You know it, we know it, we know you know it and you know we know it, but we’ll say it anyway: repeat business is where you’ll make the real money. It doesn’t matter if you’re a B2B consultancy with a handful of major clients or an FMCG brand with millions - if you can’t get people coming back for more then you won’t be around for long.
Here’s another cliche for you: you can’t change what you can’t measure, so before we get stuck into making the line go up let’s understand what the line really means.
What is customer retention?
If you sell a product, have you sold it to the same client more than once? Congratulations, you’ve just retained a customer. If you provide an ongoing service and a client sticks with you for more than a day then, yep, you’re retaining customers. There are a whole host of ways to achieve this, from loyalty cards to VIP programs, but the aim is always to have customers stay with the company for as long as possible.
Why is customer retention so important?
Well, for a start, increasing customer retention by 5% could increase your profits by anywhere from 25% to 95%. Retaining customers is significantly cheaper than finding new ones and your accountant will be glad of the consistent, often predictable income.
It doesn’t just affect your bottom line though. Customer retention has all kinds of benefits:
- Advocacy: If customers like your company, they’ll do the marketing for you.
- Information: Engaged customers are more likely to leave feedback on how you can improve.
- Cross-selling: An existing customer is more likely to explore the rest of a company that they trust.
The problem is, it’s easy for upper management to concentrate on new customer growth and miss the big picture- which is why you need solid, quantifiable metrics.
How to calculate your customer retention rate
There are a few different ways to calculate customer retention rate (you didn’t think it would be too easy did you?)
Here’s one the most common: ((E-N)/S)) x 100
E is the number of customers at the end of the period, N is the number of new customers acquired during a period, and S is the number of customers at the start of the period.
Now you have to decide on a period that makes sense. It won’t work to declare that your retention rate is 0% because a customer who bought a car or a house yesterday didn’t come back for another today. By doing a deep-dive on your sales data and using a little common sense you should be able to find a range of periods that work. Note that I said range- you might want to be able to see how you’re doing in both the long and short term.
That might be the most common metric, but there are others. Let’s cover a few of the most important:
You can get started with customer retention by calculating the percentage of customers you’re not retaining, known as ‘churn’. This is a nice easy calculation too:
(Total customers + New customers - Lost customers) / Lost customers = Churn rate %
Again, you’ll have to pick a period to measure this in that makes sense- a month, two months, a year, and it makes more sense for subscription-based businesses like SaaS providers than it does for companies that sell physical products in stores.
Repeat Purchase Ratio
If on the other hand, you do sell one-off products then a repeat purchase ratio is your best bet for solid data on customer retention. There’s a caveat though: you need to be able to show whether one person has purchased from you more than once. That’s so easy it’s trivial for online businesses, but could be tricky for companies selling physical items to retailers who then sell them to customers.
Okay, math time. Let’s take a look at the equation:
Number of returning customers / Number of total customers
So if you look at your data and see that of 10,000 customers 8,000 purchased more than once in a given period, you’ve got an 80% repeat purchase ratio. Nice and easy.
Customer Lifetime Value
Customer Lifetime Value, or CLTV, is another nice and easy one with serious value when it comes to balancing customer acquisition and the real value your customers bring.
For new businesses or new products, the cost to acquire customers (CaC) can be a ‘startup killer’ - you sink your money into glitzy product launches, an elite field sales team, and bountiful swag (got to have those branded USBs) but once you land a client they’re only paying a fraction of what you spent getting them in the door.
So, just get the totals that every customer has spent together and calculate the median (don’t use the mean average- a few big fish customers could distort your numbers). If the average lifetime value is below your acquisition cost (the simple version: your sales and marketing budget divided by the total number of customers) then you have a customer retention problem.
Revenue Churn Rate
Here’s a good one if you like getting into the nitty-gritty of your sales and return numbers, so you’ll need to have access to a CRM or accounting system, or get the company accountant coffee.
Revenue churn rate measures how much revenue you’ve lost from customer churn in a given period. You can slap together a simple Revenue Churn Rate by multiplying the number of customers you lost in a given period by your Customer Lifetime Value: ‘We lost five clients last month and with a CLV of $5,000 that means $25,000 in lost revenue.’
A better version incorporates all the different variables in your business (sorry, there’s no one-size-fits-all here). For example, if your company sells subscription products or services (so you have monthly recurring revenue or MRR) and you also have upgrades or optional features then you could use:
((MRR at the start of the period - MRR at the end of the period) - MRR from upgrades) / MRR at the start of the period
Companies with different business models will have to use different formulas, and you could use Excel to make really intense formulae if you’ve got a head for figures.
Net Promoter Score
It might not strictly be about measuring customer retention, but Net Promoter Score (NPS) is so closely related that if you measure one you should definitely measure the other, as NPS can give you valuable intel on why customers aren’t sticking around.
In case you’ve been living under a rock, NPS is a metric that shows how likely your existing customers are to recommend your company to others. It’s great for diagnosing customer retention problems because if you’re finding that retention is a problem then one of the likely culprits is that customers just aren’t satisfied with what you’re doing, and NPS will give you an insight into satisfaction problems.
If you’ve low poor retention and a low NPS then you’re pretty obviously not delivering a good product or service. If your NPS is good but you’re not retaining customers then there’s something deeper wrong with your business model- it might be that customers are using your product for a while and moving on when they have no use for it, so you might have to add new products or educate your customers.
Five ways to improve your customer retention rate
Now that you’ve measured your CRR you want the line to start going up, right? It would be weird if you didn’t.
The answer to any business-related question, whether it's B2B, B2C, SaaS, software, space tourism- anything, is always ‘make a quality product or service and sell it at a price people can afford’. But presuming you’ve got that part down, here are some suggestions.
Find out why people are leaving
This one is crucial, so it’s going first: if you know why people don’t stay with you then you can do something about it. If you can, ask former customers why they left and if possible check reviews. You will find that one of the main reasons is poor customer service and a perception that you don’t care about your customers, something that can definitely be improved with a little retraining and some changes in policies.
Focus on service
Which brings us to here. Customer service isn’t just service with a smile and remembering a chirpy ‘have a nice day now!’ at the end of a phone call, it encompasses everything from how easy it is to make an order to service uptime and technical support. In fact, it’s such a huge subject that we’d be doing you a disservice if we tried to cover it all here.
One idea we’d suggest is to empower customer-facing staff to be able to give small tokens of thanks or sorry easily and without having to call a manager to offer a refund or send a long-term client some cookies on their birthday. Little things like that go a long way.
We’re not saying that every attempt to be socially conscious in marketing works, but customers are more likely to stick with brands that share their values. That’s a difficult tightrope to walk, and above you’ll see examples of two of the world’s biggest tea companies telling people to stop buying from them in the hope that they’ll pick up new customers and strengthen their bond with existing customers. It doesn’t just mean tweeting the right hashtags, it means living those values in the form of the way your company works and how your employees and customers are treated.
Spot the Patterns
Customers usually don’t jump ship immediately- there are always warning signs first and if you can spot them you can prevent future losses.
If you have a good-quality CRM system, then you can log all of a customer’s interactions with your company and your product and, when a sizable number of them have left, you will have a dataset that you can use to find out the telltale markers of a soon-to-be-ex customer. They might call helpdesks more than usual, refuse or reschedule calls with a relationship manager, or just start logging into your website less. Whatever it is, as soon as you start seeing patterns you can flag existing customers as ‘at-risk’, allowing you to prioritize giving them the TLC it will take to keep them around.
Create a VIP program
People like to feel special, and if you’re making them feel special they’ll stick around longer. Create and promote programs for long-term, high-value customers to get more from you. That doesn’t just need to be tiered discounts but can include priority support, dedicated account managers, and even a party to celebrate your anniversary with the company.
Make Loyalty (and upselling) easy
There are probably customers out there who would love to deepen and extend their relationship with your company if they only knew how. There’s a fine line between letting your customers know about other services that you can provide and badgering them about giving you more money, but the easy way is to have upselling opportunities there when the customer is using your product. Freemium software providers often do this by having higher-level options on-screen but greyed out, with a link to purchase always nearby.
Examples of great customer retention strategies
The creativity software giant is characteristically colorful on its customer support twitter account. They’re proactive about seeking out people who aren’t satisfied with their products (tweet ‘I don’t like photoshop’ if you don’t believe me) and really great at sharing work by people who use their products. Would you switch to CorelDraw if Adobe had tweeted your portfolio out to 87,400 people?
Sephora’s Beauty Insider loyalty program is so popular that its 17 million members make up more than 80% of Sephora’s sales. Since they sell items that have to be restocked regularly, retention is key and they have taken a time-tested approach to keeping customers coming back by offering deep discounts.
With Prime, Amazon have hit on a great concept: a loyalty scheme that people will pay to join. Think about it: if you’re already paying the small fee for Prime, what reason is there to shop elsewhere? Members-only supermarkets like Costco and Sam’s Club have been using this model for decades, and Amazon have, as always, taken this concept and made it huge.
How to measure customer retention success
So you’ve set up your metric, your VIP Platinum Players Club swag bags are bulging with branded USB keys and t-shirts (XXS and XXXL only). How do you know that your strategies are moving the needle?
The first and most obvious way is to check in on your metrics regularly and see if lines are going up. As we’ve said before, having reasonable timescales is key- this is a marathon, not a sprint. Your efforts to retain customers will take time to kick in, and it will take time to see how much of an effect they have. For example, if you start a retention strategy in January and in February you see a 10% uptick in retention rates don’t start popping champagne just yet- it could be that in March the bump will go down again since you’ve only managed to keep customers hanging on an extra month. That kind of slow-and-steady mentality might be anathema to a move-fast-and-break-things culture, but it’s also the only way you’ll set yourself up for long-term success.