When a company has a high customer retention rate, buyers return to purchase products or services on more than one occasion. When retention rates are high, this bodes against customer churn.
What is customer retention?
If you provide an ongoing service and a client sticks with you for more than a day then you’re retaining customers. There are a whole host of ways to achieve this, from loyalty cards to VIP programs, but the aim is always to have customers stay with the company for as long as possible.
Why is customer retention so important?
The modern market is volatile and competitive. As many businesses will testify, attracting new customers is extremely difficult, comparatively easier than retaining prospects you’ve already managed to convert.
Financially, increasing customer retention by 5% can increase profits from 25% to 95%. Retaining customers is significantly cheaper than finding new ones and your accountant will be glad of the consistent, often predictable income. It doesn’t just affect your bottom line though. Customer retention has all kinds of benefits:
- Advocacy: If customers like your company, they’ll do the marketing for you.
- Information: Engaged customers are more likely to leave feedback on how you can improve.
- Cross-selling: An existing customer is more likely to explore the rest of a company that they trust.
The problem is, it’s easy for upper management to concentrate on new customer growth and miss the big picture- which is why you need solid, quantifiable metrics.
How to calculate customer retention rate
There are a few different ways to calculate customer retention rate, but here’s one of the widely-used methods.
((E-N)/S)) x 100
E is the number of customers at the end of the period, N the number of new customers acquired during a period, S the number of customers at the start of the period.
When calculating the customer retention rate, it’s important to establish a period that makes sense; if a customer bought a house from a real estate agent on the Friday, and didn’t buy another the following Saturday, that’s understandable.
Complete a deep-dive on your sales data and use some common sense to establish a range of periods that work. When considering the range, you might want to be able to see how you’re doing in both the long and short term.
This method is one of the most common metrics, but there are others. Let’s cover a few of the most important:
When exploring customer retention, you can calculate the percentage of customers who you’re not retaining. These are known as ‘churn’.
(Total customers + New customers - Lost customers) / Lost customers = Churn rate %
Again, you’ll have to pick a period to measure this in that makes sense - a month, two months, a year, and it makes more sense for subscription-based businesses like SaaS providers than it does for companies that sell physical products in stores.
Repeat purchase ratio
If you sell one-off products, a repeat purchase ratio is a suitable option for generating solid data on customer retention.
There’s a caveat though: you need to be able to show whether one person has purchased from you more than once. That’s easy for online businesses, but can be challenging for companies selling physical items to retailers who then sell them to customers.
Let’s take a look at the equation:
Number of returning customers / Number of total customers
If you look at your data and see that of 10,000 customers 8,000 purchased more than once in a given period, you’ve got an 80% repeat purchase ratio.
Customer lifetime value
This is an easy method with serious value when it comes to balancing customer acquisition and the real value your customers bring.
For new businesses or new products, the cost to acquire customers (CAC) can be a ‘startup killer’ - you sink your money into glitzy product launches, an elite field sales team, and bountiful swag, but once you land a client they’re only paying a fraction of what you spent getting them in the door.
So, just get the totals that every customer has spent together and calculate the median (don’t use the mean average- a few big fish customers could distort your numbers). If the average lifetime value is below your acquisition cost (the simple version: your sales and marketing budget divided by the total number of customers) then you have a customer retention problem.
Revenue churn rate
Revenue churn rate is great for exploring the intricacies of your sales and return numbers, so you’ll need to have access to a CRM or accounting system, or buy the company accountant a big coffee!
Revenue churn rate measures how much revenue you’ve lost from customer churn in a given period. You can put together a simple revenue churn rate by multiplying the number of customers you lost in a given period by your Customer Lifetime Value: ‘we lost five clients last month and with a CLV of $5,000 that means $25,000 in lost revenue.’
A better version incorporates all the different variables in your business. For example, if your company sells subscription products or services (so you have monthly recurring revenue or MRR) and you also have upgrades or optional features then you could use:
((MRR at the start of the period - MRR at the end of the period) - MRR from upgrades) / MRR at the start of the period
Companies with different business models will have to use different formulas, and you could use Excel to make intense formulae if you’ve got a head for figures.
Net promoter score
While NPS doesn’t explicitly focus on measuring customer retention, it’s so closely related that if you measure one you should measure the other, as NPS can give you valuable intel on why customers aren’t sticking around.
NPS is a metric that shows how likely your existing customers are to recommend your company to others. It’s great for diagnosing customer retention problems because if you’re finding that retention is a problem then one of the likely culprits is that customers just aren’t satisfied with what you’re doing, and NPS will give you an insight into satisfaction problems. If you’ve low poor retention and a low NPS then you’re pretty obviously not delivering a good product or service. If your NPS is good but you’re not retaining customers then there’s something deeper wrong with your business model- it might be that customers are using your product for a while and moving on when they have no use for it, so you might have to add new products or educate your customers.
How to improve customer retention
Establish the cause of churn
If you know why people are choosing an alternative product, you can do something about it.
Ask former customers why they left and if possible, check reviews. You will find that one of the main reasons is poor customer service and a perception that you don’t care about your customers, something that can be improved with a little retraining and some changes in policies.
Focus on service
Service with a smile and a chirpy ‘have a nice day now!’ doesn’t necessarily epitomize great customer service. Put yourself in the shoes of the customer: how easy is it to make an order? Can they get the technical support they need?
Empower customer-facing staff to give small tokens of thanks or sorry easily and without having to call a manager to offer a refund or send a long-term client some cookies on their birthday.
Little things like that go a long way.
It’s very rare for customers to jump ship immediately and there often warning signs to look out for that can help prevent future losses.
If possible, invest in a good CRM system and log every interaction your customers have with your company and your product. If your churn rate dramatically increases, you can consult the data to find out the telltale markers of a soon-to-be-ex customer. They might call help desks more than usual, refuse or reschedule calls with a relationship manager or just start logging into your website less. Whatever it is, as soon as you start seeing patterns you can flag existing customers as ‘at-risk, allowing you to prioritize giving them the TLC it will take to keep them around.
Introduce VIP systems
Customers always want to feel special; if you’re making them feel wanted, they’ll stick around longer.
Create and promote programs for long-term, high-value customers that’ll help them get more from you. This doesn’t need to be restricted to tiered discounts but can include priority support, dedicated account managers, even a party to celebrate your anniversary with the company.
Make Loyalty (and up-selling) easy
There are probably customers out there who would love to deepen and extend their relationship with your company if they only knew how.
There’s a fine line between letting your customers know about other services that you can provide and badgering them about giving you more money, but the easy way is to have up-selling opportunities there when the customer is using your product.
Freemium software providers often do this by having higher-level options on-screen but greyed out, with a link to purchase always nearby.
How to measure customer retention success
The first and most obvious way is to check in on your metrics regularly and see if lines are going up.
Remember, having reasonable timescales is key - this is a marathon, not a sprint. Your efforts to retain customers will take time to kick in, and it will take time to see how much of an effect they have.
For example, if you start a retention strategy in January and in February you see a 10% uptick in retention rates don’t start popping the champagne just yet - it could be that in March the bump will go down again since you’ve only managed to keep customers hanging on an extra month.
That kind of slow-and-steady mentality might be anathema to a move-fast-and-break-things culture, but it’s also the only way you’ll set yourself up for long-term success.
Introducing and solidifying your customer marketing strategy is also crucial in improving your customer retention.
How does a customer marketing strategy support customer retention?
A customer marketing strategy hinges on customer segmentation, engagement methods, and customer advocacy programs, and hones in on leveraging the experiences of existing customers, to improve both retention and growth.
With so many PMMs adopting customer marketing strategies as part of their setup, we were curious to see how they defined the process. 👇
“The process of providing your audience with the types of communications and experiences they need, want, or like as they move from prospects to customers then, ideally, to advocates.”
“The mission of customer marketing is to turn customers into advocates who expand and renew their relationship with the business. Where PMM is responsible for overall GTM strategy, CM plays a role in driving go-to-customer strategy.”
“Activities designed to drive retention, loyalty, advocacy, growth, and community participation for current customers. The strategy, which is different from marketing to acquire new customers, relies heavily on maximizing strong customer relationships.”
Benefits of customer marketing strategies
Irrespective of how you may define customer marketing strategies, it’s clear to see why many companies adhere to its key principles, with a string of benefits tied to the process:
Greater propensity to buy
We’ve all been in a position where we’ve experienced mediocre customer service.
Similarly, we’ve also been made to feel like royalty by a company and been inclined to put our money into their pockets, instead of their competitors.
This principle applies when marketing to existing customers; they’re 50% more likely to try new products and spend 31% more compared to new customers.
Key takeaway? Never underestimate the influence of great customer service; a positive initial experience with your product will boost the chances of a repeat purchase.
Get to know your customers
When PMMs are doing their utmost to attract new customers, buyer personas are used to try and understand the target market.
Sure, it’s effective, but it takes time. And time, as they say, is money.
Rather than PMMs imagining who your customers are, customer marketing strategies help you to use real-life examples, through use cases and case studies, to develop personas.
Customer marketing strategies are pivotal in staving off churn and increasing retention rates. If a customer marketing strategy is executed well (i.e. your messaging hits the right spots, they’re engaged, and your relationship’s watertight), then why would they go anywhere else?
The longer your customer uses your product, the more reluctant they’ll be to sever ties - and that’s only good news for your revenue chart.
Customer advocacy: it’s one of the most valuable ways of adding to your customer base. There’s every chance you could land additional business in the form of recommendations or referrals.
When a customer sings your praises and tells every man and woman under the sun how good your product is, they effectively do the hard work for you, offering their respective networks authentic, reliable feedback.
Customer marketing epitomizes good practice. Break down the core elements of customer marketing, and the strategy is reflective of good practice - period. Customer marketing strategies encourage PMMs to maintain customer relationships, grow revenue, and assist teams in retaining customers.
Does a high customer retention rate always come at a price?
As we alluded to earlier, there are CRMs on the market that’ve been designed to help companies spot trends and increase their customer retention rate. The problem? They cost money - and if you’re a small-scale start-up the chances are, you won’t have a great deal of spare cash in your account.
Eve Brill, Head of Product Marketing at Farfetch, shared how companies can improve their customer retention for no extra money.
Not one penny, not a single cent.
By the time you've finished reading her article/watching her presentation, you’ll have what you need to go back to your teams and implement some new retention tactics.