What is a retention curve and how to analyze it to improve customer retention rate

ProfitWell Aug 20 2021

As you continue gaining new users, wouldn't it be great if your retention rate also increases? 

Customer retention, more so for SaaS companies, is a crucial part of growth. However, knowing this and actualizing it are two different matters. Therefore, it's essential to monitor retention metrics to gain insight into the steps you need to take to improve retention.

In this regard, preparing retention curves is an essential practice. If you're a startup and it's your first time monitoring retention, don't worry. This article will teach you all there is to know about retention curves.

 

What is a retention curve?

A retention curve is a chart that reflects user retention over a specific period of time. It's an essential tool that helps you understand customer retention and plan your marketing campaigns for better results. 

 

3 most common retention curve types

There are many different types of retention curves that you can use. Each focuses on different aspects of retention, including churn. However, the three most common ones are:

1. Flattening curves 

This type of curve reflects the number of customers who remain active until they become inactive. In other words, a flattening curve shows how long customers use your service before they unsubscribe or don't return. 

2. Declining curves 

Declining curves show the number of customers who leave your service in a specific time period. This may be daily, weekly, etc. 

3. Smiling curves 

A smiling curve provides insight into the number of customers who remain active throughout their subscription. It's often regarded as the ideal retention curve since it shows how many active users you have. 

Using cohort analysis to measure & analyze retention charts

One of the most informative business analytics tools you should know as a business owner is cohort analysis. Using it gives you insight into the user behavior of various customer segments. With this insight, you'll then be able to improve user retention.

How to perform cohort analysis 

Cohort analysis isn't just a simple practice. There are several steps you need to follow. 

Step 1: Define your cohorts

A cohort is a group of customers who share a common characteristic or experience. To perform cohort analysis, you'd have to define specific cohorts that reflect the behavior of the users you want to monitor for retention. 

Step 2: Define retention metric and date ranges

The next step involves defining your retention period. For instance, you could keep track of users who remained active for more than 90 days or those who left in less than 30 days. It's also essential to define the time periods that reflect user activity before leaving the service.  

Step 3: Graph the data and analyze curves

Finally, you can graph your results to determine whether there are any significant trends. Also, take note of the types of retention curves you get after analyzing your data. With this information, you can then devise a marketing strategy for each curve to improve the user retention rate.

Types of cohort charts 

There are different types of retention charts you can create:

  • Segmented Cohort Chart - Such charts are essential for customer retention analysis. You'll get a better understanding of the lifecycle of each user segment and how to improve their loyalty. 
  • Line Chart - This type of chart is best used to determine the average monthly active users over time, one at a time. 
  • Bar Chart - A bar chart is an easy way to track your daily active users over time. It also allows you to know how much your overall user base changes each month. 

What cohort analysis does for your product 

The primary benefit of performing cohort analysis is that it helps you identify your most active users over time. This provides a lot of insights into customer behavior and their potential reasons for leaving the service.

By collecting all this data, you can now identify key performance indicators (KPIs) to track your user retention rate. 

Creating a retention graph: 6 most common mistakes to avoid

When performing cohort analysis, there are some key mistakes that you should avoid. 

1. Poorly selected user cohort 

It's important to have a specific user group for creating your retention charts. Make sure you choose one that reflects the lifecycle of each customer segment. 

2. Forgetting to eliminate users who churned 

Using a larger cohort could include users who left during the first days of your service, thus skewing results. 

3. Ignoring the cohort view of the retention curve 

It's important to draw a cohort retention graph instead of a simple consecutive month retention chart. You'll get a better idea about your users' behavioral patterns over time and improve your product for each behavior.

4. Bad date ranges 

If you don't define your period parameters well, it may skew your results and show inaccurate active users. 

5. Ignoring early cohorts 

While it's essential to track users who are most likely to churn, it's also important to keep tabs on the early cohorts. 

6. Not considering all user activity 

If you want a better idea of why customers leave your service, you should look at all their actions before they decide to quit. 

Predicting retention curves

One of the practices that can help you achieve better retention is predicting your retention curves in advance. This will help you pinpoint problem areas and address them, thus increasing your retention rate. 

Find the average retention curve 

Break down your entire active user pool into many smaller groups. You can do this by dividing them into cohorts based on their date of birth. Do this for each of the past few years, and note how retention has changed over time for each group.  

Analyze existing cohort data 

Analyze data for past cohorts to determine the reason behind their fall in retention rate. By doing this, you can pinpoint problem areas and address them in the future.  

Use MCMC method

To create a useful retention curve, you have to use the Metropolis-Hastings Markov Chain Monte Carlo method. This is one of the most accurate methods for performing cohort analysis and predicting retention rates over time. 

Best ways to improve customer retention rate

Although there are numerous tactics you can use to achieve long-term retention, the best ones include:

1. Improve customer experience and engagement 

If you provide your customers with a better experience, they might be more likely to stay with the service. In addition, by improving engagement and retaining your customers' interest over time, you can increase the customer retention rate. 

2. Focus on the main contact points 

Each contact point provides an opportunity to win back customers who might be planning to leave the service. Examples of such contact points include social media, app stores, email campaigns, blog posts, and newsletters, etc.   

Determine your primary contact points and put your focus on them to increase satisfaction and engagement.

3. Detect and solve problems with your product 

By looking for problem areas and addressing them, you can lower the churn rate. Usually, the most common problems relate to poor customer support and a lack of new features.   

More importantly, you should listen to your users and fix their problems by adding new features or improving existing.  

4. Adjust and monitor product pricing 

You can keep retention rates high by adjusting your product pricing regularly. For example, if you have too many features for a high price, try cutting some in favor of lower costs.   

By doing this, you'll be able to offer users affordable prices and increase the number of users who are willing to pay more in the future.

5. Track, understand, and improve your retention rate

When it comes to user retention, there are a lot of things that come into play. These range from product-market fit to user experience. Therefore, it is essential to know the right retention metrics to track to draw actionable insight from them.

For this, ProfitWell offers two solutions that help you pinpoint key data points to improve retention; ProfitWell Metrics and ProfitWell Retain. With the former, you'll be able to track the right retention metrics. On the other hand, ProfitWell Retain automatically helps reduce customer churn.

As such, by combining the powers of these solutions to reduce churn and increase retention, you can grow your active user base significantly.

Retention Curve FAQs

As you prepare to gain more control over your retention rate, you may have some questions about retention curves. Here are some common retention curve questions and their answers. 

1. What are the most common retention curve types? 

The most common retention curves are flattening, declining, and smiling curves.

2. How to calculate retention curve? 

Finding retention rates in cohort analysis is possible through the use of the MCMC method. However, you can also use other methods for finding your retention curves, such as ECDF and CDF methods.

3. What are the best ways to improve retention rate?

By finding your retention curve, you'll be able to track how your customers feel about the service. This is a great way to find out what they like or dislike, and you can use this information to improve products and features.

4. How to interpret a retention curve?

You can study how you retain users by looking at the shape of your retention curve. This will show you how satisfied your users are, and you'll be able to identify problem areas.

5. What is a retention rate?

The retention rate shows how many customers remain active after using your product for a certain time frame. 

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