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Customer Retention: Definition, benefits and strategies

Customer Retention Definition
What is customer retention?
Why is customer retention important?
6 strategies to improve customer retention rates
Final thoughts

Customer retention is crucial if you want to build trusting relationships and improve lifetime value. With a focus on retention, you can hold on to the customers you’ve spent so much effort acquiring.

Increasing your customer retention rate takes more than having a good product, however, it involves the entire customer experience. You’ll keep more customers in the long term by providing seamless interactions.

This article will provide a customer retention definition and explain why it’s critical for business success, then take a deep dive into six key strategies you can use to retain your customers.

What is customer retention?

Customer retention is a measure of how many customers make repeat purchases with your company over time. It’s a key metric that helps gauge loyalty and assess how satisfied your customers are with your products and services.

Companies use several customer retention strategies to increase retention rates, including loyalty programs, discounts, personalized communications and great customer support. These strategies help build stronger relationships with customers and encourage them to remain loyal to the business.

The thing is, customers prefer reliable brands that understand their needs and support the causes they care about. In other words, retention isn’t about the transactions – it’s about creating great customer relations.

How to calculate customer retention rate

The customer retention rate is the percentage of customers you’ve retained over a specific period.

To calculate customer retention, you need to know the following:

  • The number of customers you had at the start of a given period

  • The number of customers you had at the end of the period

  • The number of new customers you’ve gained through customer acquisition during that time

Then you need to divide the total number of customers (minus any newly acquired ones) by the number of customers you had at the beginning of a period.

Here’s what the formula should look like:

customer relation formula

For example, say you started the fiscal year with 50 customers. Over that time, you lost 10 customers but gained 20 new ones. So, at the end of the financial year, you have a total of 60 customers. Your equation should look like this:

(60 - 20) ÷ 50 x 100 = 80%

The retention rate for that financial year was therefore 80%.

How to calculate churn rate and customer lifetime value (CLV)

There are a few other customer retention metrics that help you assess how well your company is doing by your customers.

The first is the customer churn rate. Churn refers to how many customers you’ve lost during a period. If you have low customer retention, you’ll have a high churn rate. To calculate it, you need to find the percentage of customers you’ve lost in a period.

Here’s the formula to calculate the churn rate:

(Number of lost customers / Total customers at the start of a period) x 100

According to the example above, your equation should look like this:

(10/50) x 100 = 20% churn rate

Another important sales metric is customer lifetime value, which is an estimate of the total revenue you can expect to gain from a customer during their relationship with your company. It’s a good way to work out which customers are most valuable and helps companies identify winning strategies.

To calculate CLV, first, choose a period to analyze and then, for each customer, multiply the number of transactions by the transaction size by the average customer lifespan.

Here’s the formula for CLV:

(Average transaction size x Average number of purchases) x Average customer lifespan = CLV

Why is customer retention important?

Customer retention is a key performance indicator (KPI) that lets a company assess its ability to keep customers in the long term. Improving the customer retention rate has several benefits for a company:

  • Retaining customers is generally easier (and cheaper) than acquiring new ones. According to Ali Cudby, getting a new customer is 6–7 times more expensive than keeping an existing one.

  • Loyal customers make more purchases, so companies can approach them with upsell and cross-sell offers since there’s already an existing relationship.

  • Satisfied customers often tell other people about your company, increasing sales through referrals and word-of-mouth marketing. According to Texas Tech, 83% of satisfied customers are willing to refer a company to friends after one positive experience.

  • Customers are likelier to return to a company that provided an excellent experience. In fact, 95% of consumers cite customer service as one of the most important reasons for their brand loyalty. That allows companies to build a positive public image and competitive edge.

6 strategies to improve customer retention rates

Let’s take a look at some strategies to help you boost customer retention and keep your customers happy.

1. Personalize your customer experiences to provide relevant content

Every customer has different needs and preferences. Personalization lets you provide tailored solutions rather than taking a one-size-fits-all approach.

According to McKinsey, 71% of customers now expect companies to personalize their interactions and 76% get frustrated when that doesn’t happen.

Personalized messaging enables you to foster meaningful relationships and create an emotional connection with customers, setting you apart from the competition.

These interactions with customers make them feel like more than a number, helping to create a memorable experience that keeps them coming back.

Personalization also helps make service more efficient, enabling businesses to resolve issues quickly and improve customer experience.

To personalize messaging, companies should:

  • Leverage customer data. By collecting and analyzing sales data like shopping habits, past purchases and website browsing activity, you’re able to personalize your messaging to a customer’s individual preferences.

  • Use segmentation to tailor content. You should divide your customer base into different segments based on factors like demographics, location, purchase history and preferences. Then you can use tailored content to target each segment.

  • Use triggered emails. Trigger automated email marketing campaigns based on customer behavior to improve engagement. These emails should provide customers with relevant content and discounts for products or services.

By keeping your offerings relevant to each person and paying attention to their needs, you increase the chances that they’ll buy and become repeat customers.

A great example of this is Amazon’s product recommendation engine, which was responsible for 30% of Amazon’s revenue in 2015. By tracking a customer’s interactions across the storefront, email and elsewhere, Amazon can determine which products suit that customer.

Placing recommendations in key locations like the homepage and the cart before finalizing the purchase encourages customers to buy additional relevant items.

2. Collect (and act on) customer feedback

Customer feedback is one of the most important sources of insight available. Satisfied or not, customers are usually willing to share their thoughts. These insights can help improve your offerings, create more relevant marketing material and boost customer relations.

When customers see you acting on their suggestions, they’ll feel like their voices are heard and their opinions valued. That is likely to increase their loyalty and lead to retention.

To collect feedback, you could consider:

  • Surveys. Conduct them online, via email or in person and allow customers to share honest thoughts on products and services.

  • Social media monitoring. Track customer feedback on social media platforms like Twitter and Facebook. That enables you to act quickly if a customer has a complaint or comment.

  • Focus groups. You can hold focus groups with customers to gain insights into their experiences. During these sessions, customers can provide detailed feedback that you can analyze in greater detail.

  • User testing. Companies can set up user testing sessions to observe customers using their product or service. This type of testing allows companies to get a detailed view of how customers interact with their product, allowing them to improve it.

  • Review aggregator websites. These resources are great for tracking customer sentiment and can provide insight into how customers view a product or service.

Once collected, you can act on the information you’ve gathered as follows:

  1. Analyze the feedback. First, identify any common feedback patterns, which can provide valuable insight into customer needs and preferences. Pay special attention to complaints, criticism and compliments, as those types of feedback can be the most informative.

  2. Determine underlying concerns. After analyzing the feedback, determine the underlying concerns that will help you develop a plan to address customer needs and expectations.

  3. Respond to customers. Reach out to customers who provide positive and negative feedback to show appreciation for their opinion and respond to their questions or complaints. Even if you cannot act based on the feedback, you should still thank customers for their input and offer them a reward like a gift card.

  4. Implement updates or changes. Consider customer feedback when making changes and updates to products or services. Show customers that you value their opinions and your company will stay ahead of customer expectations.

3. Invest in effective customer service tools

It’s important to take an end-to-end approach when improving the customer journey and one of the most important places to focus is customer service.

Good or bad customer support can make or break a relationship with your company. PwC found that around one-third of customers will stop doing business with a brand they loved after one bad experience.

Customers need quick and helpful support from staff who meet their needs and take their issues seriously. That can lead to more satisfaction, stronger brand loyalty and a desire to stay with the company for a long time.

Further, when customers feel supported, they are likely to recommend the company to their friends and family, creating positive word of mouth to drive further retention – which is important as 93% of customers trust friends and family more than advertising.

This is especially true when things go wrong. Taking complaints and support inquiries seriously allows you to turn detractors into brand ambassadors.

Here are four ways you can improve your customer service:

  • Train your customer service representatives. By providing training on your company’s offerings and customer success strategies, reps can address needs quickly and accurately, ensuring a positive customer experience.

  • Make customer service accessible. Offer customers easy access to customer service by providing omnichannel support. For example, offering phone, email and Live Chat can provide customers with multiple ways to get the help they need.

  • Respond to customer feedback quickly. Customers should have an easy and accessible way to provide feedback about the company’s products or services. Make sure to address any concerns or issues promptly and properly.

  • Apologize when you make mistakes. Mistakes are inevitable – it’s how you respond that sets your company apart from the competition. If you try to sweep the problem under the rug, your customers will feel cheated. If you apologize and seek to rectify the problem, however, they’re more likely to forgive and continue to do business with you.

  • Invest in customer service software. Automated customer service systems allow reps to set appointment reminders and receive notifications when a customer makes an inquiry. That’s a cost-effective way to free up time so reps can focus on more complex requests and provide a quicker response to customers.

One example of excellent customer service is Rackspace, a cloud infrastructure company. The organization has won several industry awards for customer service and refers to its support as a “Fanatical Experience”.

In a noteworthy example of Rackspace’s great customer service, an agent was helping a customer through a lengthy troubleshooting process. Over the phone, the agent heard the customer say they were hungry, so the support agent ordered a pizza. They were still working through the problem when the pizza arrived.

4. Reach out to customers at the right time

Content needs to be relevant, but it also needs to be timely. There are different types of customers and each can benefit from different kinds of messaging.

You might have customers who make a purchase every week, customers who haven’t purchased anything in a few months and customers who have expressed dissatisfaction after their last interaction.

By analyzing their behaviors and personas, you can find opportunities to reach out to each of these categories and retain them.

For example, you could:

  • Upsell and cross-sell to current customers. If you have customers that make a lot of repeat purchases, they might enjoy some of your other offerings. By analyzing their usage and preferences, you could reach out to them with relevant offers.

  • Re-engage dormant customers. Dormant customers are those who haven’t purchased in a while. By identifying these customers, you can target them with promotions that will convince them to do business with you again.

  • Identify customers that are likely to churn. If a customer has expressed dissatisfaction with your company or been dormant for a long time, they’re likely going to churn. To prevent this, you should analyze why they’re dissatisfied and reach out with a solution.

Beyond that, targeting customers at key times makes them more likely to respond favorably. For example, some customers are more receptive at particular times of day, on key dates or after certain events (like birthdays, anniversaries or when they’re on their lunch break at work).

By understanding their behavior, you can target them at these times, making your efforts far more effective.

Some strategies to consider include:

  • Maintain constant communication. Utilize automated emails like email newsletters, welcome emails or follow-up emails to stay connected with your customer base. For example, if a customer’s subscription is expiring soon, you could send an automated email reminding them to renew.

  • Geolocation-based targeting. It’s now possible to leverage geolocation technology to target customers with specialized offers and messaging when they are near a company location.

  • Timed deals and promotions. Target customers at certain times by offering exclusive discounts and promotions. This strategy allows companies to not only drive additional sales but also influence the timing and frequency with which customers make purchases.

  • Contextual targeting. Use contextual targeting to deliver offers and promotions to customers when they are more likely to make a purchase. For example, companies can target customers with relevant product offers when they are researching products on the web.

5. Implement a loyalty program

Focusing on customers who are at risk of churning is important, but it’s also crucial to reward your loyal customers.

A loyalty program encourages customers to make more purchases through a rewards system. Not only does that increase sales and revenue, but it also makes customers feel more valued for their continued commitment to your company.

One example of a customer retention program is a point system where individuals can collect points for each purchase they make. These points accumulate over time, and once customers earn a certain number of points, they get a discount or free item.

For example, a bookstore might offer a loyalty program where customers get a stamp for every book they purchase. After ten stamps, they can get a free book.

Another example to consider is a membership-based program, where customers can opt in to become members. The program might provide members with exclusive perks like discounts, priority access to products, free shipping and members-only events.

To put a loyalty program into place, you should:

  1. Define objectives and goals. Knowing what you want to achieve with your loyalty program is important. Decide what types of customers to target and how your loyalty program will benefit them. Create specific sales goals for the program to ensure it aligns with the overall marketing strategy.

  2. Choose the right points system. Figure out the best model to motivate customers to return to your business. Consider how often customers get rewarded and offer bonus points to frequent customers. Also, consider how you will track and measure success.

  3. Research the competition. Check out what other companies in your industry are doing for their loyalty programs. Identify their strengths and weaknesses and come up with ways to differentiate your program from theirs.

  4. Select appropriate rewards. Give customers the incentives they want. Consider attractive options from gift cards to discounts to special events.

  5. Promote your program. Reach out to your existing customer base through emails and use online marketing campaigns to attract first-time customers.

Starbucks Rewards, which has nearly 30 million members, is one of the most famous and successful examples of a loyalty program. It’s also one of the simplest. Customers receive stars when they buy coffee. They can then redeem those stars for free drinks, food or priority service whenever the customer wants.

Beyond this, members can enter exclusive contests, games and events. They also get access to members-only emails that offer promotions, bonuses and additional discounts.

6. Provide helpful resources to your customers

Customers appreciate having access to support, which makes them more likely to stick around.

When customers can find helpful resources, they are more confident in their purchases because they can troubleshoot potential problems on their own.

Additionally, by providing helpful resources, you build trust with customers who view you as a reliable source of information and support. With enough effort, customers will begin to see you as an expert in your industry, which increases brand reputation and attracts new customers.

Here are some ways to provide helpful information to customers:

  • Create a strong onboarding experience. Onboarding is your company’s first chance to make a strong impression on your customers. A good onboarding process should include automated workflows and well-timed follow-up emails to remove any hiccups as the customer sets up your product.

  • Implement self-service features. Self-service tools like a knowledge base, frequently asked questions (FAQ) section, user forums and video tutorials give your customers everything they need to resolve problems on their own. That makes things more convenient, decreasing resolution times and reducing the burden on your customer service team.

  • Feature a blog on your website. A blog allows you to inform customers about your product, provide detailed information about the industry and announce upcoming events. Help your company engage customers and build relationships by offering useful advice based on your expertise in the industry.

  • Send a periodic newsletter. Your newsletter could contain tutorials, new product details and links to your blog – resources that should help your customers achieve their goals using your products or services.

Final thoughts

The bottom line is increasing customer loyalty and retention isn’t a one-time thing. Turning your customers into loyal advocates takes continued effort throughout the customer lifecycle. By providing seamless experiences, great support and personalized content, you can begin to grow relationships and build long-lasting trust with your customers.

Driving business growth