So you’ve successfully brought in a new customer and they made a purchase, now’s the time to about-face and worry about the next customer, right? Not quite.
A lasting company is built on the foundations of customer retention, not solely on customer acquisition. Sure, bringing in new customers is important, but once you have them inside your castle walls you need to keep them there.
Many people in business talk about the benefits of building a moat as a competitive advantage. We think the moat can serve another purpose in business: customer retention. If your moat is a dedication to customer service, for example, the customer loyalty that follows can double as your competitive advantage.
It’s unlikely that every customer will be loyal, but measuring your customer retention rate using the calculator below can reveal problems within your business model and guide your strategy for extending customer lifetime value.
Retention rate measures the percentage of customers who continue to award the company their business compared to the percentage of customers who have churned. Churn rate, the inverse of retention rate, is the percentage of customers who no longer patronize the business.
Customer retention rate should be a north star metric for companies as it is the basis for the longevity of a sustainable business model.
Often times, the best decisions in business are those that sacrifice profit in the short-term but result in long-term gains. The legendary customer service policies at Zappos are a perfect example of short-term losses resulting in long-term customer retention.
A customer called Zappos to inquire about their return policy, explaining that their mother had passed away with multiple pairs of unopened shoe boxes. The Zappos customer service representative told the customer they would happily accept the returns for a full refund and would send a large box with a return shipping label to accommodate the shoes.
That’s great customer service, right? Well, the story doesn’t end there.
The next day, that customer received a bouquet of flowers from Zappos as a condolence for the family’s loss.
There are many more stories like this coming out of Zappos’ customer service center in Las Vegas every day. Word of mouth marketing from stories like these leads to more and more dedicated fans.
The customer-centricity that Zappos instills in their team has kept customers happily coming back. This has resulted in Zappos’ unheard-of customer retention rate of nearly 75%.1
When calculating your retention rate, you evaluate the number of customers that remain at the end of the time period in review, compared to the number of customers that were present at the beginning of the period.
When calculating retention rate, we don’t really care how many new customers were acquired.
In fact, we only consider this number to subtract it from the total number of customers at the end of the period. Then we divide the difference by the number of customers at the beginning of the period. Finally, we multiply by 100 to discover the retention rate as a percentage.
Retention Rate = ((E-N)/S) x 100
E = Number of customers at end of the period.
N = Number of customers acquired during the period.
S = Number of customers at the start of the period.
While retention rate is an important indicator of how healthy the customer base is, an economic analysis of that customer base is equally as important. Calculating the dollar retention rate can provide a deeper understanding of whether the retained customers are spending more or less money.
The goal is to retain 100% of customers and increase their customer lifetime value, but even companies with the healthiest competitive advantage and customer retention still lose customers.
Even in the midst of losing customers, the dollar retention rate could indicate a trend towards a healthy business model. How is that possible? Let’s use an example.
Let’s assume a food delivery app offers half off of delivery fees on Fridays. Customers love themselves some low-fee Friday, but the company operates at a loss when the fee is cut in half.
The company runs this deal for the three month period in the first quarter of the year. After calculating their customer retention rate for Q1 they notice a retention rate of 55%, great, but overall an operational loss for the quarter, not so great.
The company decides to discontinue their low-fee Fridays, and instead test surge pricing on Fridays in the second quarter. When calculating customer retention rates for Q2, they notice their retention rates have dropped substantially to 25%, uh oh.
Then they calculate dollar retention rates.
Although their churn rate increased for the quarter, they came out substantially more profitable, which is indicative of a much healthier business model.
Unfortunately, this can also play against the company. If surge pricing caused more customers to purchase on any other day of the week, they could see a higher customer retention rate, but a lower dollar retention rate. This is why calculating dollar retention rate is important.
Some of the largest and most successful companies have been built with these principles in mind. Although there is no absolute path to success, many—if not all—entrepreneurs, leaders, and operators of businesses agree that dedication to the customer is important.
Customer retention rate is like a check engine light for your growth machine. If the light indicates a problem, you can start plotting a plan of action. Perhaps that action plan starts with strengthening your customer service strategy with personalized mobile marketing communication.
Building app retention rate starts by focusing first on eliminating user churn. You wouldn’t put air in a tire and drive across country without first patching the hole. Learn more about how you can create an airtight user retention strategy for your mobile app using CleverTap.
For an easy way to calculate LTV or CLTV, use our Customer Lifetime Value Calculator.
See how today’s top brands use CleverTap to drive long-term growth and retention