How to measure retention correctly with cohorts (step by step guide with examples)
Understanding how to calculate retention correctly is key to growing every product.
However, it is reported in different ways that may not be actionable or useful. For example:
“Our monthly churn is 5% / We keep 95% of our users each month”
While this reporting may seem helpful, the stage of a company matters a lot when reporting this way. This churn metric is naturally high in early days and lower for older businesses. Older businesses have many cohorts where only high intent, retained users come back. So, high intent retained users make a larger percent of the user base. Since this metric goes down on its own, it’s not as actionable for early companies.
“90% of our users who perform <action> retain”
This metric usually causes confusion between correlation and causation. High intent users are more likely to perform actions, and high intent users are more likely to retain. Many companies try to identify their “magic action” and drive users to perform that action, but it often doesn’t increase retention significantly.
It is important to understand the correct way to measure retention in order to build a sustainable growth strategy. So, how do you measure retention correctly?
Measure retention in signup cohorts. Cohorts can be weekly or monthly.
Step 1
Get the number of signups in a specific month
In January, we had 112 signups
Step 2
For these users who signed up in this specific month, calculate how many were active each month after the first month. Month 0 has all users active by definition. For subscription products, measure how many users are still subscribed.
In this example, 10 months later there were 36 out of the original 112 users active
Step 3
Convert these to percentages of the original users in the cohort. In google sheets it is easy to make this a separate chart that refers to values in the previous one.
In this example, the bottom right cell is 32%, which is 36 users active 10 months in out of the original 112
Now you know the cohort retention rate for a single cohort! In this case, it levels off around 32%.
Step 4
Apply steps 1-3 to your other cohorts
You will notice that the retention rate between cohorts generally stays around the same. It’s hard to increase retention! Now you can apply an average at each column and get a range of where the values level off. In this example, the long term cohort retention seems to be trending towards 31-32%.
Why is cohort retention useful?
Benchmarking - by using a standard method to measure retention, you can benchmark your product against other products. Retention is an important metric because it highly correlates with company success. Almost every successful company has solid retention, where most failed companies have poor retention.
Cohort retention benchmarks to aim for long term
Consumer free products: 40%
Consumer subscription products: 50%
B2B selling to Small businesses: 60%
B2B selling to Enterprise: 90%
I picked these benchmarks because there exists companies valued above $10 billion who have these cohort retention rates. There are companies with much better retention, but it’s not absolutely necessary to grow big. For more benchmarks, I would recommend Lenny Rachitsky’s “What is good retention” where he interviewed industry experts to get their take.
Actionable - A cohort chart like the one above is one of the most useful inputs to early growth strategy. If the dropoff is in the first week or month, then activation and onboarding should be the priority. If the dropoff is later on, then product work needs to be done to solve a more sticky user problem. If you make improvements to retention future cohorts will have higher numbers.
Takeaways:
Understand the math behind cohort retention
Track your cohort retention in a triangle chart
Benchmark your cohort retention against successful companies
Use your cohort retention chart to guide your early growth strategy