The Importance of Cohort Retention Rate in Product Market Fit

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Jun 28, 2023
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The Importance of Cohort Retention Rate in Product Market Fit
In the world of product development and growth, achieving product market fit is a crucial milestone. It signifies that your product is not only good enough but also ready for scalable acquisition channels. But how do you determine if your product has reached this elusive state of product market fit? According to Jeff Chang, the cohort retention rate is the most important metric to consider.
The cohort retention rate measures the percentage of users who continue to use your product over a specific period of time. It is an indicator of how well your product satisfies the needs and expectations of your target audience. When a product has a high cohort retention rate, it means that users find value in it and are willing to stick around.
Chang argues that cohort retention rate is a better metric for determining product market fit than other commonly used metrics like Net Promoter Score (NPS). While NPS can provide some insights into customer satisfaction, it doesn't necessarily correlate with a product's ability to achieve significant growth. Many successful tech companies have low NPS scores but still manage to attract millions, or even billions, of users.
On the other hand, a product with a great cohort retention rate has a higher chance of success when paired with a solid growth strategy and execution. As you continuously improve your product, newer cohorts should demonstrate high cohort retention rates. By tracking this progress through a cohort retention "triangle" chart, you can gauge whether your product is achieving product market fit.
But how do you know when you've truly reached product market fit? Chang suggests looking for a few cohorts that level off at a vertical-specific number. This indicates that your product has found its market and is satisfying the needs of a specific group of users. Of course, different types of products have different points of product market fit, so it's important to find comparable products in your industry and benchmark your retention rate against theirs.
To provide a general guideline, Chang proposes a floor retention rate of 25% for consumer products and 70% for B2B SaaS products. These benchmarks can serve as a starting point for evaluating your product's performance. However, it's essential to remember that every product and market is unique, so it's crucial to analyze your specific industry and audience to set accurate benchmarks.
Why is cohort retention rate so important for product market fit? Good retention amplifies your acquisition efforts by ensuring that the users you acquire actually stay. It's also a reflection of how much users love your product, which can lead to positive word-of-mouth and organic growth. Users are more likely to share your product with friends if they continue to use it over a long period of time.
Now that we understand the significance of cohort retention rate in achieving product market fit, how can we effectively use what we read to improve our products? Readwise, a platform that helps users extract valuable insights from their reading materials, provides a three-step reading workflow that can be applied to any type of reading.
The first step is capture. It's crucial to have a reliable system outside your mind to capture any meaningful information that stands out to you while you read. This can be done through highlighting, note-taking, or any other method that allows you to save and organize important ideas and concepts.
The second step is review. Once you've captured the information, it's essential to regularly review it to reinforce your understanding and retain the knowledge. Readwise offers various ways to review your highlights, with their daily email being a popular option. This email contains a curated selection of your best highlights, providing you with opportunities to revisit important insights.
The third step is integrate. Integration involves finding ways to incorporate the knowledge you've gained into your work or daily life. This can be achieved through various means, such as using spaced repetition techniques to enhance retention, exploring the connections between seemingly unrelated ideas, or acting on inspiration triggered by a well-timed reminder during your daily review.
By following this reading workflow, you can maximize the value you derive from your reading materials. It helps resurface important ideas and concepts, creating repeated opportunities to apply them effectively. Many great readers throughout history have relied on similar external systems to compensate for their forgetfulness and ensure that they make the most of what they read.
In conclusion, the cohort retention rate is a key metric for determining product market fit. It measures the percentage of users who continue to use your product over time and reflects their satisfaction and loyalty. By actively measuring and improving cohort retention, you can amplify your acquisition efforts and foster organic growth through positive word-of-mouth. Additionally, implementing a reading workflow can help you extract actionable insights from your reading materials and integrate them into your work or daily life.
To apply the insights from this article, here are three actionable pieces of advice:
- 1. Actively measure and track your cohort retention rate using a "triangle" cohort retention chart. This will provide you with a visual representation of your progress towards achieving product market fit.
- 2. Benchmark your retention rate against comparable products in your industry. Look for successful products that have significantly grown and analyze their cohort retention rates to set accurate benchmarks for your own product.
- 3. Implement a reading workflow to make the most of what you read. Capture important ideas and concepts, regularly review them, and find ways to integrate them into your work or daily life. This will help you retain knowledge, foster creativity, and take action on valuable insights.
By incorporating these recommendations into your product development and reading habits, you can increase your chances of achieving product market fit and derive more value from the information you consume.
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