Investors are also noticeably shifting their focus. The first questions they asked startup founders before were primarily about their revenue or gross merchandise value (GMV). But today, a startup’s customer retention rate is a more important topic of discussion.
However, many startups fail to prepare themselves for the change. I wrote this article to share insights into customer retention from my observations of many Vietnamese startups I have worked with over the years.
Why should startups prioritize customer retention over customer acquisition?
A customer retention rate reflects a startup’s ability to convince customers to buy, use, and come back for its products or services in a certain period. It is considered one of the most critical indicators of a financially healthy and sustainable startup.
According to a study on customer loyalty conducted by Harvard Business School, repeat customers spend 33% more than new customers. Also, a 5% increase in customer retention rates can boost profits by 25% to 95%.
It is a misstep if startups only focus on acquiring new customers and fail to take care of existing customers because their financial performance, including topline and bottom line, is at risk.
On the one hand, customer acquisition costs are skyrocketing in the context of increasing market competition, with paid advertising channels and marketing campaigns showing limited effectiveness.
Meanwhile, if startups cannot retain their customers, their customer lifetime value (CLV) – which now becomes the customer’s one-time value – cannot compensate for customer acquisition costs and operational costs to serve those customers. Consequently, their financial health is threatened because more new customers do not equal more profits, ironically.
We should be upfront that many startups have suffered significant financial losses due to missteps and that it’s time to reflect on what truly drives their business.
What prevents startups from retaining their customers?
“All are invited”: Targeting the wrong customers
It is typical for early-stage startups to over-focus on lead generation by running ads and going the extra mile to convert their leads into customers even though they are not a good fit for their business at the time.
This is the case for many early-stage startups. To right the wrong and to minimize the churn rate, more often than not, they need help to adapt their products to satisfy a wide range of customers with different preferences.
Consequently, their products become less than ideal and less outstanding than their competitors in the market. Their supposedly one-size-fits-all products turn out to fit no one.
“Treat or trap”: Too many promotions
Early-stage startups often implement promotions, offer discounts, or even deliver free-of-charge products to attract customers’ attention and interest in using their products.
However, this is a risky strategy if what early-stage startups are selling fails to satisfy their customers. You cannot expect consumers to stick with you because they only come for all those special promotions, and when those good things are gone, they are gone, too.
As a result, this strategy can bring about plenty of registered users but few active users and even fewer paying users.
“The broken basket”: Premature scaling
The broken basket is a metaphor for businesses failing to retain their customers due to premature scaling. This pitfall was also discussed in my previous article on SCALE.
Premature scaling happens when a startup scales up without achieving product market fit, finding a profitable growth model, and building a scalable operation.
Startups are more likely to get caught in this pitfall due to increasing pressures for growth and expansion while failing to make necessary preparations. Consequently, a broken customer experience comes with the territory. When customers are not satisfied with your products or services, there is no reason for them to stay any longer.
Simple strategies to increase customer retention rate
Among countless books and articles on how to boost customer retention rates, I am impressed with a tweet by Lenny Rachitsky, Airbnb’s former product manager. He shared some simple but profound strategies, likening increasing the retention rate to hosting a party.
According to Lenny Rachitsky, there are five essential steps to ensure a successful party.
1. Invite the right people: Startups should target the right customers who are the perfect fit for their products or services in different development stages and scales.
2. Welcome them thoughtfully: Every startup needs a sales team to take good care of its prospects and connect them with the values that it can offer.
3. Make sure they have a great time: Startups must continuously deliver values that satisfy their customers and make them stay.
4. Catch them before they bail: A customer support team is a must for a startup. It’s important to recognize the signs that their customers are about to leave and retain them by adding more value.
5. If they leave, show them what they are missing: Startups should regularly keep in touch with their old customers, showing them the great values they’ve been missing and intriguing them to return to their products.
Let’s explore a concrete example to better understand how one of these strategies works in reality.
Kamereo, one of the Vietnam-based startups backed by Genesia Ventures, has implemented effective strategies to increase its retention rate. On average, more than 80% of its customers are monthly active users.
Taku Tanaka, founder and CEO of Kamereo, revealed some secrets to their success. First, their Sales and Customer Support are established as two separate teams.
It is a common practice for a sales team to take care of multiple tasks, such as looking for new prospects, doing sales activities, and supporting those customers. However, when they acquire more customers, it becomes challenging for them to properly and effectively handle all those tasks. On the other hand, finding and retaining new customers require different skill sets.
Besides, Kamereo has gone to great lengths to maintain customer loyalty. For example, by applying the Kaizen philosophy to its business operations, its daily on-time delivery rate reaches nearly 100%.
As an early-stage startup investor, I prefer a startup with a pretty good growth rate and a high retention rate to a startup that grows impressively but fails to retain its customers.
Hopefully, after reading this article, startup founders will look at their current situation and develop effective retention strategies to ensure healthy and sustainable growth for their businesses in the context of a cold funding winter.