I understand retention policies applied to Exchange means all mailbox data is retained for a period defined in retention policy.
Does this mean if our organisation want to reduce overall Exchange mailbox data then there is no point asking users to cleanup their mailboxes as even if a user deletes their data, it will still sit there and have no impact on storage consumed by EXO?
You correctly state that your goals are in conflict. By design, retention rules will win in a conflict with deletions. They wouldn't be much use otherwise. You need to decide which goal matters more to your organization and it may be different on a per user or group of users basis. Typically retention goals trump deletion goals because retention is driven by legal/compliance/regulation. At some lifecycle stage, the reverse becomes true and items that are X years old are deleted because legal/compliance/regulation retention requirements have been met and the continued retention actually becomes a potential risk. One compromise between your goals would be to adjust lifecycle rules so items are moved to an archive mailbox where they are retained, so that space is freed up in the user's primary mailbox. The default rules for EOL are here. https://docs.microsoft.com/en-us/exchange/security-and-compliance/messaging-records-management/defau... You could reduce the default 730 day move to Archive to be a shorter period.