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What is good retention?

TIER 5   2020-06-09

Hello, and welcome to the free monthly editionof my weekly newsletter. I’m Lenny, and each week I tackle reader questions about product, growth, working with humans, and anything else that’s stressing you out at the office.

Q: What do you consider GOOD and GREAT retention?

“Great retention is the scalable way to grow a product. It’s the best indicator of product-market fit, it is the most important factor in a user’s lifetime value, and high retention drives all of the best acquisition strategies. It’s growth’s equivalent of the triple word score.”

—Casey Winters

Although retention is widely considered to be the most important metric to get right when building (and investing in) a business, it’s also one of the least understood. Why? Because unless you’re a growth expert or an experienced investor, you’re often relying on anecdotes, dated blog posts, and misguided benchmarks. I ran into this problem myself many times when working with startups.

So when Casey Winters (former head of growth at Pinterest and Grubhub, and now CPO at Eventbrite) brought up this question in a conversation we were having, we decided to take the opportunity to do some new research. Together, we reached out to 20 of the most experienced growth practitioners we know and asked them two simple questions:

  1. What do you consider GOOD and GREAT user retention (at 6 months)?
  2. What do you consider GOOD and GREAT net revenue retention (at 12 months)?

Taking these insights and combining them with available public data, we’ve come up with a set of concrete recommendations for GOOD and GREAT retention across most types of businesses. Below you’ll find a visual summary of these conclusions, along with detailed recommendations from each of the experts, and public comps from many of today’s biggest companies.

As a companion to this post, Casey also published an essay delving into ways to increase retention, among other topics, that you should definitely check out.

Without further ado, let’s dive in.

What is GOOD and GREAT retention?

GOOD and GREAT user retention

GOOD and GREAT net revenue retention

Here’s a handy visual guide, which links to a high-res PDF:

Image from What is good retention?

Big thank-you to the experts

Adam Fishman (Patreon, Imperfect Foods), Andrew Chen (Uber, a16z), Andy Johns (Twitter, Facebook, Wealthfront), Brian Balfour (Reforge), Brian Rothenberg) (Eventbrite, TaskRabbit), ChenLi Wang (Dropbox), Dan Hockenmaier (Thumbtack), Elena Verna (SurveyMonkey, Miro), Fareed Mosavat (Slack), Jamie Quint (Notion, Reddit), Jeff Chang (Pinterest), Julie Zhou (Hipmunk, Yik Yak, AdRoll), Kevin Kwok (Greylock), Li Jin (a16z), Merci Grace (Slack), Mike Duboe (Stitch Fix, Greylock), Naomi Ionita (Evernote, Menlo Ventures), Nick Soman (Gusto, Decent), Sarah Guo (Greylock), Shaun Clowes (Atlassian, MuleSoft), and Yuriy Timen (Grammarly). And, of course, my incredible partner on this research, Casey Winters.

Disclaimer: Why it may be OK for your retention to be low

To some, these retention benchmarks will seem high. This is because the bar to build a massively successful business is high. Frankly, it’s why most startups fail. However, although retention is an important metric to get right, it doesn’t live in a vacuum. There are cases when a lower retention rate is OK:

  1. You’re just starting out: Don’t despair if you don’t see this level of retention immediately. Use these benchmarks as a guide to prioritize between retention versus acquisition, and read Casey’s post for three ways to approach increasing retention. But just know, startups rarely increase retention significantly.
  2. You have low CAC and marginal costs: Growth is a balancing act between CAC, retention, and unit economics. If you can acquire new users cheaply (e.g. SEO, word of mouth, or virality), you can afford to lose more users. This thread by Dan Hockenmaier explains why low retention for businesses like Shopify and Twitter is OK.
  3. You’re not building a venture-scale business: These benchmarks are coming from people who helped build iconic, massively scalable businesses. This level of retention is not required for product-market fit or to build a sustainable business. Though the upside will be limited, a flat retention curve that drives a scalable acquisition strategy is enough to keep your business alive.

Ultimately, what matters is that your retention supports sustained growth.

—Fareed Mosavat

Now let’s get into the details.

1. What is good user retention?

Let’s define user retention as the percentage of users who signed up and are still active (i.e. using the product, making a purchase, posting a photo) six months later.

Consumer social: ~25% is GOOD, ~45% is GREAT

This includes companies such as Snapchat, Twitter, and Instagram that are free to use and are generally supported by advertising. The denominator in this category is registered users.

Expert recommendations

Public comps

Consumer transactional: ~30% is GOOD, ~50% is GREAT

This includes companies such as Airbnb, Lyft, and TurboTax that are generally supported by one-off purchases. The denominator in this category is users who have made at least one transaction.

Expert recommendations

Public comps

Consumer SaaS: ~40% is GOOD, ~70% is GREAT

This includes companies such as Netflix, Spotify, and Hulu that sell a monthly/yearly subscription to consumers. The denominator in this category is users who have started a paid subscription.

Expert recommendations

Public comps

SMB/mid-market SaaS: ~60% is GOOD, ~80% is GREAT

This includes companies such as Asana, Slack, and Atlassian that primarily sell a subscription product to companies of roughly 100 to 1,000 employees. The denominator in this category is companies that have started a paid subscription.

Expert recommendations

Public companies

Enterprise SaaS: ~75% is GOOD, ~90% is GREAT

This includes companies such as Salesforce, Workday, and ADP that primarily sell a subscription product to large enterprise companies (i.e. over 1,000 employees).

Expert recommendations

Public comps

2. What is good net revenue retention?

Let’s define net revenue retention as a company’s monthly recurring revenue (MRR) one year ago divided into the current month’s MRR from that same group of customers. Essentially, how much revenue are you driving from one cohort of customers over time?

You’ll notice this section has slightly different categories from the previous section. This is because of the way the customers a business sells to impacts revenue retention (unlike user retention). For example, the network effects in bottom-up SaaS often drive up retention, while the involuntary churn of very small businesses (VSB) is common because many go out of business, and land-and-expand models increase revenue per user in ways that can make up for high user churn.

Now let’s look at what good and great net revenue retention looks like for each type of business.

Consumer SaaS: ~55% is GOOD, ~80% is GREAT

This includes companies such as Netflix, Spotify, and Hulu that sell a monthly/yearly subscription to consumers. The denominator in this category is users who have started a paid subscription.

Expert recommendations

Bottom-up SaaS: ~100% is GOOD, ~120% is GREAT

This includes companies such as Slack, Figma, and Zoom that offer a self-serve prosumer subscription product to individual contributors inside of a company.

Expert recommendations

Public comps

Land and expand VSB SaaS: ~80% is GOOD, ~100% is GREAT

This includes companies such as Gusto that sell a subscription service to early-stage companies, roughly under 100 employees.

Expert recommendations

Land and expand SMB/mid-market SaaS: ~90% is GOOD, ~110% is GREAT

This includes companies such as Atlassian, Box, and Zendesk that sell a subscription service to companies with roughly 100 to 1,000 employees.

Expert recommendations

Public comps

Enterprise SaaS: ~110% is GOOD, ~130% is GREAT

This includes companies such as Salesforce, Workday, and ADP that primarily sell a subscription product to large enterprise companies, roughly over 1,000 employees.

Expert recommendations

Public comps

In summary

If you take nothing else away from this post, it should be that retention matters. A lot. No other metric is as singularly telling of whether your business will thrive or die. And so the better you understand what good retention looks like for your business, the better shot you have at the former. We hope this research proves useful to you whether you’re building, investing, or just curious.

Please ping me if you have any feedback, suggestions, or questions about this post. And don’t forget to go read Casey’s companion post.

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Sincerely,

Lenny 👋