It is often noticed that entrepreneurs talk about repeat usage by customers, or customers coming back to the platform, or customers transacting more than once in a month or two, depending on the business model. When they claim that the repeat usage/retention percentage is high in the case of consumer tech companies, it is observed that the immediate conclusions are made with positive comments. Here, I have explained why customer retention is not the only factor to measure the growth of a consumer tech start-up.
High customer retention in a consumer tech start-up — Good enough?
To give a blinder yes, it sounds super!
But, how do you develop a perspective on such statements as a founder or an investor, while measuring the growth of a consumer tech start-up?
This is a debatable statement until you don't get the facts right. To build a relatively fair perspective there are various factors to be analyzed and multiple questions to be answered.
Some of them, I have personally experienced:
1. What if the retention is absolutely positive, but new customer acquisition is minimal, month on month? Such cases are to be categorized as flat business models, not growth-oriented ones. Measuring growth here, means that the retention rate should be decent enough while the growth rate of consumers month on month should also be parallel. When I say retention rate, it means, repeat customers, or customers coming back to the platform, or customers transacting multiple times within a stipulated period.
2. What if the retention rate is high, the consumption growth rate is decent, but the CAC (customer acquisition cost — expense made to acquire a user) is high? Considering the recurring nature of business, reaching the break-even point, and then managing profitability are the most important factors. One way to go about this would be to increase the price of the value offering; but when users have become comfortable at a particular price point, it is difficult to drastically increase the ticket size (pricing) of the product without hitting negative retention numbers. Seeing as this is, keeping proven consumer behavior in mind, the pricing strategy has fallen flat, and cannot be reconciled easily.
3. What if retention, CAC, and consumer growth are decent but the fixed cost and other variables are relatively, explicitly high, and cannot be controlled by any means? In such situations where the operational profitability remains flat leading to a weak business model, all the above factors fall flat. For any business, failing unit metrics indicate to a failing business model.
Good retention rate might be a celebrated term for businesses across the world, but it is highly dependent on factors such as month on month customer growth, cost of customer acquisition, overall recurring expenses, realistic profitable business projections, and many more (some of which I will cover in my next article).
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