Customer Retention: Definition, Formula, and Strategies
Definition
Increasing sales can be done in various ways. One way is to retain existing customers to make repeat purchases, that is customer retention. Customer retention is a company’s ability to make customers return to buy or use its services and not switch to competitors. This is often referred to as activities and actions taken by companies to reduce customer defection (customers who leave and do not return to become regular customers).
Why does Customer Retention Matters?
Paying attention for existing customers is considered more effective for increasing sales. This is because companies no longer need to attract, educate and persuade again. It’ll only result in a net negative for business if we spend a huge amount of money to acquire new customers but fail to retain them. That’s why customer retention is important for the profitability and growth business.
Improving customer retention can have a significant impact on a company’s bottom line, including:
- Lower costs (a 2% increase in customer retention can lower costs by 10%)
- Increased profitability (lowering churn by 5% can increase profitability by 25–95%)
- Nearly 50 percent of a business’s revenue comes from approximately 8 percent of its most loyal customers.
Retaining customers is so valuable, consider research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) that shows increasing customer retention rates by 5% increases profits by 25% to 95%. Why? Return customers tend to buy more from a company over time. As they do, your operating costs to serve them decline. What’s more, return customers refer others to your company. And they’ll often pay a premium to continue to do business with you rather than switch to a competitor with whom they’re neither familiar nor comfortable.
How to Calculate Customer Retention Rate?
Before we begin to consider a retention strategy, understand what our current customer retention rate is. The customer retention rate is a metric used to measure a company’s customer loyalty. It reflects the percentage of customers that continue to purchase products or use services from a brand over time e.g., quarterly or yearly. To calculate the customer retention rate, use the following formula:
Customer Retention Rate = ((E-N)/S) x 100
Where:
E = the number of customers at the end of a particular time
N = the number of new customers acquired during that time
S = the number of customers at the start of that time
For example, let’s say your business has 500 customers at the beginning of Quarter 1, gains 100 new customers throughout the quarter, and ends Quarter 1 with 600 customers. To calculate its customer retention rate for the quarter:
((600–100)/500) x 100 = 80% Customer Retention Rate
This indicates that during the first quarter, your company kept 80% of its clientele. Although a 100% customer retention percentage would be ideal, this isn’t always the case.
If customer retention rates is low that mean the money your company puts into customer acquisition costs (CAC) fails to translate into strong customer lifetime value (LTV).
7 Strategies for Increase Customer Retention
Customer loyalty helps to ensure that a business will remain profitable. But how can you keep your customers loyal? It starts with understanding strategies for increasing customer retention to ensure that your customers stay loyal to your brand. Let’s look at some strategies for increasing customer retention for company:
1. Segmenting customers
Gather and analyze data to better understand customer preferences and behavior. “Segment your customers based on their behavior, characteristics, and needs. Segmentation can help you understand the different types of customers you have, their motivations, pain points, and expectations, and how they interact with your brand. You can use analytics to create segments based on criteria such as demographics, purchase history, engagement level, feedback, or loyalty status. You can also use predictive analytics to identify customers who are at risk of churning or have high potential for upselling or cross-selling”.1
2. Optimize and personalize experiences
According to the HubSpot stats, 93 percent of customers with excellent customer experience are likely to purchase again from your business. You can offer a personalized customer dashboard, emails, rewards, deals, discounts, and offers to ensure a better customer experience.
3. Listen to customer feedback
Pay attention to customer feedback and use it to improve your strategies and keep customers engaged. You can collect customer feedback through surveys, online forums, or social media through your customer service department.
4. Be proactive
Don’t wait for customers to contact you. Use your customer service department to reach out to customers proactively through email or social media for marketing, to find out how they feel about a specific product, and to provide personalized offers, discounts, and more.
5. Keep communication lines open
Make sure customers can easily reach out to your customer service and support department if they have any questions or concerns.
6. Manage your customers’ expectations
Set realistic expectations, so customers aren’t disappointed or frustrated. Offer accurate delivery dates, and if there are delays, inform customers through your customer service department as soon as possible.
7. Monitor and adjust strategies
Pay attention to customer retention strategies and their results. If something isn’t working, make adjustments or try different strategies.
Conclusion
Customer retention strategies are essential to keep customers loyal and ensure business remains profitable over time. Ultimately, we should tailor the strategies for increasing customer retention to meet customer needs and expectations. By understanding these strategies, we can start implementing them effectively and provide customers with a personalized experience that will keep them coming back.
