Why you are not their favorite?
Maybe you never asked this to yourself :)
Welcome to Orange Owl’s newsletter, where we discuss driving growth, branding, positioning, and everything that makes sense in marketing for companies and marketers. Grab a coffee or matcha and let’s get started ☕
In this edition, we are talking about retaining your users and being their favorite for startups. We are sharing our time-tasted strategies and insights for customer retention to fuel your startup growth and build a competitive moat. Let’s dive in.
Declining CAC and Growing Focus on Customer Retention
The average American has 80 apps installed and checks their phone every 12 minutes. On average, people tend to only use 9 specific apps daily. These apps are “sticky” and are rooted in their habits. The remaining 62 percent of apps are rarely used because they aren’t “sticky” enough. Why is this more relevant for startups than ever?
Customer Acquisition Cost (CAC) has risen by more than 50% in the past 5 years, making it much more expensive to acquire new customers. The ease of creating marketing campaigns has increased, but their effectiveness in attracting new customers has declined, leading to less efficient spending.
As VC funding fuels startups and acquisition costs soar, a key question emerges: where can you find growth and profitability? The answer lies within your retaining existing customer base.
How are you retaining your customers?
If users leave shortly after trying your product, you'll encounter two major challenges:
First Impressions Matter: In SaaS, if users leave quickly, you damage their initial impression, which is critical in a crowded app market.
Paid Acquisition Costs: If users don’t stick around and generate revenue, your ads might become too expensive to sustain.
GOOD and GREAT User Retention across Verticals
Consumer Social: ~25% is good, ~45% is great.
Consumer Transactional: ~30% is good, ~50% is great.
Consumer SaaS: ~40% is good, ~70% is great.
SMB / Mid-Market SaaS: ~60% is good, ~80% is great.
Enterprise SaaS: ~70% is good, ~90% is great.
Credits: KevanLee
When users leave, it's known as churn. The strategies you use to address churn and keep users engaged are called retention strategies.
Key Retention Strategies in Modern SaaS Products:
Personalization: Spotify used tailored playlists to keep users engaged and attract new subscribers. However, with Apple Music bundled into the Apple ecosystem and offering similar personalization features, users have found themselves less impressed by Spotify.
Feedback Loops: Zendesk gained traction by incorporating user feedback into its platform. However, Freshdesk offers advanced feedback integration with AI-driven sentiment analysis, making Zendesk less distinctive.
Loyalty Programs: HubSpot attracted users with tiered rewards and features based on subscription levels. However, Salesforce offers extensive customization and integrations, making HubSpot’s rewards seem less compelling.
Seamless UX: Dropbox provided an intuitive user experience with minimal friction. However, Google Drive offers an even more integrated experience within the Google ecosystem, making it easier for users to adopt and stick with its platform.
There are countless retention strategies discussed on the internet which became irrelevant with time. What's next? What will drive an early-stage startup to achieve unprecedented value?
The most impactful retention strategy we have observed is "building substance”. This same principle explains why many mediocre companies remain unbeatable for decades—like eBay and Craigslist. Despite having poor UX, being disliked by users, and failing to innovate, no startup has managed to topple them.
In SaaS, users stick around because 1) they don’t want to lose everything they’ve built up, and 2) they can leverage their growing status for their benefit.
To build a product that has substance, startups shall focus on:
Building a non-transferable reputation: If an app collects 100,000 feedback ratings on the App Store, you’re unlikely to switch platforms. This valuable reputation boosts revenue by establishing trust with users. Platforms like Yelp, Airbnb, Etsy, and Alibaba use this non-transferable reputation to maintain user loyalty and competitive advantage.
Building a non-transferrable audience: The tactic of building a non-transferable audience is common on platforms like Notion, Discord, and Instagram. Once a startup grows a community of 100K users on Discord, moving them to another platform is tough. If your product offers a marketplace or audience graph, motivate users to develop their presence within it to boost their engagement and value.
Creating Non-Transferable Data: Analytics SaaS platforms like MoEngage, and Amplitude recognize that continuously evolving their analytics tools is essential. Without this evolution, they risk losing the ability to capture new data, which is crucial for advanced analysis. This cycle of ongoing improvement creates immense value for both the company and its users, delivering richer insights and a better experience every day.
Creating Unparallel Advantages: Integrating payments, messaging, cloud services like Stripe, AWS, etc into your SaaS makes switching providers for users difficult. The effort required to rebuild channels often makes staying put the easier option.
Securing marketplace exclusivity: Salesforce's acquisition of Slack and its exclusive integration into their ecosystem created a strong partnership, positioning Salesforce as a primary hub for team communication and collaboration.
How can a startup be sure they are heading in the right direction?
Their guiding compass is Net Revenue Retention (NRR). NRR measures the percentage of recurring revenue retained from existing customers, taking into account expansion revenue, downgrades, and cancellations. It's a crucial indicator of success in retaining and growing your customer base. Here’s the formula:
NRR = [RR beginning of period + expansion RR during period - downgraded RR during period - canceled RR during period] / (RR beginning of period)]
Credits: Google Images, Metricstack
Calculating NRR hinges on having deep insights into the value your solution provides to customers. Once a startup understands this, they can drive upsells, cross-sells, reduce discounts, and fully realize the revenue potential of each account.A higher NRR will naturally follow.
Conclusion
The key takeaway for startups is that customer retention isn't a one-time fix; it's an ongoing process. To remain relevant, you must continuously evolve and adapt to your customers' changing needs and expectations. Successful retention requires consistent effort, regular updates, and a deep understanding of what keeps your users engaged and loyal. It's about building long-term relationships that grow and strengthen over time, ensuring your product remains indispensable to your customers.
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Keep pushing forward!