This article will focus on an important metric that serves as a benchmark for any successful subscription business: retention rate.
In the following paragraphs, we'll define retention rate, demonstrate how to calculate it, and show it in a real-world context.
Retention rate is an essential measure of product stickiness and value
There are 3 different types of retention metrics: user retention, customer retention, and net & gross dollar retention
The most useful way to understand retention dynamics is through the use of cohort analysis
Retention rate encompasses 3 different types of retention metrics:
User retention rate is exactly what it sounds like: the percentage of users who are still users after a certain period of time.
Customer retention rate, then, is the percentage of existing customers who remain customers after a given period. The difference here being that this metric accounts only for paying customers. You could have users who are not customers, hence the need for a separate calculation.
Unlike the other retention metrics, net and gross dollar retention deal in dollars.
Net retention rate is the percentage of revenue that you retain from your existing customers in a given period. This calculation takes expansion revenue into account.
Gross retention rate, by contrast, is the percentage of revenue retained in a given period without factoring in expansion MRR.
We’ll dive into how to calculate retention rate below, and offer a few examples to put the metric in context.
Note: the examples below are of user and customer retention.
Customer retention rate is a key indicator of both business health and product value. That’s why it’s essential to view your retention number as one of your primary KPIs. Thankfully, the calculation is extremely straightforward.
First, you just need to determine what period of time you wish to analyze. Then the retention rate calculation is as follows:
( [# of users at end of time period] - [# of users acquired during the time period] ) / [# of users at the beginning of the period]
This will give you your retention rate in decimal points. To convert it to a percentage, simply multiply the decimal by 100.
You need to subtract out the number of users acquired because they negatively skew your actual retention rate.
For example, if you started a year with 100 users, lost 5, but then gained 10 new ones, you’d finish the year with 105 users. If you don’t take out the newly acquired users, then you would have a retention rate of 105% in the given time frame, which is mathematically impossible.
This formula ensures that you’re measuring only the percentage of already existing users at the start of a specific time period who are still users at the end of that period.
A good way to get good insights from your retention rate is looking at it cohorted by signup month and see how it evolves the following months after signup.
Looking at the evolution of your retention rate this way can help you:
Measure the efficiency of your onboarding
Have a good representation of your product stickiness over time
Visualize changes you make in your product (new onboarding flow, new features…) and see their impact on retention
Identify gaps and drops that can help you prioritize where to focus your efforts