Growth but how?

In today’s world, almost all product and technology companies are heavily investing in growth. They establish large marketing teams and various subunits under them to support this growth in different ways. The job descriptions in this field are becoming increasingly diverse, with titles such as “performance marketer” and “growth hacker.” This diversity and the high costs involved clearly demonstrate the importance companies place on growth. However, does growth only occur by acquiring new users or bringing them back through repeated advertisements? Most companies do not pay enough attention to retaining their existing users, which is a far more critical factor for growth than acquiring new users. You can see this by looking at how many companies around you have teams focused on growth and how many have teams specifically focused on retention.

If all the users we acquired continued to use our product consistently, our growth would be much faster, and our marketing activities would be much more efficient. This is where the concept of retention comes into play. Generally, retention refers to the proportion of users who use our product for the first time and then return to use it again. The rate at which these returning users are measured is called the retention rate. I will revisit how retention is measured and how it varies depending on the nature of our business, but first, I want to emphasize its importance and its relationship with growth.

As I mentioned at the beginning of the article, while almost every company places great importance on growth, most of them track growth through increasing user numbers or rising revenue. There is a critical point here that often goes unnoticed: the main factor driving growth. We can use an analogy of a pool problem here, comparing our company to a pool we want to fill and our users to the water filling the pool. In this scenario, marketing activities would be the tap filling the pool. Of course, like any pool problem, there is a leak at the bottom of our pool, and the users we fail to retain are leaking out.

Most companies increase their user numbers by opening the tap more (making significant marketing investments) while there is a large leak at the bottom. In other words, they increase their user numbers by bringing in more users than they lose within a given month, giving the appearance of growth. In reality, what they are doing is merely filling the pool with water that will soon leak out, by paying for it. Fortunately, there is a metric that examines this relationship and saves us from this situation if we track it correctly: the quick ratio. This metric is found by dividing the users we gain (new or resurrected) within a specific time period by the users we lose. This ratio numerically represents the main factor driving growth; an increase in the ratio indicates growth driven by existing users, while a decrease indicates growth driven by new users. In fact, good investment companies, especially for SaaS products, suggest this ratio should be around 4.

Quick Ratio = (New + Resurrected) / Lost

To understand this more clearly, let’s go through an example. Imagine two companies, each with 100 users, and their user numbers increase to 120 the next month. Both have achieved 20% growth in user numbers. However:

• The first company lost 60 users and gained 80 new users to reach 120.
• The second company lost 10 users and gained 30 new users to reach 120.

The quick ratio for these figures is:

• For the first company: 0.75 (80/60)
• For the second company: 3 (30/10)

As seen, while the first company’s growth comes from new users, the second company’s growth comes from existing users. It is not difficult to predict how these figures will reflect on growth (or marketing expenses) in the medium term. Therefore, the focus should not be on user numbers or other growth-oriented figures but on achieving growth through existing users, which requires closing the leak at the bottom of the pool.

I will explain how to close the leak at the bottom of the pool in the next article, but for now, let’s better understand the concept of retention and how it is measured. We defined retention simply as the proportion of users who use our product for the first time and then return to use it again. However, some questions arise here, such as “How soon should users return?” and “Is it enough for them just to return?” The answers to these questions vary depending on our business, but retention is always evaluated based on two concepts: event and time interval. Depending on our business model, we determine within what time frame users need to perform which event in our product to be considered retained. For example:

• A social media application might consider users retained if they log in daily.
• An e-commerce application might consider users retained if they make a purchase weekly.
• A hotel reservation application might consider users retained if they make a reservation quarterly.

While daily retention rates (how many users who came on the first day returned on the second day) might be reasonable for a social media application, expecting daily purchases from an e-commerce site or weekly reservations from a hotel reservation application is unrealistic.

Retention rate can be calculated using simple event-time interval pairs like this, or more complex calculations can be made according to your business needs. For example, a fast delivery application might consider users retained if they place more than three orders per week, while a messaging application might consider users retained if they send more than three messages per day. The main goal here is to establish an early warning system and understand when things are going wrong (i.e., when you are about to lose users) before it is too late (before the user cancels their membership). Therefore, when determining these metrics, you should set the minimum usage levels for users who continue to use your product and take early action when things start to fall below the minimum. For example, Slack expects its users to send 50 messages per week and takes measures on a mass or individual basis if the numbers fall below this level.

Retention rate is generally measured through cohorts taken over time. It looks at the proportion of users in a cohort from a particular week who perform the specified event in the next time interval (the next week). Your product’s retention rate is calculated by taking the weighted average of these cohort rates. However, it is also possible to look at different cohorts for various analyses. For example, by looking at the retention rates of users from a specific region or marketing channel, you can decide on your marketing strategies or better understand your users. Additionally, you can look at this metric based on product features and compare the situation of users who use a particular feature with others. This comparison will shed light on your feature selections and prioritizations.

In this article, I highlighted the importance of the retention concept. In the next one, I will focus on how to achieve retention.

See you soon.