The headline is somewhat like asking the question “How high is up?” but I will venture to say that by the end of this article, you may be thinking that your retention rate could be too high. I know, a bold supposition since I don’t know you, dear reader.
But stay with me and allow me to explain.
What is member or customer retention rate? Can you fairly compare your retention rate to another organization? Are all retention rates created equal? Is there a single number you should be striving for?
In the words of Mr. Churchill – “It is a riddle, wrapped in a mystery, inside an enigma.”
But it doesn’t need to be. The problem is that we all look for daily “shorthand” that allows us to describe something quickly and assume everyone else knows what we mean.
“Retention rate” is not a very straight-forward phrase and is often used to tell a story (to a peer, to a board, to a reporter) rather than used to drive your business.
Defining Customer Retention Rate
Let’s start with some typical definitions:
Retention rate1 could be defined as: the difference between your year-end member or customer census and starting census divided by the start of year census.
Anyone who is at all comfortable with percentages and growth calculations can see that this is not a very accurate depiction of your ability to retain your audience. Why?
Because it completely misses the point that you not only lose people over the course of a year, but you gain people, too. You’re leaving out your acquisition pipeline. At best, this calculation is probably better called “growth rate.”
Ok – let’s try again.
Retention rate2 could be defined as: the number of people (who are not new) that we have at the end of the year divided by the number of people we had at the beginning of the year.
This one seems like we are headed in the right direction, but it is misleading as well. Are you counting people who have paid for multiple years in advance? Are you counting lifetime members? (This is quite common – so if you don’t include lifetime and multi-years in your calculations, you already have a better grasp than many organizations.) Are you counting complimentary (unpaid) people?
If someone paid for three years last year, then they are getting counted in both the numerator (the top of our formula) and the denominator (the bottom). That person has a 100% retention rate — and yet the organization doesn’t have to DO anything to earn that retention. There was no marketing. No communication. You don’t even have to deliver value to that person and most people will not bother to demand a refund.
You might call that “stacking the deck” when it comes to metrics reporting!
Does A Blended Customer Retention Rate Mean Anything?
This brings us to the concept of “blended retention rate.”
Blended retention is what most organizations talk about in board meetings and brag about to others. It is a soundbite and mostly meaningless in terms of how you operate your organization.
How could we be more precise (and operationally useful)?
Retention rate is better defined as: the number of people who PAID for a renewal in the last 12 months divided by the number of people who were renewal eligible (that have a term that will cause them to stop being a member/subscriber/customer during the same period).
Note – we are still working with a blended retention rate because it doesn’t show you how retention breaks down by tenure.
An Illustration of Meaningful Retention Rate Calculations
It might be useful to illustrate the point with a fictitious organization. Our favorite – the Left-handed Bowlers League of America (LHBLA).
The LHBLA had 1,000 members at the beginning of 2020. Broken down categorically, they had:
- 100 lifetime members
- 57 people who had paid for more than one term and don’t expire in 2020
- 10 complimentary industry members (who never pay for their membership)
- 15 “trial members” who were given a complimentary membership in 2019 but will have to pay in 2020.
- Everybody else either pays or becomes a “former member” in 2020.
With that information we can find how many “renewal eligible” members LHBLA has to work with.
Renewal eligible = 1,000 total members – 100 Lifes – 57 Multis – 10 Comps – 15 Trials = 818
Wait. Why did I subtract the 15 trial members who are renewal eligible? Patience…
At the end of the year, 654 of those 818 members paid for another year of membership.
Now we have a blended retention rate (of paying members) of 80% (654/818). This is a slightly better metric, but we can be even more precise to truly know what is happening at LHBLA.
Member Retention Rate by Tenure
Of those 818 renewal eligible members, 122 are first year members who joined in 2019. And when we look a little deeper we see an interesting fact:
1st-year renewal eligible: 122 Renewed: 73 Retention rate: 60%
At LHBLA they call these people (1st year Renewal Eligible cohort) “converters.” Why? Because it is another (more precise) shorthand for a very specific group – a group of people who are “converting” from joiners to renewers. For most organizations, this is the most important cohort and member retention rate to monitor. (But you will have to read all the way to the end to hear why.) What about the rest of the renewal eligible pool?
2+-year renewal eligible: 696 Renewed: 581 Retention rate: 83.5%
Starting to see why blended retention rate is misleading?
Let’s not forget about those trial memberships.
“Trials” Renewal Eligible: 15 Renewed: 5 Retention Rate: 33%
If we lumped those trial members in with the 1st-year and regular renewals, we would never see how low that number really is!
What Does Traditional Retention Reporting tell you?
A recap: LHBLA started 2020 with 1,000 members.
We could say that they have a membership retention rate of 82.6%
Membership Retention Rate = Retained members (100 Lifes + 57 Multiyears + 10 Comps + 73 1st-years + 581 2+-years + 5 Trials = 826 Retains) divided by 1,000.
Not incorrect – but if that is the only number you know you don’t really know what is going on. It tells you very little. It might be a good number to trot out at a conference when discussing with people who you don’t really know – but it isn’t very useful in operating your business.
Sophisticated Retention Reporting Provides Clarity
Instead – what if you reported on membership retention broken down by category? Like this:
- 100 lifetime members (forever) – 100% Retention*
- 57 members who paid for more than one year in advance (some portion will move to “Renewal Eligible” next year – but for now…): 100% Retention*
- 10 comp members (who don’t pay and don’t renew) – 100% Retention*
- 696 members who have been a member for two or more years – (581/696) 83.5% Retention
- 122 members who joined last year – (73/122) 60% Retention
- 15 “trial” members who didn’t pay last year but need to pay now – (5/15) 33% Retention
(* – for the scrutinizing reader, you will recognize that 100% is still not completely accurate. Deaths and cancellations will actually lower the rate below 100%. Depending on how your system tracks that, you could further refine by reporting the % active of even these categories. Failure to “cancel” deceased life members can catch up with you over time, so you should consider tracking the retention rate of even “100%” retention categories.)
Technically either method is correct. But the sophisticated method not only tells a richer, more detailed story – it also gives you far more valuable information. Information that you can act on to drive your business. The key is to report in categories that you can market to and show how your retention efforts performed. You don’t market to the multi-year paid-up members, so you shouldn’t lump them in with your other 2+year members and artificially inflate the apparent performance of your marketing efforts.
Benchmarks for Retention and How to Interpret Them
By looking at the breakdown in our more sophisticated reporting option, what can you learn?
LHBLA trial members are converting to paid at 33% — good or bad?
You don’t know because you don’t know what LHBLA’s costs are to acquire and fulfill those trial members, but in general a free-to-pay rate like that is pretty good! There are organizations where a free-to-pay conversion rate of 7% or 8% is still profitable.
1st-year converter rate of 60% — good or bad?
You might be tempted to say “bad” and that you need to work harder to keep more of them. But be patient just a little bit longer and you’ll see why that might not be true.
2+-year Renewers at 83.5% — good or bad?
Even that percentage is blended across people who have been members for 2, 3, 5, or even 50 years. And that suggests that you will have to work very hard to move that number up much. Upward movement is not impossible — but death, finances, time and priorities all put a lot of pressure on high-tenure group retention rates. You don’t want to create an annual plan that says you are going to raise 2+-year retention from 83.5% to 88%. Experience says that won’t happen.
The point is less about your specific numbers and more about what you can do to change those numbers. There are options to help you improve in each area.
- Better onboarding (and “re-onboarding” for renewers) can help your 1st-year conversion and 2+year retention, by better explaining your value proposition.
- Reducing transactional friction with automatic renewal or multi-year renewal can bring improvement.
- Refining you member value proposition will help with retention.
Is Your Retention Rate REALLY Too High?
OK – you’ve been patient. Can your retention rate really be too high? It can!
A 60% 1st-year conversion rate means that 40% of those new members walk out the door after the first year. Why wouldn’t you want that number to be higher? You spend a lot of money recruiting and fulfilling first year people don’t you? So isn’t that 40% wasted? In the growth business we have learned that you must cast a wide net and accept that you will catch and then have to release people (join and then unsuccessfully renew first year members) in order to grow your organization.
If your recruiting machine is only recruiting highly qualified individuals, we would expect your first year retention to be high. You’ve pre-qualified them in some way or they found you on their own and their likelihood of renewing moves closer to your general population of higher tenured people. Unless you have a crystal ball, it is hard to tell the difference between a “good” who will renew and a “tire-kicker” who is just trying you out to see if they like what you have to offer.
In order to grow you need more new members/subscribers/donors/customers. And the harder you recruit, the more likely you are to attract a tire-kicker who might not renew.
But that isn’t all bad news. If you can recruit more people — even if the conversion rate drops — you will likely push more TOTAL people into that 2+ year group.
Let’s quickly jump back to the LHBLA. In 2019, they recruited 122 new members and 60% of them (or 73) converted to a second year.
Now – let’s assume they did more recruiting or perhaps made a more promotional offer in 2020 and recruited 220 new members. We would anticipate that their conversion rate would slide. For the sake of our illustration, let’s say that it declines from 60% to 45% — a full 15 points.
220 new members x 45% = 99 2nd-year members.
This is how continuous growth is delivered to an organization — when the pipeline of 1st year members moving into 2nd year membership is growing.
99 2nd-year members instead of 73. And those 99 will renew into their 3rd year at a rate much higher than 45%.
Is Your Focus On A “Better” Retention Rate Masking Your Underperformance In Recruiting?
Now you can see that your retention rate really could be “too high.”
Especially when we are talking about new audience members. A high blended or even conversion-specific retention rate can be a sign that you are either not recruiting enough (only getting those who find you), or you are being too selective in the acquisition process (pre-selecting only the “best” people.)
Would a 15 point drop in your 1st-year conversion rate be a good thing for you? Again – you can’t answer that without examining all of your acquisition and fulfillment costs. But often the answer is that organizations are spending too much time being proud of that “high” retention rate – or obsessing about retention rate improvement and not enough time and resources recruiting – and leaving members (and money) on the table.
If you still need that “blended retention rate” for board meetings, annual reports or press releases, it is simple enough to calculate from the more discrete tracking. But if you only have that one blended number, you don’t know what levers to pull and by how much in order to make meaningful changes in your organization.