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Access to a steady current customer base is one of the most important elements of running a successful business — but sometimes, that can be easier said than done. With an average financial hit of $243 for every customer lost, not cultivating consistent customers from the start can be a good way for a fledgling business to fail.

But what exactly does customer retention mean, and how do you leverage it in your favor?

I’ve got a few tips and some advice to help you master customer retention rate, including how to calculate it and what you can do to improve it — as well as how to utilize it as a way to identify deficiencies and growth opportunities in operations. It can also help your bottom line, expand reach, and ensure as many existing customers as possible choose your company over the competition. Is there anything it can’t do?

What is Customer Retention Rate?

Customer (aka logo) retention rate (CRR) is simply a way to evaluate a business' efficiency at retaining — or keeping — customers over time. Since it's generally less costly to retain existing customers than to track down new ones, a high customer retention rate can keep more cash in your pocket, allowing you to focus on other areas of your business. 

Retention Rate vs Churn

Retention rate isn't the only way to examine customer behavior. Customer churn is another point of consideration that can help you evaluate how customers are perceiving your opportunities. Effectively, customer churn is the inverse of retention rate, providing a way to dig into what percentage of customers you're losing over a given period. Customer churn can often be most valuable on a shorter-term basis, allowing you to look for trends in the market or your strategies to game plan for the future. 

To calculate churn:

(Number of customers lost in a given time frame / Total number of customers) x 100

Say, for example, you lost seven customers in the month of March and have 100 customers in total. This would make your churn rate 7%. This is a high churn rate for many industries, so keep an eye on rising numbers if it becomes a noticeable trend. And, of course, if some months have higher churn rates than others and your business isn’t particularly seasonal, it can be worth digging into any strategies employed to determine what's working and what isn't.

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5 Ways to Maximize Customer Retention

While there's no way to ensure every customer makes a lifetime commitment to your company, there are strategies you can employ to cultivate loyal customers who will stay true to your brand.

To prevent customer churn, you need to understand where your company currently stands — and that means breaking things down by the numbers. When you can quantify your results in addition to qualifying them, drilling down into business management strategies can be far more efficient. 

In addition to customer retention rate and customer churn, there are some other customer retention metrics you can add to your arsenal:

  • Revenue churn: This metric breaks down the amount of revenue lost over a particular period of time.
  • Net promoter score: This is an average score of how likely customers are to refer your business to their friends based on single-question email surveys.
  • Long-term value (LTV) /customer acquisition costs (CAC): This metric compares how much money retained customers are bringing in versus how much you're spending to acquire them.
  • Repeat purchase rate: This is the number of total purchases versus the number of repeat purchases to evaluate spending and retention trends.
  • Customer lifetime value: This metric calculates the average order value multiplied by the repeat purchase rate, less the cost of customer acquisition.

Once you have a clear picture of how customers factor into your business, you can better see your strengths and weaknesses, as well as where improvements to customer retention strategies will add the most value. 

These five techniques to improve customer retention can maximize revenue and customer retention.

1. Focus on the Right Fit

Not all customers are going to be right for your business. Some may not have a long-term need for your products or services, some may be choosing your brand as a stand-in for another company that's unavailable, and some may simply not fit in with your core messaging. And that's okay — do you return to every store or brand you've ever shopped with? 

However, to excel with as many buyers as possible, you need to make sure you're putting your attention where it will make the largest impact. This means identifying your average customer — are you most popular with growing SaaS companies or established enterprises? — and putting your brand in front of the right eyes. This can impact everything from the kind of ads you run to how you approach SEO, so do your homework on not only who is most likely to work with you, but also where you're most likely to find that customer base. 

Casting the widest net possible may seem like the best way forward, but this is more likely to drive up costs without any measurable change in customer acquisition.  

2. Reward Loyalty Through Incentives

Found the right fit and want to keep them engaged? Showing appreciation to loyal customers can go a long way in providing them with yet another reason to stay with you. Loyal customers are repeat customers, which is especially important if you’re looking to reduce costs associated with acquiring new clients.

Of course, what you decide to offer as incentives will largely depend on your business and retention goals, but some common ones include:

  • Discounts on purchases
  • Free shipping
  • Early access to events, sales, or products

Incentive plans can make your customers feel valued and appreciated, which increases their satisfaction. Whenever you can, try to strategically leverage them to create repeat sales and increase customer lifetime value.

3. Make a Good First Impression

Even if you have the perfect product, customers will still shy away from working with you if their initial contact is unpleasant. A quality onboarding experience can instill customer loyalty from the start, increasing the likelihood that customers will talk you up to their friends and peers and stick with you long-term. The following tips can help you improve customer satisfaction from the very first point of contact: 

  • Be professional: Demonstrate product expertise and a positive attitude, even when faced with tough questions and criticisms.
  • Solve problems creatively: What worked for one customer may not work for another, so stay flexible and always be on the lookout for ways to customize experiences.
  • Respond promptly: Answer questions and concerns quickly, ideally within the same day whenever possible.
  • Offer Resources: Provide tools and resources so customers can help themselves; over 70% of customers report a preference to solve customer service problems independently via a comprehensive knowledge-base system.
  • Follow through on promises: If you tell a customer you'll get back to them in an hour or you'll have their tech issue solved the same day, make sure this happens. If it can't, offer something to make up for deficiencies, such as a discount or freebie.
  • Stay honest: Customers are far less likely to trust companies that feed them half-truths than companies that are honest, even when they make mistakes.
  • Be the first to make contact: This can mean following up after a purchase to see if customers have questions or reaching out with new products and promos as soon as they become available.

Even minor errors can be made up for with prompt responses and sincere apologies, so always take whatever steps are necessary to cement customer loyalty, even when things aren't perfect.

4. Personalize Experiences

While taking a one-size-fits-all approach to e-commerce marketing is certainly the easiest, it's not necessarily ideal for customer retention. All customers have different preferences — for example, some want regular email updates, while others may want text messages with relevant sales announcements — so tapping into that can be key.

When customers engage with you, such as creating an account or signing up for your marketing emails, make personalization a first priority. Early in communications, collect information, such as preferred contact methods and favored product or service categories. This way, customers can get the information they need in the manner that's most suitable, making them more likely to engage. After all, one impactful sales opportunity is more valuable than a deluge of marketing messages customers will send directly into the trash unread.

5. Put Humanity Back in Business

Many businesses today rely on cost-cutting and efficiency measures, such as automated chatbots in customer service, long waits for help-desk tickets, and hard-to-navigate phone menus. While some of these strategies can be a great way to support operations — not every customer will need to chat with a real person every time they need help — making it easy to get in touch with a human can make all the difference. 

Voice of Customer (VoC) programs can go hand-in-hand with this. These programs are designed to give customers a seat at the table, gauging everything from customer expectations to input on new programs and services. The same is true for customer communities, such as portals or social media pages, where they can interact with others, and customer loyalty programs that are cost-effective but help users feel prioritized. Small coffee gift cards or perks for answering surveys don't take much money out of your pocket but make customers feel appreciated simply for engaging with your services.

And, of course, when you ask for customer feedback, be sure to listen. A pattern of asking and ignoring can be worse than not asking at all. 

Ignoring customer retention can be a great way to miss out on growth and cost yourself revenue you could be investing elsewhere. By understanding how to calculate retention and churn and improve your odds of a loyal customer base, you can best set your business up for success. 

Consider This Too

Tactics are good and strategizing is great, but there are some things to consider before implementing your plans. For starters, does your company have robust systems, like an ERP or a CRM, that can accurately collect data? Information like customer interactions, purchase histories, and other key KPIs are invaluable when it comes to understanding customer patterns and customer needs.

You’ll want to periodically calculate your CRR to get a better idea of just how effective previous retention strategies have been, as well as to help guide the development of future plans. As a quick refresher, the customer retention rate is a nifty metric that lets businesses measure the percentage of customers they’ve retained over a period of time. The higher the rate, the more successful you are at keeping customers, with most businesses looking to be above 85%. Anything under 70% should be seen as a warning sign for most companies across industries and a wake-up call that there's room for improvement.

The formula is pretty straightforward:

Customer Retention Formula Graphic

Where:

  • E is the number of customers at the end of the period
  • N is the number of new customers acquired during the period
  • S is the number of customers at the start of the period

Let’s say you have 100 customers at the start of June. During that month, you lose 5 and gain 8 to end the month at 103 customers. Your CRR calculation would look like this:

CRR = ([103-8]/100)*100 = 95% retention rate

Using the formula above, this breaks down to a CRR of 95%, which is (almost) the stuff of dreams - personally, I dream of 100% but hey, I might just have high standards.

A lot goes into customer retention and there’s no single solution for every business. Do your due diligence, gather the data, and collaborate with teams to limit your company’s customer churn rate.

Speaking of Retention

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By Simon Litt

Simon Litt is the Editor of The CFO Club, where he shares his passion for all things money-related. Performing research, talking to experts, and calling on his own professional background, he'll be working hard to ensure that The CFO Club is an indispensable resource for anyone seeking to stay informed on the latest financial trends and topics in the world of tech.

Prior to editing this publication, Simon spent years working in, and running his own, investor relations agency, servicing public companies that wanted to reach and connect deeper with their shareholder base. Simon's experience includes constructing comprehensive budgets for IR activities, consulting CEOs & executive teams on best practices for the public markets, and facilitating compliant communications training.