Retaining Users by Building State
Startup Handbook:
How are you retaining your customers?
This lesson shares strategies for retaining users over the long-term.
If users leave shortly after trying your product, you’ll encounter two problems:
- You’ll ruin your first impression, which deeply matters in software. There are thousands of other apps competing for a customer's attention.
- You’ll hurt your paid acquisition economics: if users don't stick around and generate revenue, ads may be too expensive to run.
When users leave, it's called churn. The strategies you implement to combat churn are called retention or stickiness strategies.
The most effective retention strategy is what I call building state. It's a concept borrowed from video games: the more you play a given game, the more “state” you accrue. This may include your armor, weapons, character skins, and so on.
More state compels users to stick around because (1) they don’t want to lose everything they've worked for and (2) they can exploit their increasing status to gain more state more easily. (The rich keep getting richer.)
State building is an old concept. Think of credit card rewards and frequent flyer programs: you spend money, accrue points, and convert points into rewards. Once users build momentum through state building, they're less likely to switch to a competitor.
In software, which is this lesson's focus, state is exceptionally powerful. It's why many mediocre companies remain unbeatable for decades—like eBay and Craigslist. Their UX is bad, people dislike using them, and they fail to innovate. But no startup has managed to topple them. This lesson explains why.
The more you embed the following retention strategies into your product, generally the more likely users are to stay.
State building strategies
Not every strategy below works for every business. See which strategy your business maps onto the best—then consider prioritizing it.
1. Accrue non-transferrable reputation
If you accrue 10,000+ feedback ratings as an eBay seller, you’re not leaving eBay any time soon. That reputation is too valuable: it produces a huge boost in revenue because of the trust it commands from buyers.
And here's what makes this state even stickier: **your seller reputation cannot be transferred to another marketplace.
**
This type of stickiness—non-transferrable reputation—applies to all marketplaces and directories: Yelp, Airbnb, Etsy, and Alibaba all rely on this technique to retain users and thereby their monopoly.
This is why they pester you to leave reviews and provide feedback all the time.
2. Accrue a non-transferrable audience
When a YouTuber acquires 1M subscribers, those subscribers can’t be transferred to another social platform. Users are accruing a non-transferrable audience.
The more state (audience) you accrue on YouTube, the easier it is to go viral. This is what I mean by the rich keep getting richer. Because of this momentum trap, it's difficult to convince a top YouTuber to leave for another social network.
This tactic—accruing a non-transferrable audience—occurs across all social networks: Twitch, Instagram, Twitter, and so on.
So, if your product provides a marketplace or an audience graph, encourage users to build state within that to accrue more power. For example, if eBay wanted to become even stickier, they'd prioritize sellers with higher ratings in their search results—to help them make even more money. This makes it even tougher for the best sellers to leave and abandon that edge.
As a counter-example, the newsletter software Substack.com does allow customers to export their subscribers' emails. So, if a product much better than Substack emerges, Substack's stronghold is weak. (Fortunately, they're making the ethical choice and their users win with more freedom!)
3. Create non-transferrable data
Apps that collect direct messages, such as customer support software (Zendesk) and chat apps (Slack), accrue state in the form of data. _If that data is critical for the business to reference—_to employees to find answers and form strategies—then the customer is increasingly locked into that product.
Especially if two things are true:
- The messages cannot be transferred out. (This may annoy users.)
- Important and proprietary analytics data is accrued in the act of using the service, and no other tool can parse that data. (For example, Salesforce analytics shows you the historical performance of salespeople.)
Analytics products, such as Mixpanel and Amplitude, also fall into this category of creating non-transferrable data if the analytics can't be transferred out.
4. Consolidate contacts into a social graph
Let’s say you’ve spent years adding everyone you care about to Facebook or to iMessage. Or, let's say you've spent a decade building your "professional network" on LinkedIn. Even if these platforms allowed you to export your social graph to competing products, it's impractical to convince your contacts to move to the new platform with you. If you're the only one on the new platform, you have no one to message.
In other words, if users build social graphs within your product and use it to communicate with each other, they're less likely to leave for a competitor.
In the rare circumstance where new social products overcome the cold start problem, (e.g. Signal), they're propelled by an enormous PR apparatus and cultural tailwinds. Or they're catering to a niche subset of the original audience before expanding broader.
Additional retention strategies
There are more retention strategies beyond state building. I've listed some below for folks who optionally want to dive deeper. Otherwise, skip to the next section.
When you integrate libraries or cloud infrastructure (e.g. Twilio, Stripe, AWS) into your application, you're unlikely to switch providers because it's often too much work to learn a new API and rewrite your code—especially for competitors that are only marginally better.
Similarly, if you spend weeks building a website in a site designer like Squarespace, and if there's no ability to transfer that site to an alternative platform, you’re locked into Squarespace for as long as you use the site. This lock-in dynamic also applies to Figma (for UI design), Framer (for app design), Softr (also for app functionality), and other apps.
In both cases, building your business atop third-party infrastructure makes that infrastructure sticky. In the second set of examples, users are even more deeply embedded into the infrastructure: they can't swap them out and they'd have to restart from scratch.
If a particular social network is the only place that creators Pewdiepie or Physics Girl post their content, fans of those creators are stuck using that platform. This is why Spotify paid Joe Rogan and other celebrities millions for exclusivity.
Similarly, if eBay is the only place with a critical mass of Beanie Baby buyers and sellers, it’ll be where every Beanie Baby shopper visits first.
This is the power of supply exclusivity, which is relevant to marketplaces in particular. The best exclusivity is long-term and unpoachable—like ESPN's multi-year deal with the UFC. Otherwise, if your exclusivity is fleeting, your retention will be too.
The longer that a company has successfully handled your sensitive items, such as your money and collectibles, the stickier they are to you. Because even if a better competitor emerges, the competitor’s benefits are unlikely to be great enough to overcome the hard-earned trust of the current provider.
This same dynamic applies to law firms and accountants that you trust to not screw up the sensitive work they do for you.
This phenomenon explains why so many mediocre legacy companies have survived so long. Customers are afraid to switch; they don't perceive enough ROI.
Investor's perspective
Terminology note: You’ll often hear retention and stickiness referred to as a “moat.” I avoid this term because I find it misleading. Few companies have genuine moats—unless they’re exploiting kleptocratic, scientific, or intellectual property advantages where competitors are literally unable to replicate them. In practice, for most businesses, you try your best to maximize stickiness while remaining innovative and culturally relevant over the long term.
Consider which of this page's strategies can apply to your startup then lean into them.
From my perspective as an investor, if you're a software company that isn't implementing at least one user retention strategy from this page, I'm less likely to invest in your startup because I'd be afraid of competitors easily stealing users from you. There must be gravity keeping users around in the face of increasingly formidable competition.