Great article on retention economics
Most people look at retention as something they measure annually – which misses the opportunity to respond to early warning signs in your installed base. So when I read this article over on Chief Marketer I got suitably excited … because it is right on in pointing out how to measure retention using two metrics that are much more immediate:
- dollar retention rate
- replacement rate
Dollar retention rate
A customer who spent an average of $1000/year drops to $50/year. Is the customer retained? She didn’t leave, so traditional retention measures would show no churn. Clearly this doesn’t capture the erosion in value. Instead, use “dollar retention rate,” which measures the percentage of revenue retained over a prior period. So where you may have an 80% traditional retention rate in your best customer segment, if half of those retained drop 95% in value like the example above, your dollar retention rate is only 42% (40% retained at prior value and 40% retained at 5% of prior value). This means you need to replace 58% of your best customer revenue from somewhere else.
Replacement Rate
You had 10,000 customers in your top segment. You lost 500 in the last month. How many new ones entered the top segment? If its 500, you have at least held your ground. Any fewer and you have to account for the lost revenue elsewhere.