What is customer retention?

Plenty of articles out there will tell you how to find new leads and how to convert them into customers, but what comes next? Many novice marketers and salespeople spend all of their time and effort (and money) on acquiring new customers when, if they knew about the deep reservoir of potential already available to them, they could multiply their efforts.

What are they missing? Customer retention. Put simply, customer retention is a measure of how well you engage existing customers and generate repeat business from them. The definition itself is fairly straightforward, so this article will focus on the benefits of customer retention, how to calculate it, and how to improve on it once you have a grasp of what it is and how it can be useful to you.

Benefits of customer retention

Increase in long-term revenue

That it is easier to keep a customer than to acquire a new one is almost a proverb in business, and you’ll find that when you begin to pay attention to customer retention, it proves itself to be true. Provided that you do good business and cultivate a good customer experience, you’ll find that generating repeat business can cost up to five times less than acquiring new customers.

The logic makes sense: warm leads are generally more likely to buy than are cold leads, so it follows that those who are already familiar with your brand and services and please with the customer experience overall should be most inclined to maintain brand loyalty and remain a repeat customer. In fact, the probability of selling to an existing customer may be up to 65% greater than that of selling to a new lead.

But not only is an existing customer more likely to buy again, they also tend to spend more and are more likely to try your new offerings after several purchases. Successful business is built on trust over the long term, and once a new customer trusts you, they will continue to reward you with more and more business.

Defense against competition

Would you rather have customers who buy from you because they need to, or because they prefer to? If you have the former, you’ll lose your customers as soon as another company comes along that offers the same product or service at a better price. Companies that work to bring value to existing customers are much more likely to stand up to competition and changes in the marketplace.

Decrease in marketing expenses

Selling to existing customers can cost much less, but this benefit is important enough to be a point of its own. In a landscape with more options and variables than any one person can keep track of, finding a consistent service provider that fits within an established budget is often a herculean task. Some of your customers may be responsible for buying on behalf of an organization, in which case their choices can have repercussions beyond themselves. Customers want to be satisfied so that they don’t have to look very far for what they need. Sure, many of them will only make a single purchase for one reason or another, but the more you can encourage repeat business, the more likely they are to continue to return.

But as good as that sounds, you may be wondering how this translates to lower marketing expenses. It is, in part, because the ultimately successful customer retention strategy markets for itself. Most people who make purchases know others who will need to make similar purchases, and if your business is at the front of your customers’ awareness, it is only natural that they should send their friends, associates, and colleagues to you. Now, you have the best kind of new customer there is: a referral.

Data

It’s been said that data is king. The more you can attract business from repeat customers, the more data you have on customer behavior. You can use this data to improve at bringing your customers what they want, which translates again to more sales. A large part of this entails an understanding of how customer retention can be quantified, so next we’re going to look at how to calculate your customer retention rate.

How to calculate customer retention

You might think of customer retention rate as the opposite of churn rate. Churn rate is the measure of customers who stop paying for a product or service over a period of time, particularly in a subscription-based model. And based on what you now know about customer retention, it follows that your retention rate is the measure of customers who make repeat purchases across a given period.

You can calculate yours by following this generally accepted formula:

[(E -  N)/S] x 100 = Retention Rate (%)
  • E = customers at the end of the given period
  • N = customers acquired since the start of the period
  • S = customers at the start of the period

It isn’t as complicated as it might seem at first glance.

Customer retention example

Let’s say you’re in charge of sales for a credit card processing company, and you want to measure customers retained across the first quarter of the year. You begin with 150 customers who have previously purchased, acquire 30 more, and end the period with 170 customers having used your service. Plugging the above numbers into the formula gives us the following result:

[(170-30)/150] • 100 = 93.3%

What this means is that you’ve retained 93% of your customers over that three-month period. In the real world, the percentage you’re looking for naturally depends on your particular business and on your goals, but it’s safe to say that the higher you can push this number, the better. Next, we’re going to look at a few things you can do to start retaining more of your customers after the first sale.

Increasing customer retention

1. Manage Customer Success

One great way to improve customer retention is to manage customer success. When a customer makes a purchase from you, they are looking to solve a problem or to achieve a goal. To help existing customers, teach them to use your products properly and actively check in on their experience. You can do this through personalized onboarding sessions, webinars, drip campaigns leading to guides and product videos, and more.

2. Gaining and responding to customer feedback

What’s working, what isn’t, and what could be better? These are questions that can only truly be answered by the people who use your products and services. If you ask them, your customers will often tell you exactly how to help them — especially if you offer them something in exchange for their time. By using a form or customer survey tool like Google forms of Survey Monkey, you can quickly get insights into the opinions about your business and customer service experience.

Of course, feedback is useless if you do nothing with it. You’ve surely cringed at the sight of a poorly handled complaint on a review board for a product. Conversely, you may have been led to a purchase decision upon noticing that a company went the extra mile to be sure that another customer had a good experience. Customers want to know that when they take time to tell you something, you are listening and responding to what they have to say.

3. Offer Incentives

You probably don’t want to go too far with this one, but the right incentives can often be just what you need to encourage another purchase. You may consider offering bonuses for referrals as well. People are more likely to continue using something that they’ve recommended to someone else, because they want to feel that they stand by what they’ve shared.

4. Loyalty Programs

Customer loyalty programs are somewhat different from incentives in that they focus around customers who return again and again. While you do need to take steps to capture the all-important second purchase, it’s also a good idea to bring value to your core supporters above and beyond what they have come to expect.

5. Customer Service

You are likely to have customers who encounter difficulties or situations where something doesn’t work as intended, and that’s okay. The important thing is to have a customer service system that is easy to use, readily accessible, and most importantly, backed by a staff that is highly skilled at and well-equipped to solve problems.

Learn how call tracking helps you to improve customer satisfaction and retention.