Why Retention Matters and How to Optimize for Retention

Robbie K Baxter
5 min readMar 18, 2023
Why Retention Matters and How to Optimize for Retention

Retention is having a moment. Marketing budgets and marketing staff are shrinking, and consumers are less likely to buy. It’s more important than ever to keep the customers you already have–and expand the relationships.

Additionally, recurring revenue gets higher multiples with investors than transactional revenue, and retaining a customer is way cheaper than attracting a new one or winning an old one back. Technology is enabling companies to understand consumer behavior differently and rethink pricing structures to include subscription, pay-as-you-go, pay-per-use, etc., and not just “pay to own.” Staying with one company can be better for consumers, too, by providing consistency, recognition, cost savings, and/or a more personalized experience over time.

Part 1: The Basics

What is retention?

Retention is a word used to describe the act of keeping customers engaged in buying from your organization after that customer’s initial transaction.

Who should care about retention?

For subscription businesses, retention is usually measured by the number of people (or, in B2B, the number of companies) who don’t cancel their subscription in a given period.

Retention is also important in transactional businesses.

For example, Mcdonald’s isn’t just interested in the number of Big Macs sold daily. They also want to understand how many of those burgers are bought by repeat customers and the engagement (frequency, recency, volume, and variety) of their ongoing purchases. Tracking retention with transactional purchases is more challenging, but it’s still important.

How do you measure retention?

You can calculate retention by starting with the number of customers at the end of the period, subtracting the number of new customers acquired during that same period, and then dividing by the total number of customers at the start. Multiply by 100 to get the retention rate.

But there are important leading indicators as well.

For example, engagement metrics are the metrics that tell you how frequently someone transacts or engages with your offering, how recently they last engaged, how long they spend (or how many dollars), and how much and the variety of what they do or use.

Metrics that track satisfaction and willingness to refer, such as the well-known Net Promoter Survey Score (NPS), are also important.

Here’s a dashboard of metrics to help track your customer retention. Save and use it!

What is “good” retention?

Many people ask me, “what’s a good retention benchmark for my industry?” and the answer is, of course, “it depends.” For example, Netflix might have retention of over 90%, while Hyatt Hotels might be happy if 30% of their visitors at any point in time are returning visitors. What’s more important is to establish a baseline and continue to improve from there.

Another important way of benchmarking is to segment your audience, identify the behavior of your “best customers,” and measure your effectiveness at attracting lookalikes. What does it look like when a customer commits to your brand? How often do they return, and in what ways do they engage? All of these questions can help you arrive at a good benchmark.

Part 2: How to Improve Retention

Know your ideal customer (LTV, uses products regularly & well, aligns with future plans)

When I help companies improve their retention, the first step is to understand what retention “should be” by defining and then understanding the organization’s “ideal customers.”

The easiest way to identify ideal customers is by lifetime value. Which customers spend the most? Comparing this segment to other customers can provide a good start for understanding how ideal customers look and behave differently.

But there are additional ways to refine this group. Consider which customers you wish you had more of — for example, the customers who reflect the future of your business, have the most long-term potential, or refer the most additional customers.

Once you’ve defined this group, look at their goals for your product(s). What brought them to you, and why have they expanded this relationship with you over time? Usually, this group shares an ongoing goal or ongoing problem to solve. For example, maybe the best customers at a women’s clothing store have a job that requires a particular wardrobe, and this store has the staff and product assortment to suit that ongoing goal.

Understanding these ongoing goals or problems — and making a forever promise to these customers that you will help them with these desired outcomes — can drive loyalty.

Create more ideal customers.

Optimizing touch points for ideal customers is a simple way to improve retention. For example, you can target this group specifically, casting a narrower net in a better fishing ground. You can include the ongoing benefits in your messaging rather than just focusing on a specific one-time driver.

Once someone buys anything from you, think of that initial transaction as the starting line, not the finish line for communications.

You want to onboard a new customer to drive habits. Think about how you will onboard them for success: First, of course, to get them what they need with as little friction as possible, then to reinforce the wisdom of their decision, and ultimately to show them how they can continue to benefit from a relationship with you into the future.

Along the way, and at key points, you want to be sure the customer is engaged and that you surface relevant opportunities to expand the relationship.

You might even want to layer in new products and services to drive engagement between visits and to more fully deliver on your forever promise to help your customer achieve their desired outcome.

A big part of retention is optimizing at every step — even starting the process before acquisition by focusing on attracting the best customers.



Robbie K Baxter

Author of THE FOREVER TRANSACTION & THE MEMBERSHIP ECONOMY; Leading expert on membership models and subscription pricing. http://www.robbiekellmanbaxter.com