Growth is a promise, retention is a promise kept.
The reason why growth is the wrong metric in early stage-startups.
Investors love growth; it is an easy metric to understand and measure. Founders love growth because it is easy to communicate and influence to some degree. While growth is a good metric to follow, it is not the most important one in early-stage companies, where I make most of my investments.
Before we start, let’s look into what growth and retention mean:
Startup customer growth is the process of developing a new business for a specific customer segment. For B2C startups, it means new users; for B2B startups, it might mean new companies using the product or the service the startup produces. Growth is a simple metric to follow and understand.
Startup customer retention is the ability of a business to retain its existing customers over a specified period. Retention is harder to measure because you need to understand what makes a user retained. For some businesses, a user that visits the product once a month is perfect (like Gusto for payroll), while for other businesses a user must visit at least once a week for them to count as retained (Slack is a good example of that). In contrast to growth, retention requires a deeper understanding of user behavior. It requires an understanding of the range of behaviors that go from occasional user to avid user. This set of behaviors is often called user engagement and could be looked at as a deeper secondary aspect of retention.
Retention is a much more important metric to follow for early-stage startups because it is a strong indicator of Product-Market Fit. The holy grail of early-stage startups is to find the Product-Market Fit (PMF). PMF means that users love and want to use your product, need your product, and find value in it. Once you have proven PMF, your startup risks are much lower, and you can apply growth strategies while effectively retaining the users you acquire.
Growth marketing is a promise a company is making to their potential customers — “come and try it out, we will deliver great value to you”. Retention (and its secondary metric, user engagement) is the indicator that you are meeting that promise to your customers on an ongoing basis.
So, how do you understand retention?
Understanding retention through user churn
The easiest way to understand and measure retention is through churn. Churn is the amount or percentage of customers that have actively left your service or have passively stopped using it. The problem I have with this approach is that it is often hard to understand why users are leaving, and it is often too late to get them back once they have left. Looking at churn is also a shallow way of looking at retention, which might not give you the depth of understanding to figure out how to fix your retention issues.
Understanding retention through user behavior
The way I usually tackle understanding retention in a startup is to ask the founder, “What is the optimal user behavior of your product?” Do users go every day to do something? Do they interact with others? Do they spend a certain amount of money? How much time is the perfect amount of time to spend on your product each day/week/month?
Once you figure out this behavior, ask yourself how many customers follow that pattern. If most of them do, you have healthy retention; if most of them do not, you still have work to do.
Bonus: Understanding retention through a magical moment
An advanced version of understanding user behavior is figuring out what the magical moment is that turns customers using your product or service into avid customers. What is the first moment they unlock the value? What is the moment that will make them come back?
At Slack, it might be adding a teammate to a new Slack team and sending them the first message. At Twitch/YouTube, it might be subscribing to a content creator. For developer tools, this could be the first time you successfully call an API.
User analysis shows that once a customer experiences this magical moment, they are much more likely to retain and become an avid user. Understanding how to get the user to that magical moment is key to improving retention.
Make sure you can keep the promise before making it.
In essence, spending resources on growth without retention is like pouring water into a leaky bucket. It is easy to understand that you need to fix the holes in the bucket first, and then pour water into it.
While this is common sense, I hear endless stories of startup founders spending millions of dollars on user acquisition, only to lose these acquired customers when they churn. It’s a great deal for Google, Facebook, and other advertisers, but less so for the startup and its investors.
To conclude, you should deeply understand the desired vs current behavior of your customers. Make your product better until you have strong engagement and retention. Only then should you move to the delightful stage of a growth startup.
