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What is customer retention?

Customer retention 101

Repeat customers are an excellent indicator of a thriving business. If customers are happy with the value they get from your product and the experience of buying from you, you have an opportunity to earn their long-term loyalty. Customer retention is a measure of your company’s ability to do just that: convince customers that remaining loyal to your brand is a better option than going elsewhere. By focusing on customer retention, you can maximize the revenue you generate from each customer over time.

Why is customer retention important?

High customer retention is a key indicator of success in any industry. A high retention rate shows that your customers are happy with the value they get from your products or services. When customers are happy, employees are often more engaged as well. But aside from these two basic benefits, there are other reasons to sharpen your focus on customer retention:

  • Lower your costs. Acquiring new customers through marketing and advertising is five to 25 times more expensive than selling to existing customers. Retaining existing customers and maximizing your sales with them is a comparatively low-effort, high-reward initiative.
  • Gain brand ambassadors. Loyal customers can generate free word-of-mouth advertising when they recommend your brand to people in their circle and on social media. They tend to leave positive reviews and offer valuable feedback that can help you improve your product or service.
  • Increase average order value (AOV). Fully engaged customers represent a larger wallet share compared to others. Many companies make the largest percentage of their overall revenue from repeat customers.
  • Multiply profits. Even an increase in your customer retention rate as modest as a few percentage points can dramatically improve your bottom line.
  • Add resilience to your business. Having a large base of loyal customers can help your business weather unexpected market volatility with less revenue disruption.

Customer retention vs. customer acquisition

Customer acquisition—finding new customers and convincing them to buy from you—is strategically different from customer retention. Acquisition is about getting people through the door and converting their interest into sales. A customer retention strategy is about being a good host to those who have already crossed the threshold, making them want to stay because you give them reliable value and impeccable service.

Loyal customers not only provide an excellent return on your relationship-building investment in terms of revenue, but they also often become ambassadors for your brand. Their recommendations create a buzz about your products, lowering your customer acquisition costs.

Calculate your customer retention rate

Your customer retention rate is easy to calculate and can be a useful key performance indicator for your business. Your customer retention rate is the percentage of existing customers who remained loyal to your brand during a particular period of study. You’ll need to know three variables:

  1. Number of customers you had at the start (S)
  2. Number of customers you had at the end (E)
  3. Number of new customers you added during the same period (N)

Now apply this customer retention rate calculation:

Subtract new customers (N) from your end value (E) and divide it by your starting value (S). Then multiply by 100 to get a percentage.

Here’s what that formula looks like:

[(E-N) ÷ S] * 100 = X%

For example, let’s say that you want to know your customer retention rate for the last quarter. If you had 1000 customers at the beginning of the quarter (S), had 900 at the end of the quarter (E), and acquired 200 new customers during that same time (N), your calculation would be:

[(900-200) ÷ 1000] * 100 = 70%

That means that over the last three months, you retained 70 percent of your existing customers. The inverse of that figure is your customer churn rate: 30 percent of existing customers stopped buying from you during that period.

As you put initiatives in place to increase customer loyalty, you can use your customer retention rate as a key measure of the effectiveness of your efforts. The goal is to drive your customer retention rate as high as possible and maximize customer lifetime value (CLV)—the projected revenue you will receive from each customer over the course of your relationship.

Customer retention best practices

Earning high retention rates is about taking your relationship with your customers beyond the transactional level. Businesses with loyal customers are attuned to where the friction points are in the customer journey and are dedicated to removing them. Slow page load times, a poor website user experience, or a long customer service wait time can often be enough to give customers a negative impression of your brand. It often takes just one negative experience to inspire consumers to switch brands, so it makes sense to ensure every customer interaction is positive, simple, and efficient.

Here are some actions to take to get more customers thinking of your business as their go-to brand.

Use data to inform your customer retention strategies

Customer relationship management (CRM) software can provide analytics that will help you better understand your customers’ needs. Data can help you find out what their frustrations are, learn where there might be cross-sell or upsell opportunities, and gain insights into your brand reputation.

Meet customers where they are

Today’s consumers expect access to their preferred brands on the same digital channels they use every day. Providing simple and flexible options for contacting and buying from you can lead not only to high customer satisfaction (CSAT) scores but can also increase purchase frequency and transaction amounts. Give your customers as many ways to contact your business as you can effectively manage, including:

  • Live web chat. Many consumers—especially those under 35—prefer a fast-and-friendly interaction with a live agent to a call.
  • Chatbots. Chatbots, virtual assistants, and virtual agents (VA) provide convenient self-service for simple issues and inquiries and can be escalated to contact with a live agent if necessary.
  • Social media channels. A social media presence can make brands seem more human while giving them the ability to answer consumer questions, expanding their following, and showcase new products.
  • Messenger apps. Popular apps such as Facebook Messenger and WhatsApp can facilitate quick and convenient chats between your customer support team and consumers.
  • Email. Use email to keep customers in the loop about their purchases and engage them further through targeted email campaigns.
  • Video chat. Video chat enables easy communication, and screen sharing is useful for more complex customer needs such as product demonstrations.
  • Voice. With some or all the channel options listed above in place, your contact center agents will have more time to engage effectively, and customers will enjoy shorter wait times.

Aim for customer service excellence

Great customer service helps you to stand out in the competitive business landscape. Invest in contact center employee training that emphasizes how to listen empathetically while resolving problems fast.

Customer service software can help your agents track conversations across channels so that customers never have to express their issue twice. This kind of tool can empower your contact center agents to make each interaction a positive one while also giving your organization the insights you need to discover why your loyal customers choose your brand—and how you can keep delivering more of the same.

5 customer retention strategies that get results

Customer retention strategies are initiatives and processes businesses put in place to increase loyalty and customer lifetime value. As customer expectations for value and convenience continue to rise in today’s marketplace, customer retention strategies have become crucial operations—a “must have” rather than a “nice to have”—for many businesses. A good retention program isn’t just one tactic, but a multi-pronged approach to engaging customers more deeply while improving the customer experience.

Here are five proven customer retention strategies that you can implement in your business to increase loyalty, average order values, and purchase rates.

  1. Track and analyze churn metrics. Customer relationship management software can give you insights into how often customers decide to stop buying from you and why. Because you can’t fix problems you don’t understand.
  2. Fine-tune your user experience (UX). Spot obstacles in the customer journey and remove them. Make it fast and easy for online customers to find the products or services they need and check out. Invest in levelling up your customer service game so every customer gets a quick response and feels listened to. It’s also a best practice to give customers self-service options, such as FAQs, so they can get instant answers to simpler queries.
  3. Personalize your communications. Tailor marketing campaigns to specific segments of your customer base and engage them on the channels they use most, whether it’s email, chat, or social media.
  4. Collect customer feedback. Learn about your customers’ experience by asking them about it. Use reviews and surveys to refine your offerings and let your customers know your aim is to always exceed their expectations.
  5. Start a customer loyalty program. Exclusive memberships and loyalty programs can offer existing customers extra value while making them feel part of your brand. Encourage regular customers to spend more and buy more often by offering incentives such as free merchandise, first looks at new products, and special promotions.

In an ideal world, your retention rate would be 100 percent: customers would value your offering so highly that they would remain loyal customers forever. A perfect retention rate might not be possible in the real world but following some of these practices will help you get those numbers up.

Plan your customer retention strategy

Customer retention initiatives offer valuable opportunities to keep your existing customer base loyal to your business while increasing customer lifetime value. Using these tactics, you can encourage customers to spend more on each order, buy from you more often, and become enthusiastic ambassadors for your brand.

Microsoft Dynamics 365 can help you optimize your customer retention strategies by giving you easy-to-understand analytics of customer data with insights to improve your CSAT score. Dynamics 365 Customer Service gives your business a 360-degree view of customers, so you always understand what they want and need most.