How to think about Retention in a subscription business?
Finding customers (Acquisition), collecting payment for premium products (Realisation), and ensuring that customers don’t go away (Retention) are the three pillars of any subscription business. Together, they determine the entire top line of the business.
I have written this article on retention with subscriptions in mind but some of the principles are generally applicable for any business.
What is Retention?
Customer Retention in most subscription businesses is measured in terms of renewals. If subscriptions for 100 people end today, and 60 of those renew it in the next 7 days, D-7 retention of the business is 60%.
7 days can be treated as a “consideration window” for the customer to make their decision. Technically speaking, a consideration window can be any duration as long as the business doesn’t incur an acquisition cost in reactivating that customer. But this is very hard to figure out in practice so most businesses use some other way for determining this window. One good way is to ask “How long a break from your product is acceptable?’
The Retention Problem
Higher retention has many benefits for a business:
1 — It proves a strong Product Market Fit
2 — It ensures that there is a larger base of paying customers
3 — It increases the average Life Time Value of the customers thus allowing more flexibility with average Customer Acquisition Cost.
At the same time, poor retention is like a massive leak in the vessel which puts everything into question. Why are people not staying with us? — Does our product suck? Is the experience horrible? Are we not able to deliver value?
Compared to acquisition where the primary question is “how to explain value” retention problem requires a much deeper investigation.
Here is what a Product Manager can think when thinking about retention.
When are customers lapsing?
Contrary to the common view, customers don’t lapse when they do not renew. Customers lapse when they stop using/caring about the product.
In such cases, these customers don’t even reach the consideration window to make their decision. They might have already made up their mind and possibly deleted your application before their subscription ends.
It is critical to acknowledge this and keep a tab on inactive users and have strategies/product interventions to re-engage such users. For a product manager, it is also important to understand why users are lapsing in the middle of their subscription.
How are customers deciding about renewal?
For those who actually reach the consideration window and think about renewal. What do they really look for? Of course, VALUE!
But here is the thing — humans do not think about “value” in a scientific way and therefore it will be different for different people.
I would say that there are 3 factors in the value equation that determine the renewal decision: Rational, Irrational, and Emotional.
1 — Rational Factors
How do we determine “value” rationally? Past-Usage, Past-Experience, Results, and Relevance
Usage and Experience are the most well-understood criteria here. Why will I renew a subscription of a product that I did not use/like using? Improving usage and experience should be very high on the PMs list of priorities.
But there are two deeper parameters that also determine value: Results and Relevance.
Result: Did I get the benefit that I thought I will get from this product? Let us take the case of a young manager who subscribes to Harvard Business Review hoping that it will improve her management skills. She may have read and enjoyed reading all the articles, but she will only renew if she feels that there is some improvement in her management skills because of HBR.
The end results for the users may not always be evident but it is important to understand and measure this for the long-term success of the product.
Relevance: Is this product still useful for me? Sometimes delivering results may actually come in the way of relevance. Take an example of a Language Learning App. A superuser will soon cover all the basic modules and will now seek advanced modules and if these advanced modules are not available, the user will move on to something else.
It is important to understand how the usage of the product will alter the needs of your users and build enough selection that can keep users engaged for a long time.
2 — Irrational Factors
In this case, the parameters for judgment largely remain the same as the rational ones. But, our judgment itself is clouded by cognitive biases. There are many many biases that can affect the decision of a user. A lot of them are listed in this book.
Recency Bias is one of the most common ones that I have encountered. When users look back to determine usage/experience, rather than rummaging through their entire lifecycle, they reflect upon the last 7/14 days to make their decision.
How do you navigate such biases is critical for the retention?
3 — Emotional Factors
There is no one who doubts the relevance of emotions in making a purchase decision. But not many conversations on retention involve an exploration of the emotional aspects of renewing a subscription. IMO, it is equally relevant.
Let us take Instagram for an example. If you ask someone — Why don’t you quit Instagram? — you won’t hear many people saying that they will no longer be able to apply filters to picture and post it? You will rather find reasons such as — I will miss on updates from all my friend, I will lose all the pictures that I have shared or I will lose my celebrity status/ my followers. Whatever it is, for most people it is an emotional barrier (and not the utility) that prevents them from moving out of Instagram.
“What will I lose on other than the utility of your product, if I happen to stop using it? Is it strong enough to trigger an emotional response of loss?” This is an important question that any product manager focusing on retention should deeply reflect upon.
Retention is the most important metric when we think about customer orientation of an organization. It tells us that our business is relevant for the customer and also validates the successful execution of the product.
But solving for retention is one of the toughest and possibly most exciting problems. How do you go about it? What do you think about when you think about retention?
Let me know at vishweshwar.vivek@gmail.com.
