Whether you want to make a case to a senior member of your team, or you’re considering if it’s worth implementing into your company's ecosystem, these’re the essentials that everyone should know about customer retention.
In this article we’ll explain:
- What customer retention is,
- How customer retention can benefit your business,
- The role of customer loyalty in customer retention, and
- How to calculate customer retention.
What is customer retention?
Customer retention refers to a company's ability to keep hold of its customers over a sustained period of time’. If a company has a high rate of customer retention,this means that customers continue to buy your product, instead of churning and moving to an alternative business or product.
What is customer churn?
There are instances when a customer stops buying a product or service - this is known as customer churn.
There are two types of customer churn:
- Voluntary churn, and
- Involuntary churn
Voluntary churn is when the customer makes the active decision to end their subscription. This decision could be made when they are unsatisfied with the product, or they’re not receiving the value they thought they would get.
On the other side of the coin, involuntary churn is when something outside of the customers control happens. This is something not related to your business. This could be a payment failure, service errors, or insufficient funds.
The increase of customer churn (and reduced customer retention) can occur when something has gone wrong with your current strategy, there’s a new competitor on the market, or your consumer isn’t being offered an enticing incentive to continue buying your product or service.
How does customer retention help businesses?
Keeps costs down
It’s easier and cheaper to keep existing customers happy, instead of starting from scratch and sourcing and converting new prospects.Getting a new customer to buy is five to 25 times more expensive than convincing an existing customer to stay.
This is a statistic that’s constantly being thrown around when it comes to customer retention, but for good reason. It’s a mind boggling number, and should convince those who may be still on the fence about customer retention’s importance.
Upselling and cross-selling
It’s not only cheaper to try and convince a customer to remain a customer, but they are also the best people to offer other products too. This is a chance to increase sales. If someone is already a customer of yours then they already have a good understanding of your brand and what they can expect from you.
Once you’ve considered their customer journey, and understand which needs you are fulfilling for them, it’s a good idea to offer them other products or services that you think they may be interested in.
If they know that you provide these other services, and that you’re recommending it to them specifically and not just as a mass advertisement, then they’re not going to go through the inconvenience of trying to find another company that does the exact same thing.
Also, if your customer knows you well, there’s every chance they'd be willing to spend a bit more money to remain with someone they trust. You can upsell some of your more expensive products by letting them know what more they can get for their money.
Improve your bottom line
Retention means stability. It’s a topic that aims to keep things the same. This may sound disastrous in any other department, but customer retention is successful when things stay consistent.
Having a group of customers that keep returning means that you’ve successfully retained them. It's a win! Not only is it a win for retention, but it’s also a win for your bottom line. Studies show that if you were to keep all your existing customers for just one extra month, your annual growth could increase by 3%.
Existing customers can market for you
It’s a well known fact that customers trust word-of-mouth more than they do any other form of marketing. And they’re more likely to be receptive to this form of marketing from friends and family.
An increase in customer retention can also lead to an increase in new customers merely by association. A good relationship with your brand can get customers talking about you to those around them and bring more awareness to your platform.
This is what is known as customer advocacy, and is another vital resource that can aid the success of your business.
The role of customer loyalty in customer retention
One of the ways to increase customer retention is by creating a custom loyalty program. This’ll provide you with a clear-cut process to follow and help you track your progress.. A great way to set this up is to have a tiering system for loyalty. This is just one type of loyalty program, but there's a variety of ways to set one up.
For the outspoken advocates who have stuck with your business for a long time, you might also want to consider an advocacy program. This is where you can actively built a rapport with the most hardcore of your loyal customers. Advocacy programs are a wonderful incentive to explore further down the road.
To begin with, think about these components:
Incentivise your customers to stay
If you’re lucky, customers may stay with you regardless of how much you interact with them - particularly if your product consistently ticks all the right boxesBut if the day comes that you don’t completely fulfill that need, then they’ll have no reason to stick with your product, irrespective of how long they’ve been using your products.
If you’re a regular presence in their inbox or on social media and keep them up to date with any changes, or new products, then you’re as much a part of their life as they’re in yours. Customers who know you and the faces behind the brand will be far more likely to talk to you about making changes to fit their needs, because they would prefer to stay with you.
Building that relationship and trust is the first and most important step.
Personalize the program to them and their journey
Whether it’s a tiered, points-based, paid, or value-based program, you need to make sure it fits your product and your customers.
Establish whether they're looking for exclusive experiences, discounts, or rewards. This point’ll be entirely dependent on who you are and what you can afford to give. Don’t be afraid to give one a go and change it once you have feedback.
Another good trend is to make it personal to the customer. For example, perhaps you could send them a discount or offer on their birthday.
Alternatively, if they’ve just secured a new promotion, offer them an experience that can help set them up for their new position. Personalization of loyalty rewards is worth its weight in gold - in a literal and metaphorical sense.
Offer chances to feed back
Customers who sign up for loyalty programs are looking for the next step of access. Be it in discounts or rewards, or feedback, when they give you more of their time (and money), they’re wanting you to reciprocate in some way.
A great way to do that is make them feel like their voices can be heard. Prioritize your existing customers by giving them the opportunity to offer suggestions on how to improve your product, and let them know when their suggestions have been acted on!
Seeing the results of their efforts ‘in the flesh’ is the best way to show them how much you value their insight.
How to calculate customer retention rate
Customer retention may seem like a more qualitative piece of data than it is quantitative. As this is a topic that comes about through conversation and interaction with your customers, rather than seeing them as a simple set of numbers, this isn’t untrue.
However, retention can feel elusive when it isn’t a simple number on a chart. Calculating customer retention rate can give you that number to make it much easier to measure your success as you move through this journey.
To make things easier, this calculation can also give you your customer churn rate too, as it’s simply the inverse of your customer retention rate. Two statistics for the price of one.
To calculate your customer retention rate you’ll need four key figures:
- The time period you want to calculate your retention rate for. For example, weekly, monthly, quarterly, or yearly.
- The number of existing customers at the start of your chosen period. That'll be defined by S.
- The number of total customers at the end of your period. That'll be shown as E.
- The number of new customers added within the period. This Is identified by N.
Then you can input this data into this formula.
[(E-N)/S] x 100 = Customer Retention Rate
You want to work out your CRR (Customer Retention Rate) for the first quarter of the new year.
- The number of existing customers at the start of the quarter was 100. S is 100.
- You ended the quarter with 110 customers. 110 is E.
- The number of new customers you added over the quarter was 10. N is 20.
The formula will then look like this:
[(110-20)/100] x 100 = 90
Your CRR for that quarter would be 90%.
Understanding your retention rate can give you a way to evaluate your metrics. You'll have a good understanding of how you performed during your chosen time period and a good number to show to C-suiters when showing the value of this topic on your company's bottom line.
Looking for something more in-depth?
Our ‘guide to customer retention strategies and frameworks’ takes you through the details of ways in which you can actually begin implementing it into your business as a concrete component to the way you approach marketing, sales, and success.
In it, we take you through:
💡 5 simple strategies to drive your customer retention,
☀️ We detail the type of content that works for boosting your customer retention,
🔥 What it means to have a high customer retention rate, and
📱 How to boost your customer retention with social media.
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