Don’t trust Google for your customer retention metrics
Transcript
At MATH, we talk a lot about early customer signals. You see, we want to see that a company is going to be successful before anybody else sees it. And if we wait until the data shows up on the income statement, it's too late. Anybody can read an income statement. And one of the best early signals is customer retention. You see, customer retention is an indication of happy customers.
It's an indication of a bigger lifetime value because the customers stay longer, which of
course improves your LTV to CAC ratio, which is something that I've talked about many,
many times before.
And if you follow the trend and you can continue to see increase in customer retention, that's
a sign that you're headed in the right direction and your customers love you.
Oh, by the way, you know that income statement I talked about?
I'm going to make a pretty bold statement.
every revenue dollar in the income statement is worth the same amount. Yeah, you heard me right.
Not every revenue dollar is worth the same amount. Huh? Well, you see, a new customer that brings in
a dollar of revenue, well, that's great. I love revenue, but we had to pay to acquire that customer
versus a returning customer who brings in a dollar revenue where we didn't have to pay anything.
It actually cost us more to get the new customer than it did the returning customer.
Therefore, the revenue dollar from returning customers is more valuable.
And it's not just monetarily more valuable.
It's more valuable because it's a good indication, again, that our customers love us.
So, if not all revenue is the same, guess what?
Not all customers are the same.
Returning customers are worth a lot more than new customers.
We don't have to pay for them.
They're a good indication that we're doing things right.
Now, there are lots of tools that will tell you about what percentage your customers are
returning.
For instance, Google Analytics that most of us use.
Google Analytics tells you for a given period what percentage your customers were new and
what percentage were returning.
Seems like a great metric.
It actually tells you very little.
You see, I could game that.
I could have 100% returning users on my website according to Google Analytics by basically
attracting no new users doing no marketing I'd have great metrics
according to Google Analytics a hundred percent of my customers are returning
but it would be horrible for my business conversely if I were to do a
great ad campaign or have a viral campaign and get hundreds of thousands
of new users to my website Google Analytics would tell me I have a very
tiny number of returning users compared to my new users the KPI would look bad
but it actually would be great for my business because hundreds of thousands
of people got exposed to my business turns out that that KPI from Google
Analytics is a horrible metric they're doing it wrong let me explain to you how
I think you should track your returning users or customer retention let's
Let's imagine a fictitious company that goes live January 1st and in the month of January
we get 100 customers that buy from us.
100.
February comes along and in February we get 500 customers that buy from us.
90 of whom, by the way, were returning customers who had purchased the previous month.
Now, most tools would look at this and say, well, in February you had 90 out of 500 customers
that were returning.
therefore 18% returning customers. But I would tell you that I believe that you actually
have 90% returning customers because you only had 100 customers who were eligible to be
returning customers, the ones who came the month before, and of them 90% returned. So
I would argue you actually have 90%, not 18%. You see, the way I measure it is I look at
the number of customers that were eligible in this period.
Now you could look back,
maybe it's people who visited your site
in the last 30 days, 60 days, 90 days, whatever it is,
be consistent, but decide who is eligible
to be a returning customer.
And then I take of those who are eligible,
what percentage actually returned.
And the beauty of it is that it is unaffected
by the current month's marketing.
For example, the case I just gave you
with the 100 and the 500,
let's say that instead of getting 500 customers in February,
we actually did no marketing and we got no new customers.
We only had the 90 returning.
Our returning is still 90%
because 90 out of the 100 who are eligible returned.
At the other end of the spectrum,
let's say that we did a crazy viral campaign
and we had 100,000 new customers come in in February.
My returning customers for February is still 90%
because 90 of the eligible customers came back.
So that means that you can use this metric to see the trend.
It's not affected by what crazy ups and downs
your marketing does in subsequent months.
So, have a great metric for returning customers.
Look at those that were eligible.
Look at the number of customers
who came from the eligible base.
This is gonna give you the real metric
of customer satisfaction.
and these trends are going to be actionable.
In the end, make sure you understand
what you are measuring and why.
Troy is back with best practices for customer retention and he tells you why you shouldn’t trust Google for customer retention metrics. In this video, he tackles some controversial topics: not all revenue and customers are the same. Learn about what metrics matter for customer retention and how to start tracking them for your startup.
Originally published on the MATH Venture Partners blog.