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.

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.