Most people think retention is so crucial simply because it means you lose fewer users than you otherwise would. Though this is true, it misses the critical point. Retention is the core of your growth model and influences every other input to your model. This is important because if you improve retention, you’ll also improve the rest of your funnel:
1. Retention drives acquisition. For many products, especially those that grow through virality or user generated content (UGC), retention has a double effect. As you retain more users, those additional users take more of the key actions that accelerate acquisition, either through sharing, inviting, word-of-mouth, or creating content. As more of those new users retain, more are acquired – improving retention sets off a self-reinforcing cycle that drives acquisition.
2. Retention improves monetization. When it comes to monetization, two important things happen with improved retention – you can retain a larger proportion of a cohort, and in doing so, make more money from that cohort within a given period of time, and you can increase the length of time that a cohort retains, increasing LTV.
3. Retention builds an acquisition competitive edge. As you increase retention, monetization, and LTV, you can pay more to acquire a customer. In doing so, you can push competitors out of acquisition channels, open up new channels that were previously too expensive, and grow faster.
4. Retention accelerates payback period. Payback period is the time it takes to break even on the cost to acquire a customer. It also determines how fast you can start reinvesting in acquisition to fuel growth. Improving retention can help shorten your payback period to grow faster.