What is Customer Retention and how is it defined?
Let's jump into understanding what customer retention is, and why it matters, especially for online businesses. This foundational knowledge will set the stage for deeper exploration in subsequent concepts.
What is Customer Retention?
Customer retention measures the ability of a company to keep its customers over a specified period. It reflects how well a business maintains its customer relationships post-acquisition.
For instance, an e-commerce site may consider a customer retained if they make repeat purchases each quarter, indicating ongoing satisfaction and engagement with the brand.
Why is Retention Important?
Retention is crucial for sustaining business growth and profitability, particularly in online models where competition is fierce and customer loyalty is volatile.
Take, for example, a SaaS provider that relies on monthly subscriptions; maintaining a high retention rate ensures a stable revenue stream and reduces the dependence on acquiring new users, thereby lowering marketing and sales expenses.
How is Retention Calculated?
Retention is typically calculated by determining the percentage of customers who remain active over a time period relative to the number at the beginning of the period.
For example, a streaming service might track how many subscribers renew each month versus those who cancel, providing them with a clear picture of their retention effectiveness.
We will cover the nuances of this calculation using cohorts in upcoming concepts.
Takeaway:
Understanding customer retention's what, why, and how lays the groundwork for upcoming discussions on its impact on growth models and the specific calculation methods tailored to different online business models. These insights are essential for any business aiming to thrive in the digital economy.