More like this:
Listen to the audiobook:
“In the current downturn, many companies are tightening belts. But too many are missing their biggest opportunity to keep costs down: building loyal relationships with customers and other stakeholders.” Frederick Reichheld - Bain & Company
Sounds like it could have been written yesterday, right? Actually, it was written more than 20 years ago by Frederick Reichheld (the Bain consultant who invented the Net Promoter Score).
Companies have long known that retention is important to cutting costs and growing sustainably. But in the last few years, it’s become much less of a focus. This has been thanks, in part, to an influx of venture capital that allowed many marketing teams to double down on their acquisition channels—spending to fill the top of the pipeline and contribute to new revenue, without worrying too much about what happens after an MQL is passed to sales or the deal is closed-won.
But now, we’re experiencing a reckoning.
It’s like pulling the plug from a bathtub while the water is still running—as long as the water drains at an equal rate as the tub fills, it’ll always look full. But as soon as you turn off that tap, the water will quickly disappear.
And that tap has just slowed to a trickle.
Thanks to the current economic downturn, it’s become impossible to ignore the problem of churn. But that’s not entirely a bad thing—in fact, focusing on retention can open up a host of other benefits for your business. In this guide we’ll walk you through exactly what retention is, why it matters, and concrete strategies you can use to reduce churn and increase your customer loyalty.
Let’s jump in.
In a nutshell, customer retention refers to your ability to maintain your customer base over time—whether that means they continue their subscriptions or keep purchasing your products.
Customer lifetime value is a measure of the value of a retained customer. You can calculate it with this formula:
Customer lifetime value (CLTV) = Average customer lifespan x Average revenue per customer
High customer lifetime value is an indicator that you’re doing a good job consistently retaining customers.
Having loyal customers who are willing to buy from you time and time again means you’re less likely to be affected by market fluctuations. Focusing on retention is one of the best things you can do to build resilience as a company.
"Profitable and mature companies with large, active customer bases are better equipped to handle downturns, especially if more than 75% of their revenue comes from existing customers." - TechCrunch
In 2018, Mixpanel, a leading product analytics software company, was struggling with a big churn problem. This was the result of a lot of factors, including jumping the gun on too many new product lines and trying to move upmarket too quickly. This led to low-performance metrics like:
Low weekly active users
A Net Promoter Score of 15
A gross dollar retention of 50%
So, the Mixpanel team set out to tackle the problem. They worked on improving customer segmentation, fixing their messaging, and even deprecating some products that weren’t serving their customer base. By tackling their retention issue head-on, they were ultimately able to raise $200M and achieved unicorn status in 2021.
If you’re not maintaining your customer base, growing your business is like trying to build on shifting sands. Keeping your existing customers allows for a smooth, upward growth trajectory.
"Companies with best-in-class retention grow 1.5-3x faster than their peers."
It’s easier to sell to people who trust you and understand the value your product provides. For many companies, this is a huge revenue opportunity: Once you land a loyal customer, you can continue to expand your business together.
"The probability of a successful sale with a new prospect is just 5-20%, while the probability of a successful sale with an existing customer is 60-70%" - Marketing Metrics
Developing a successful retention strategy is a three step process that starts with refining your ideal customer profile (ICP) through quantitative and qualitative analysis, turning those insights into action with fit scores and lifecycle campaigns, and then continuously optimizing and refining that strategy over time.
Pro Tip: These three steps don’t necessarily need to be tackled chronologically. Figure out which area feels like it might pose the biggest risk to your business's success, success and start there.
For many of us, our products could serve an incredibly wide range of customer profiles. The reality is, however, that you’re not going to acquire every prospect nor retain every customer, so you need to know where to focus your efforts.
Step one in the process of shifting to a retention-first mindset is (re)defining an ideal customer profile (ICP) to get clear on what high-value customers look like for your organization. If you already have an ICP defined, that’s great—but consider whether it might be time to refresh it.
Ideal customer profile - A term for the collection of attributes that define accounts that are expected to become a company’s highest-value customers. These attributes might include demographics, firmographics, behavioral signals, or other qualities.
To determine who your best-fit customers are, you’ll want to both look at your data and pick the brains of your customer-facing team members.
Analyze your data to gain a better understanding of the granular makeup of your customers (and what they have in common). Consider things like high CLTV, high average contract value (ACV), strong product engagement, and high NPS.
Similarly, make sure to also look at data from your churned customers to see if you can identify patterns that made them a high churn risk.
Speak to sales and members of your customer success team to understand what red and green flags they look for.
What inbound conversations tend to be the easiest wins?
What kinds of conversations are a lot lower confidence when they come inbound?
Which profiles are you most excited to see?
What types of profiles take the most resources to win?
Ask customer success:
Which customers understand the value of the platform and use it effectively?
Which customers require the least amount of intervention?
What customers suck up a lot of resources?
This isn’t a one-and-done process— you might need to go through a few rounds of iteration to land on an effective ICP definition. For instance, you might complete a round of quantitative analysis, but then uncover new perspectives from talking to sales that prompts you to interpret your data in a different way. Or they might highlight a gap in your data that you haven’t yet considered.
For example: You discover from speaking to sales and customer success that large teams are a great fit for your product—but you aren’t yet measuring team size in your data.
Once you’ve collected your data, put together a tidy summary of your ICP, highlighting all of the important information you’ve learned. This might include:
Demographics: Job functions, seniority levels, skill sets, etc.
Firmographics: Company size, industry, geographic location, annual revenue, tech stack, etc.
Signals: Actively hiring, recent funding round, launch of new products, etc.
With a clear ICP definition, you can now start strategizing on how to target your best-fit customers. This includes attracting higher-value customers into your funnel as well as nurturing the best-fit customers you already have.
But first, you need a way to measure people in your funnel against your ICP definition. That’s where fit scores come in.
Create fit scores
Fit scores are a powerful tool for understanding your audience, spotting trends, and executing on your ideas. Note that fit scores are different from engagement scores—fit scores show you how well a customer fits the criteria for your ICP based on their demographic and firmographic data, while engagement scores also take into account the customer’s intent (whether they’re actively interested in a solution like yours). Your engagement score might capture things like prospects’ content consumption, clicks on calls-to-action (CTAs), and behavior in a free version of your product in addition to those fit criteria.
Using your marketing or sales automation tool, you’ll want to set up a fit score using the criteria from your ICP definition. You can also weigh different variables as more or less important by assigning them a different number of points. Depending what tool you use, you may also be able to assign negative point values for any variables that are indicative of high churn.
With fit scores aligned to your ICP definition, you now have a lens for evaluating where your biggest opportunities lie across the customer lifecycle.
Make smarter acquisitions
Churn prevention begins with acquisition—high-fit acquisitions will have a higher propensity to retain over time. Some of the key things you should look at with a critical, ICP-first lens, include:
What channel(s) does your ICP primarily engage with? Are you allocating enough resources to these channels?
Does any channel(s) bring in a lot of leads, but tend to be lower fit?
Identify untapped opportunities to engage with your audience (ex. Do folks from your ICP loathe Twitter but eagerly read Substack?).
What topics, voice, and tone speak best to your audience?
Are there certain messages that resonate most with your ICP and others that resonate most with low-fit leads?
Does your existing content align with the topics your ICP is most curious about?
What new topics should be added to your content roadmap to best capture their attention?
At Ortto, we were spread across quite a few channels with good potential and okay acquisition performance—but the reality was many weren't a great match for our ICP and we weren’t mastering any of them. Abandoning those channels was necessary to focus on the ones that mattered most. This also helped free up headspace to start tackling the gaps where we knew our audience was but we weren’t present yet, plus tackle our messaging and content.
Here's what we did
Audited our existing acquisition channels
Abandoned channels bringing in low-fit leads
Optimized channels bringing in high-fit leads but poor ROI
Launched new channels
Overhauled our messaging (which fed into successfully optimizing and launching channels)
Ultimately, we reduced spend and increased impressions—one month later, we also saw an increase in both volume of leads and the quality of those leads.
In addition to making better acquisitions at the top of the funnel, you should also focus on best-fit customers within your existing database. Identify who meets your new ICP definition and could use some additional attention so you can create lifecycle programs with them in mind.
What not to do - Create one or two generic nurture journeys that you drop everyone into.
1. Make audiences
Use your ICP fit definition to look across your existing database of prospects and customers to spot cohorts where your biggest opportunities lie. For instance:
Free trial users
Identify those who are heavy product users on a free trial, since they're likely to convert to paid plans.
Paid users on lower-tier plans
Look for those bumping up against the limits of the functionality they've paid for since they'll be ideal folks to upsell to.
Customers with low product/ feature adoption
Identify what functionalities users have access to but aren’t making use of. Consider how you help them discover and engage with those offerings to get more value.
Understand how your ICP-fit customers tend to engage with and adopt new features. How can you tailor your next product launch to them?
New team members
Think about how you can help onboard new team members into your customers’ product instances quickly and smoothly.
Industry or persona-based groups
Identify trends among buyer personas within your ICP that you could address.
2. Build lifecycle campaigns
Use automation to create campaigns that target these unique cohorts of users with timely, personalized messages. Begin to target the audiences you just created with content that moves them toward the action you want them to take.
For instance, here are some examples you can use as thought-starters for your own campaigns.
3. Involve the whole team
Your retention strategy shouldn't live in a silo—the whole business needs to rally behind servicing your ICP. Consider where any campaigns or programs you design will intersect with the effort of other teams, such as product, sales, and customer success. Ideally, you’ll want to work closely with them to ensure the end user has a smooth experience.
For instance, if it’s possible within your marketing automation tool, you might want to set up automated sales alerts to indicate the appropriate moment for AEs to reach out to a free-trial customer for a meeting.
Once you have your ICP, scoring, and campaigns set up, the next natural question is: What's working?
That’s where reporting comes in. You want to set up your data reporting processes so you get a good sense of what’s going well and where you can continue to refine your strategy.
1. Define your key metrics
To track whether your campaign is getting the results you need, it’s important to define some key metrics. Ideally, this should be a combination of leading and lagging indicators. Early indicators can help alert you to whether a change is starting to take effect, while long-term indicators (like CLTV) can definitively show you whether your strategy is paying off in terms of retention and revenue.
You can think about your metrics in tiers: You’ll have a key success metric— customer lifetime value—but it’s lagging, so it’ll take a while to see the effects of your actions paying off.
You’ll also need leading metrics that will be indicative of change, as well as supporting metrics at the campaign or program level to help you make optimization decisions. These all serve the purpose of helping you understand the effects to your CLTV better.
Example key success metrics
Customer lifetime value (CLTV)
Example leading indicators
Monthly recurring revenue
Conversion rates at key points
in the funnel
Average contract value (ACV)
We recommend keeping your list of supporting metrics fairly short. Optimizing for everything means that you’re optimizing for nothing. While you can certainly look at more metrics than what’s listed above, only these select few should inform your decision-making.
2. Set up your reporting infrastructure
Once you’ve chosen your key metrics, you can set up your reporting infrastructure that enables you to understand how you’re performing against those metrics—as well as the key variables that influence them.
Like we’ve already said—you can track an abundance of metrics but that doesn’t mean that you should. It’s important to keep in mind that capturing unnecessary data can eat up a lot of development resources, so be judicious in the metrics you choose to track. It’s important to know what your goals are as well as what data you need to capture in order to be able to measure your progress.
Without retaining your customers, it’s impossible to achieve sustainable growth. This isn’t news—it’s something that businesses have known for a long time. We’ve just had the luxury of forgetting.
Now’s the perfect time to act on this long-held wisdom and build a retention strategy using the information and data you already have on hand. You just have to think about your audiences, channels, and campaigns in a slightly different way.
So take a look at your process and ask yourself:
Do I have a strong sense of my ideal customer profile?
Are my campaigns focused on my ICP?
What is my reporting telling me?
Building the ideal retention strategy takes time and patience, but the potential return on investment for your business is huge. Aim for progress, not perfection—it will pay off in the long run.
You might also like:
How to build a SaaS lead scoring framework that actually works.
This eBook is the need-to-know on email deliverability: Why it's important, the factors that hurt it, and how to improve it.
Headless commerce is a great option for ecommerce stores looking for an agile solution. With plenty of industry excitement and platform growth to look forward to, now is the time to explore your options.
“We were looking for a solution that was really easy to use, didn’t require a tech team, and would have a robust integration with Salesforce so we could trigger sales communications in a smarter way. Nobody else out there has what Ortto has.”
Build a better journey.