If I get to pick one metric or one graph to look at for any business, big or small, to determine if the business is in a good shape, I will look at the retention metric and the corresponding retention curves. Retention is the NUMBER ONE thing that every business should look at, any business from early startup to established companies. For early stage startups, retention curves can tell you if you have product-market fit. For established companies, they can tell whether the businesses are growing. There are three important elements when we look at retention curves that are particularly useful for the companies.
- Customer and revenue retention
We should not only look at the % of customers that are coming back at a regular time interval, but the amount of money they spent with the company. A retention curve that looks like the first graph below means that your company does not have product-market fit. You will eventually lose all customers you have acquired. A retention curve that looks like the second graph below means that there are a certain % of customers you acquired who will come back to visit/purchase again and again. Your company has product-market fit. Here is a blog post that shows how to construct a retention curve.
- Cohort retention
Cohorts are group of customers that share a common characteristics. Frequently used are cohorts that start interacting with the business at the same time, for example, customers who made their first purchase in 2019. Cohort analysis is very important and also actionable. A change in the behaviors from cohorts to cohorts can indicate some strategic moves of your business is making an impact. From the chart below, we can tell that customer retention has been improving from 2017-2020. Something changed in 2020 that has significantly increased the customers’ retention. Further investigation will be needed. Some hypothesis could be a significant improvement on user onboarding/first time use experiences, increase of product selections from retailers etc.
- Smiley faces
A retention curve that looks like a flat line is a good thing. An even better retention curve is a smiley face, which means that your customers are visiting at an increasing frequency or spending more money. Your company is growing.
In any case, a retention curve is very much revealing of the health of any business. So much to do to get to a smiley face retention curve, it is a state that any business would like to be in.