to move, there are essentially three ways to measure the impact of your retention initiatives, and they sit in priority order: 

1. Control groups - Comparing the KPI performance of a proportion of customers not exposed to your action vs those exposed

2. A/B testing - Changing the experience for some customers while leaving the existing experience for others

3. Pre/post analysis - Examining behavior before and after your initiatives while normalising for other factors

Building Leadership Confidence

Once you've identified moments of truth and KPIs to shift, you must build confidence with leadership by translating what you have done or plan to do to hard financial metrics that your CEO and CFO demand.

This is where many marketing and CX teams fail. Judging your own homework can be mistrusted, and focusing only on improved KPIs often gets a "so what?" response.

So, at this stage, it is vital to work closely with your finance team to build confidence. 

This can be done by extrapolating the impact on the KPI to financial impact or by demonstrating the cumulative impact of your program on customer lifetime value. 

For more details on CLV, check out episode 26

Or reach out to me for a pack explaining how I proved to a CEO how CRM Marketing drove an 8-figure incremental impact (email [email protected]  if you want this pack).

Six B2B SAS Case Studies

Here's how six different B2B SaaS brands drove their P&L by identifying moments of truth and optimising retention:

• Slack measured the impact of feature adoption on retention, finding that teams that used integrations had a 93% lower churn rate than those who didn't. This translated to millions in preserved revenue and informed their R&D investment priorities.

• Hubspot publicly shared how, through customer success initiatives, it reduced churn from 3.1% to 1.4% over four years.  

• Adobe's transition from perpetual licenses to a subscription model shows retention economics at scale. They documented how retention improvements drove their stock price from $30 in 2013 to over $300 in 2020, with recurring revenue growing from 30% to over 90% of total revenue.

• Dropbox published data showing how their referral program not only acquired customers but also improved retention by 15%. They quantified that referred customers had a 20% higher lifetime value than non-referred customers.

• Zoom - Released information about their net dollar retention exceeding 130%, showing how expansion revenue from retained customers fueled their growth. They specifically measured how improved onboarding reduced early-stage churn by 60%.

• Shopify shared how their retention economics work, noting that merchants who stay beyond 12 months tend to remain for 3+ years, with each additional year increasing their platform spend by approximately 30%

What I love about B2B SaaS is their focus on retention and their deep understanding of how critical it is to grow, because, unlike some B2C brands, they are very conscious that their market is finite. 

In the next few weeks, I will launch episode 2 of the Customer Retention Show, featuring a panel of B2B SaaS retention experts: a must-watch for retention folks in any sector. 

Subscribe to my new YouTube channel so you don't miss it!

Final thoughts

Connect your work directly to financial impact if you want leadership buy-in for retention initiatives.  

Start by identifying key moments of truth, forecasting the KPI improvements you expect, and measuring and linking those changes to hard P&L outcomes. Use control groups, A/B tests, or pre/post analysis, and partner with finance to build credibility.

When you speak the language of the CFO, you don't just get buy-in - you get momentum.

Until next week,

Tom

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