Customer Retention Guide
Welcome to our guide on customer retention. We will take a deep dive into the concept of customer retention and how understanding your customer retention rate and developing a strong customer retention strategy is crucial for the growth of any business.
In this chapter, we will provide an overview of customer retention, how retention and churn is calculated, and explore why it’s worth the effort to maximize your retention strategy.
Customer retention measures how many customers remain loyal to your business over time. Obviously, the better your retention efforts, the faster you can grow your business.
The primary goal of your customer retention programs is to transform one-time customers into repeat customers who will continue to do business with you for the long term. Customer retention is essential to creating sustainable growth. Otherwise, you can spend a lot of money simply replacing customers that churn with new customers and have no revenue growth.
Ah, the shiny allure of a new customer. When it comes to business growth, marketing efforts often focus on seeing acquisition metrics climb up and to the right instead of customer retention metrics. But what if we told you there was a secret growth strategy hiding in plain sight, one that costs 5X less to implement?
It’s retaining the customers you already have.
Research reveals businesses that prioritize customer retention see higher ROI, and increasing retention by just 5% can drive a 25-95% hike in profits * But to unlock the benefits of customer retention, you’ll need to evaluate the holistic customer experience. What does it take to keep customers happy and coming back for more in an increasingly crowded landscape? Read on to dig into the most effective retention strategies and tactics behind today’s leading brands. From KPIs to measurement, we’ll cover how to reduce churn, deliver more value to your customers, and share the best practices every brand should take into account in 2023—and beyond.
Customer retention is the metric for measuring customer loyalty to a business over time. Fundamental to both immediate and long-term growth, companies will employ a suite of tactics to increase loyalty and prevent churn. The goal of retention is to increase purchase rates, customer satisfaction and prevent customers from switching to a competitor. Failing to do this can be costly to companies, as the average organization loses 10-25% of its customers each year *. The best retention practitioners are brands prioritizing the customer experience above all else. That’s because customers committed to repeat purchases are more profitable to your business in the long term. By working to make the transactional experience more seamless and intuitive, these companies lower the threshold for customers to get the most value out of what the brand has to offer.
To improve customer retention, you’ve got to track your customer retention metrics. Start off by learning how to calculate customer retention rate (CRR). This is the percentage of existing customers who remain customers after a set period. The goal is to keep this rate as high as possible. First, you’ll need to decide which period of time you’d like to measure. Next, you’ll calculate customer retention rate using this formula: [(E-N)/S] x 100 = CRR.
The customer churn rate is the rate of attrition, or the rate at which customers stop doing business with a given company. Customers can churn for a variety of reasons, like an expired payment method or a less-than-optimal service experience. The goal is to keep this number low. Like the example above, you’ll first need to decide which period of time to measure. Next, you’ll calculate your CR using this formula: (L/C) X 100 = CR
You’ve worked hard to earn the trust of the new customers you acquire—and that trust takes time to build. 81% of customers say that trust is an important factor in their decision to make a purchase. From paid ads to brand campaigns, if you’ve invested significant marketing and sales resources to win them over, it’s more effective to invest in ways to keep them loyal than to pay the price tag to acquire (and lose) new prospects.
And in a crowded marketplace, getting new customers to choose your product time and gain over that of a competitor isn’t easy. That’s where your retention strategy comes in. Using tactics like improving your onboarding, routine survey feedback, and loyalty programs, you’ll experience benefits like:
Retaining an existing customer is 5X cheaper than acquiring first-time customers*. In many instances, companies with a robust retention strategy reduce spending on marketing, sales outreach, and advertising because it’s simply easier to market to the customers they already have.
The more loyal your customers are, the more likely they will buy from your business again. Repeat customers are also easier to upsell to, with 57% of consumers spending more on the brands they use frequently and trust.
A happy customer shares their experience with their community, powering the most powerful form of advertising: word of mouth. Once someone becomes a loyal fan of your business, they’re more likely to refer you to friends, family, and colleagues. Word-of-mouth referrals fuelled the growth of brands like Pinterest and Casper.
Frequent interaction and familiarity can deepen customer interest in the range of what your company offers. As a result, your customers are primed to try out and pay for additional products or features your company provides.
Successful businesses also measure additional customer retention and churn metrics to ensure they’re staying on track with their strategic plan. Here are some of the more common data points they track:
the rate at which customers stop using or buying your products and services. Churn is the opposite of retention but is an inevitable challenge to building a sustainable business. You’ve spent the money on acquiring a customer only to have them leave you. And unfortunately, no matter how successful your app is, you will always have to deal with churn.
represents the amount of money you can earn from any potential customer based on sales data from your existing customers. You’ll need to know several things to calculate the CLV accurately, including average sale price, average number of customer transactions, and average customer lifespan.
To calculate customer lifetime value: Customer Lifetime Value = Customer Value × Average Customer Lifespan
It’s basically the customer value (average sale price x the average number of transactions) multiplied by the average customer lifespan.
is crucial to your business’ sustainable growth. If you’re spending more than your CLV, you’ve got a problem — especially if you also have a high churn rate.
CAC is the money you spend to attract customers to your products or services. You calculate CAC by taking the total expenses to attract, engage, and convert new customers and dividing it by the number of new customers acquired during your measurement period.
is one of the most important metrics companies need to know. If CAC exceeds the expected customer lifetime value, there’s trouble ahead. If you’re spending more on getting customers than they will spend with you, it’s simply not a sustainable business model.
The LTV/CAC ratio is generally expressed as LTV: CAC. A common benchmark for a healthy LTV: CAC is 3:1 or better.
looks at the customers who have purchased the most divided by the number of unique customers. While different companies will set the number that determines loyalty differently, an ecommerce store typically defines it as customers that have made four or more purchases.
determines how much revenue churns each month. You would calculate the Monthly Recurring Revenue (MRR) that was lost during the period and subtract any additional revenue you received from existing customers. Then, divide it by your total monthly recurring revenue.
shows how your business is increasing revenue from your current customers and is vital for measuring retention and growth. If your existing customer revenue is growing, your marketing, sales, and support teams are likely doing an excellent job of getting customers to increase spending.
You calculate the customer revenue growth rate by looking at the MRR from your existing customers during your measurement period, then dividing it by MRR at the start of the month.
is measured by asking customers a question such as: “How would you rate your overall satisfaction with [the product, service, or company] you received?” And they rate their satisfaction on a numerical scale of 1 to 5: from very unsatisfied to very satisfied. You then take the number of customers rated as a 4 or 5 and divide it by the total number of survey responses to get your percentage of satisfied customers.
gauges customer response based on a single question that asks: “How likely are you to recommend our [product, service, or company] to a friend or colleague?” Customers are asked to rank you on a scale of 0 to 10, with 1 being not likely and 10 being extremely likely.
NPS is calculated by taking the percentage of promoters (scoring 9-10) and subtracting the percentage of detractors (0-6). Those scoring 7-8 are used in the total count of those responding but are not tracked as these passive customers are not convinced either way.
Customer retention measures how many customers remain loyal to your business over time. Obviously, the better your retention efforts, the faster you can grow your business.
The primary goal of your customer retention programs is to transform one-time customers into repeat customers who will continue to do business with you for the long term.
We’ve answered what is customer retention, how to calculate customer retention rate, and what customer retention metrics you need to track in order to keep your customers coming back.
Up next, we will tackle customer retention strategies that you can implement in order to create sustainable growth. Otherwise, you can spend a lot of money simply replacing customers that churn with new customers and have no revenue growth.
Schedule a live product demo with our team today if you’re ready to see how a customer engagement platform looks.
Talk to us
