7 User Retention Misconceptions Your Should Avoid
And how to rethink your startup retention strategy.
Working on user retention is probably one of the toughest and at the same time most important areas of any startup's growth strategy. At the same time, it is also one of the most misunderstood and usually incorrectly interpreted areas based on my experience working with various companies.
Because it's long-term, company teams usually look for shortcuts or report incorrect data, which further exacerbates the problem (hello, “churn rate”).
So, to put things into the right perspective about user retention, I will focus on demystifying some of the core misconceptions I've observed teams have about it and provide my view on what the reality actually looks like.
Let's deep dive.
How important is retention actually?
Even famous growth experts like Brain Balfour believe retention is the key for growth.
No matter what stage you are at (addressing post-Product Market Fit (PMF) startups here), regardless of your team's size or your funding, you should be working towards improving user retention.
“It's one of the key metrics a VC looks at when assessing your startup. No one wants to invest in a startup that only focuses on filling the top of the funnel without a strong customer Recurring Revenue (RR) and Lifetime Value (LTV).”
To make it even simpler to assess its long-term impact, below is a simple data model structure, showing what opportunities you are missing if you don't put your focus on user retention.
Lets look at 2 examples
If you've acquired 20% of your TAM (1,000,000 in our example) and you retain just 10% annually and charge $120, you will have around $2,400,000 in revenue. But look what happens if you maintain the same price and market capture percentage, but double down your focus on retention and increase it by 20% → you increase your revenue by 3x (or $7,200,000 in our case).
Let's say you believe acquisition is more important and prefer to focus on capturing a larger percentage of the market. Suppose you aim to dominate the market by owning 65% of the TAM, but still think a 10% retention rate is sufficient. You will end up having around $7,800,000, but I can guarantee that acquiring such a market share, will require a lot of more resources in order to sustain it. Also, you are more prudent to external factors ( more competition, higher cost etc. ) that can diminish your market dominance.
What are common misconceptions I`ve encountered over the years?
1. User Acquisition is More Important Than Retention
This is a common misconception I often see and hear. Many still believe that a high quantity of users equates to progress and success, and that it's the most effective way to grow a startup.
In reality, while attracting new users is crucial, retaining current users is often more economical and beneficial over time (especially for those wary of becoming overly dependent on paid marketing). Existing users are more likely to make repeat purchases, recommend the product or service to others, contribute greater lifetime value, and offer essential feedback on the product. This is why topics like Product-Led Growth (PLG) are so important these days for every business to understand and invest in for the long term ).
2. Users Sticks by Default
A personal favorite point: I often hear the misconception that just getting users through the front door, either by downloading our app or signing up, is enough and will solve the retention problem because they are already “into it.” This is a misguided belief.
There are numerous steps a user needs to take after signing up, like experiencing the product's core value proposition, building a habit around it, and staying engaged. It's crucial for startups to dedicate resources to efficient onboarding processes and develop captivating experiences that encourage users to return repeatedly. Personally, I believe it's essential to assist users in forming a habit centered around the primary functionality of the product.
3. One-Size-Fits-All Retention Focus & Strategy
“All I need to do is define a retention strategy across all my cohorts, right?” Not exactly. No business has only one type of user. You should segment your user personas and analyze user data to build tailored retention and engagement strategies.
Not every user needs a reminder about their activity at the same time and with the same frequency.
The type of content (promotions, new features, etc.) might not be suitable for all users, especially in businesses like subscription services or sectors where users require more significant purchase decisions and motivation (e.g., buying a car or a house). It's important to understand what stage of product usage and engagement each user is at.
Some users prefer in-app engagement, while others are more responsive to email. Identifying these preferences is crucial, as these are all small but significant steps towards long-term retention.
4. Retention is Solely a Product's Responsibility
There is a notion that, just because user retention is closely associated with product usage, all responsibility should fall entirely on the product team.
Effective retention is actually a collaborative effort involving multiple departments. For example, a marketing team can re-engage users through targeted campaigns, while the customer service team can enhance user satisfaction. Each team plays a unique role in building a cohesive retention strategy. This is why user retention is the hardest metric to move, as it requires constant engagement.
5. Discounts & Promotions Are the Best Retention Tools
If you rely solely on strategies like discounts and promotions to see an "instant" spike in user retention, you are likely to fail fast. Such quick hacks are often suggested by those who have not deeply worked on retention. While I don't reject the inclusion of discounts and promotions, they are not the primary driver.
Discounts may temporarily increase engagement, but they are not a sustainable long-term solution for retaining customers. A more effective approach is to focus on improving the value and user experience of the product, which fosters deeper and more enduring loyalty. Building a robust value proposition is far more effective for retention than depending solely on pricing tactics. This approach ensures customers remain for the inherent quality and benefits of the product, not just for financial incentives.
6. Retention Efforts Don't Need to Evolve
The other big misconception I've observed is that once you nail your user retention rhythm and strategy, you don’t need to "look back" and that things will always improve. This is incorrect, considering that "user habits" change, the "market" changes, and your "competition" changes.
Retention strategies must adapt to the dynamic nature of user preferences and market trends:
A startup may initially retain users with feature-rich email campaigns, but as user behavior shifts towards mobile, adapting with a mobile-first communication strategy becomes essential.
A retention strategy that worked in a market with few competitors might lose its effectiveness as new players enter the space, necessitating a more innovative or personalized approach.
Therefore, it’s important to regularly analyze user feedback, market data, and engagement metrics. This continuous evaluation and iteration ensure that retention tactics remain relevant and effective in the constantly changing startup landscape.
7. High User Retention Rates Signal Market Fit
This last point can be interpreted differently by different people, but the main idea is that you should not solely rely on user retention as the only source of truth for market fit.
Retention rates are indeed a critical metric, but they don't single-handedly validate market fit for several reasons:
Narrow focus on current users → Relying only on retention rates can lead to a limited understanding of the broader market and potential new user segments.
Ignoring scalability and market dynamics → Retention doesn't necessarily indicate a product's scalability or its ability to adapt to changing market conditions.
Competition and evolving market trends → A high retention rate doesn't account for competitive forces or shifts in market trends that could impact future success.
Overreliance on a single metric → Using retention as the sole indicator of market fit can overlook other vital aspects like customer acquisition costs, lifetime value, and overall market demand.
The goal in addressing this misconception is to encourage a more comprehensive evaluation of market fit. This involves looking beyond just retention rates to include a broader market analysis and consideration of the product's long-term viability.
Conclusion
I'm sure there are more misconceptions around user retention that need to be avoided to achieve a higher retention rate, but I consider these to be some of the key ones, based on my experience working with and advising startups.
Retention is the silent killer in any startup. Ignoring it in the long term or focusing on what doesn't matter can jeopardise a startup's survival.