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What Is Customer Retention? Benefits and Top Strategies To Grow Your Business

Kasia Kowalska and Ania Rubkiewicz
11 min read
Jan 5, 2022
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Can you believe that companies in the US lose as much as $136.8 billion per year due to avoidable consumer switching? This clearly shows the importance of retaining customers. While it might be tempting to pile your resources into acquiring new clients, if you want to hit the jackpot, then focus on increasing your customer retention rate.

In the following article, I’m going to talk about the benefits of retaining customers, and I’ll explain how to calculate your customer retention rate. I will also share with you the best strategies for keeping your customers longer. 

Let’s start with a question.

What is customer retention? 

Customer retention describes the overall ability of a business to keep and build long-lasting connections with clients. You measure your retention rate for a selected time frame, such as a week, month, or quarter. 

While building your customer retention strategy, keep these two goals in mind:

With that in mind, it’s also worth answering another key question:

How does customer retention differ from customer loyalty? 

While these two terms are often used interchangeably, they mean different things. Customer retention relates to strategies that businesses put in place to ensure that customers stay with them as long as possible. 

A retained customer doesn’t always mean a loyal one. Loyal customers will not only buy from you repeatedly, they will also recommend you to their family and friends. The main difference between customer retention and customer loyalty lies in the emotional relationship between the client and the brand. While loyalty translates into business growth, retention is about preventing churn.  

Now that we’ve answered the question “What is customer retention?” let’s take a look at the benefits of keeping your customers for longer. 

The benefits of retaining customers

Below are a few points that will hopefully sell you on the idea of measuring and increasing your customer retention rate. Let’s start off with the first one below:

1. Optimizing customer acquisition costs

If you want to create an effective customer retention strategy, you’ll have to test various tactics to check which sales channel works best. You’re probably wondering, “What does ‘best’ even mean? Is it about attracting the most customers?” The truth is, not necessarily. It’s important to find a balance between customer retention and acquisition. 

You have different options at hand to get leads, including PPC, retargeting ads, outbound sales, content writing. All of these will cost you money, so the key is to make sure that this investment pays off, i.e., that revenue exceeds CAC. 

For instance, if it costs you $150 to acquire a customer via a PPC campaign and the client stayed with you for a year and generated $1000 in revenue, then you might consider this channel effective.

2. Higher profitability

It’s no secret that acquiring new customers is costly, so remember to find a balance between retaining customers and finding new ones. Reducing your CAC, which can be done through making sure that your clients stay with you longer, will have a positive impact on your profitability. After all, it’s much cheaper to sell to your existing customers; the longer you retain them, the more customer data you acquire. This in turn will help you create tailored offers, which will drive upsells, as I explain next.

3. Better upselling and cross-selling opportunities

Retaining customers also means that it’s easier for your brand to upsell and cross-sell services or products. No wonder: after you’ve already gained a customer’s trust, you have much higher chances of convincing them to give your other products a go — especially if you display products from complementary categories. 

Take Amazon, for one. The eCommerce giant witnessed a huge rise in revenue after they introduced the (now prolific) product recommendations. From their “frequently bought together” product box, they saw a whopping 35% increase in overall sales. Pretty impressive, right?

4. Becoming better at revenue prediction

Finally, ensuring a good customer retention rate makes it easier for companies to predict revenue, like estimating the expected MRR (Monthly Recurring Revenue) or ARR (Annual Recurring Revenue). For some businesses, such as SaaS brands, the ability to accurately predict earnings is crucial not just for product development budgeting, but also for securing investment. And it makes perfect sense: if a company proves that they have repeat buyers, then it must mean they’re doing something right!

How do I calculate customer retention for my business?

Now that I’ve mentioned some of the perks of retaining customers, you’re surely wondering how to calculate the customer retention rate. Well, it’s quite simple and involves some quick math only. Here are the steps:

Step 1: Dive into your customer analytics software and learn how many clients you’ve served throughout a chosen period. While you can select periods as short as a week, for the most reliable results, I recommend looking at a month or a quarter.

Step 2: Next, calculate how many new clients you’ve seen over this time frame, and subtract them from the total value.

Step 3: Divide it by the number of customers you had at the very beginning of the selected period.

Step 4: Multiply the number by 100, and there it is!

What is a good customer retention rate? 

When it comes to putting a number to a “good retention” rate, it’s industry-dependent. However, for most, it’s around 20%. Your retention rate will also vary based on how you define retention, as nicely explained by Mixpanel: “To understand whether their own product’s retention rate is good or bad, each product team should define retention as it relates to the health of their business.”

The most effective customer retention strategies

On this note, let’s take a look at tactics to increase customer retention, starting with identifying customer needs. 

1. Identify customer needs

The first step to developing an effective retention strategy is getting to know your customers inside out. After all, you cannot create a satisfying customer experience without knowing what their goals and challenges are, can you? 

Identifying customer needs will help you build products or services that will perfectly match clients’ requirements, and as a result, motivate them to stay with you longer. 

That being said, when you assess what your clients expect, it’s also worth asking them directly. This leads us to the next strategy below.

2. Ask for customer feedback 

There are plenty of channels where you can ask customers for their opinions, such as over the phone, via email, or in real life (if you run a brick-and-mortar business). 

However, I strongly recommend running a survey, as no other method will let you collect such a high volume of responses in such a short time. I particularly advise that you launch NPS (Net Promoter Score) and CSAT (Customer Satisfaction Score) surveys. These two survey types will help you measure the overall client happiness levels, collect improvement ideas, and spot any customers who might be thinking of leaving.

How to calculate NPS | Net Promoter Score formula

If you’re new to customer feedback collection, I recommend starting off with two methods:

That being said, there is one condition to finding success with this method: You have to run your surveys regularly. This will allow you to quickly notice any issues that could lower your customer retention rate.

3. Create an effective onboarding program 

Customers will continue using your product or service only if it delivers value. That’s why it’s so important to make sure they know how to use it and understand its full potential from Day One. Here’s where a good onboarding experience comes in handy.

As far as the very first impression is concerned, I highly recommend looking into some of the customer onboarding breakdowns by Samuel Hullick. He’s great at explaining how to design flawless user signups and product walkthroughs. While he tends to be merciless in pointing out onboarding mistakes, this means there’s more opportunity for you to learn!

Also, regardless of your industry or product, I recommend creating an onboarding email sequence. These emails should be spread out in time and help clients not only understand how to use your products properly, but also encourage them to log back in and reach out to your Customer Support with any questions or ideas.

This leads me to the next point.

4. Offer good customer service

Your Customer Support team are, quite literally, the face and voice of your business. Since 63% of clients say that they’re more likely to return to a company if they “clicked” with a support team member, you need to hire for empathy, patience, and an overall positive attitude. Now, you might be thinking, “How does that work if I also use a chatbot or other automation methods?” I discuss this next.

5. Automate wisely 

Automation can be a blessing, but it might as well be a curse if you apply it to the wrong processes. It’s crucial to be aware that people tend to prefer or even demand human-to-human interactions when they experience serious issues. In fact, according to Loyalty360, “customers greatly prefer human-to-human interactions like phone calls (62%), email (46%), and chat (37%) to self-service (14%) or bots (13%) when dealing with issues.” Technology cannot yet show emotions, such as empathy, the way people can.

6. Make yourself available to customers

Customers have different communication preferences. While some will be keen on reaching you via a live chat, others will prefer email or social media. That’s why it’s a good idea to invest in omnichannel communication, making sure that you’re available to clients whenever they need you. Based on a NewVoiceMedia survey, 31% of respondents mentioned the ability to contact the company through any channel as the top factor for building an emotional connection. Building strong relationships with customers has a positive impact on increasing the customer retention rate. 

If you struggle to be available 24/7, you might consider turning to a platform — like LiveChat — that offers a Messaging Mode. You’ll be able to chat with your customers both online and offline and send messages even after they’ve left your website. They’ll be able to read your messages and respond when they’re back on your site or via email. Even when your entire customer service team is offline, your site visitors will still be able to get in touch with you. 

7. Track customer retention metrics

Another customer retention strategy worth implementing is tracking your customer retention metrics, such as: 

If you manage to maintain a steady CLV and basket size or even see it increasing, then it means your customer retention strategy is working!  On the other hand, if you’re seeing a rise in customer acquisition costs and have noticed an increase in churning customers, you need to rethink your strategy.

First, refer to customer feedback and review any product/service-related alterations, such as changes in features, pricing, or packages. This might point you in the right direction, and you’ll know where to look. I also recommend talking with customers who are thinking of churning or who have churned already and ask them for feedback. Hopefully, their insights will help you stop more clients from leaving you in the future.  

Maintaining the right customer retention rate — key takeaways

A good customer retention rate is one of the few things that prove your business is flourishing. After all, if you’re seeing the number of return buyers grow, you’re clearly doing a great job!

There are several tried-and-tested customer retention strategies I’ve shared above that you can use to boost your revenue and improve the overall customer experience. Among others, collect customer feedback to find out how you can always stay on top of customer expectations. Also, make sure that your product has a soft learning curve by creating a comprehensive onboarding sequence. And let’s not forget about the importance of customer support teams, who should be both helpful and make customers feel at ease.

Now that you know your way around the topic of retaining customers, be sure to also give our other guides a read — here’s one on building good customer relations, and here’s another dedicated to boosting customer loyalty.

Have fun reading, and once you’re done, good luck with putting our advice into practice!

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