Is retention is the only real measure of product market fit?

Your business will live or die based on whether or not you manage to find, and maintain, product market fit (PMF). Product market fit is notoriously hard to measure, especially with leading metrics. In the long run there's only one metric that manages to capture concisely if you’ve nailed PMF. Retention. Can you convince your customers to continue to pay you money long after the glow of the sales pitch has faded away.

Assuming you’re building a business with a recurring purchase, most of your revenue will eventually come from existing customers. In the early days you may see big spikes in growth but renewals pay the bills. As such, how well you keep your customers around is the best indication of how well you’re doing. If you continue to deliver value every renewal you should see most of them stick around and continue to bring in revenue.

Customers do occasionally leave for reasons outside your control but keeping retention as your north star is a commitment to continuing to keep customers happy. That’s not in any way a signal to do things to make leaving harder. Black hat UX tactics to stop churn are not in any way increasing your PMF, despite what the numbers might be telling you. You want to retain customers because you are keeping the promises you made to them during the sale.

Selling to new customers is an exercise filled with promises. You’re working with customers to explicitly identify where their current setup is lacking and explaining how your business can help path that hole. While sales is by no means easy, customers are currently judging you based on potential rather than results. Winning the sale is about building up and communicating the potential. Retention is about delivering on that potential.

This ties in closely with the idea that its cheaper to keep customers than to win them. Traditionally, cost of customer acquisition (CAC) is a key measure of sales team efficiency. Depending on your business it might take months or a year to pay back the resources you spent on winning the customer. If that customer leaves, so does your investment.

The reason many company are happy to stomach such high cost when winning a customer is the assumption that they’ll be around long after those expenses have been recouped. Luckily, the costs of retention are, as advertised, often far lower than acquisition. The most important thing you need to do is continue to deliver on your promises. If you stretched the truth during sales, expect each renewal to be an uphill battle.

With all the positives in mind, its fair to assume there are reasons that retention isn’t the headline metric for more companies. Sure, it gets measured a lot but its rarely priority number one. First, retention doesn’t pay the bills, at least not directly. Second, you only know the customer’s stayed after they’ve renewed, if you’re optimising day to day operations you need a metric that changes more rapidly based on actions.

While most successful companies have most of their revenue come from renewals in the long term, there’s plenty of ways to maximise retention without creating a sustainable business model. For example, its much easier to maintain retention when your prices are low or zero. Many early stage companies use funding from VCs to subsidise their business model and offer product at a competitive price. This behaviour tends to be good for growth and retention but bad for long term sustainability.

The trouble with optimising for long term sustainability is finding ways to link that to the day-to-day. If you don’t know you’re on the right track you can miss your long term goals. For the most part, you’ll want to find metrics that have a close connection to the actions you’re completing each day. Short feedback loops help in refining processes and in many cases a B2B subscription will renew annual rather than every month.

You want to find metrics that correlate well to subscription rate but can be measured more than once a year. Usage and the completion of core activities is a common one. Talking to your customers regularly is also a useful, but more qualitative way to get a feel for how much value your customers derive from your product. Ultimately, you still want to maximise retention but you’ll need faster moving metrics to keep things ticking along.

So, is retention the only measure of PMF? Strictly speaking, no, but it is probably the most telling. If you can’t keep your customers happy and around for the long term you can’t really claim to have a strong fit.