Product Insights
Retention or Acquisition: How Do You Know?
Last week my colleague Christy Hollingshead and I hosted a webinar on how a better product strategy can help customer retention. On the heels of that webinar, I’d like to announce a new eBook: The Heap Guide to Retention!
The Heap Guide to Retention expands significantly up on what we covered in our webinar. It explains why retention is the best measure of product-market fit, walks through the different ways to measure retention in your product, and offers many, many strategies for increasing retention throughout your customer journey. We recount how we homed in on Heap’s current retention metrics, and outline a few retention-based experiments we’ve run in our product. Check it out!
Learn all about Product-Market Fit here!
To coordinate with the eBook launch, I wanted to address a question that came up towards the end of our webinar, one I’ve certainly faced as a PM. What makes this question so useful is that it touches on a number of ways a PM operates within the org as a whole; it’s not just about your product, it’s about how PMs go about making decisions in general. It’s this:
Would you prioritize retention over acquisition? How can you make this decision?
As I said, this question is interesting because it addresses the PM’s larger role in the organization, not just their role relative to the product.
The quick answer is that the choice of retention vs. acquisition isn’t an either/or proposition. A good PM should always be thinking about both; the question is more how you balance between them.
Balance = Business Strategy
So how do you do this? Well, as a PM, you’re responsible for developing your product, but you’re also responsible for knowing what makes your business viable. So the first rule in deciding what to prioritize—retention or acquisition—is to understand your company strategy. If you’re a very early-stage company, for example, it makes less sense to devote significant energy into retention. Your first order of business is to convert prospects into customers. As your company matures, you can start balancing features to improve both acquisition and retention.
That said, knowing when to start pivoting towards retention can be tricky. And doing that requires you to know something about business metrics. One important metric to keep your eye on is CAC (Customer Acquisition Cost) ratio. CAC ratio is the amount Sales and Marketing need to spend to acquire $1 of new ARR.
As an example, a recent report researched over 400 private SaaS companies and found that the median CAC was over $1.14. That means that most of these companies spend at least $1.14 in sales and marketing to acquire $1 of new revenue in a year.
If your retention rates are good and your customers renew, a CAC over $1 might be fine. (If you pay $1.14 to gain a customer, but they give you $1 per year for three years, you come out ahead.) However, if customers don’t renew—if your retention rates are poor—you’re in trouble. In this case you are literally losing 14 cents per dollar every time you acquire a new customer. And that is a recipe for a failed business.
Indeed, if you have a retention problem, CAC will drown your business. That’s why it’s your job to understand these metrics and the ways they affect your company’s larger business strategy. Only then can you prioritize intelligently, whether that means adopting an all-hands-on-deck approach to acquiring new customers or developing a longer-term focus on providing ongoing value.
The Product Lifecycle
Note that the consideration is similar if you’re in a company with multiple lines. In this case, your product strategy is also informed by business goals, and can differ from product to product. If you’re working on a newer product, the goal might be to acquire new users as rapidly as possible. For a more mature product, your focus might be to decrease operational costs.
The big point is that balancing retention and acquisition is really a matter of ensuring your product executes your company’s larger business strategy.
The PM’s Special Insight: Usage
As a PM, you have special insight into this issue. This because product data usually gives advanced signals on whether a customer is likely to churn. Service cancellation is a lagging indicator of dissatisfaction: when a customer cancels their contract, all you know that they didn’t get sufficient value from your product.
If you’re tracking customer behavior, however, you already know which actions correlate with ongoing retention. (See The Heap Guide to Retention to learn how!) If you have a social product, that action might be “posting six photos in the first two weeks.” If you’re running an e-commerce site, it might be “making a repeat purchase within a month of a first purchase.” For a SaaS product, it might be “sharing three reports in the first month.” And so on.
As a PM, the real-time insight you get into whether people are taking those actions gives you on-the-ground information about the health of your product. If you know users are not doing actions that correlate with retention, you’ve got a leading indicator that they might churn. This provides you an opportunity to proactively run experiments aimed at getting them to stay.
Cures from outside the product
The final thing to note is that improving retention is not always a matter of fixing something in the product. Churn can be caused by multiple reasons, many of which lie outside the product. Maybe a new competitor offers a similar product at a lower price? Maybe your customer is going through a business transformation and needs to cut cost?
Because these things affect retention, it’s your responsibility as the product owner to know about them, since they affect your ability to make your product a success.
A good strategy for this is to keep in touch with your account managers or customer experience team, who can give you detailed explanations on why customers churn. At Heap we have quarterly reviews with our AM team to make sure we understand why customers are churning and what we can do to fix that, both within our product and outside of it.
Final thoughts
Knowing how to balance priorities between acquisition and retention requires a PM to pay attention many signals: business objectives, product usage, market shifts, and more. These are best tackled by a combination of qualitative and quantitative approaches.
I encourage you to read The Heap Guide to Retention, or to get a demo to see how Heap can help you prioritize improvements to your product!