Table of Contents
Customer retention is the rate at which customers continue to work with a business. Retention is the opposite of churn, which measures the percentage of customers who stopped using a product or service.
What do those letters mean?
S: The total number of customers at the beginning of the time period.
E: The total number of customers you have at the end of the time period.
N: The total number of new customers acquired during the time period.
That's confusing, so let's break that down:
Step #1: Determine the time period you want to measure (i.e., you want to measure your customer retention rate for the past 12 months).
Step #2: Figure out how many customers you had at the beginning of the time frame you want to measure (S). For this example, let's say you had 100 customers at the beginning of the year.
Step #3: Figure out how many customers you have at the end of that time period (E). For this example, let's say you have 95 customers.
Step #4: Figure out how many customers you acquired during that time period (N). For this example, let's say you acquired 25 new customers during the year.
Step #5: Put everything into the formula. For this example, that'd look like this:
[(95-25)/100] x 100 = Customer Retention Rate (CRR)
In this example, your customer retention rate for the year was 70%.
Retention is the percentage of customers who have stayed with you over a certain period of time. On the other hand, the churn rate is the number of customers you’ve lost over a period of time. While retention indicates success, churn is the opposite and a sign that you may want to reevaluate your product and processes.
Customer retention and churn aren’t your only guiding lights. To paint an even clearer picture of your company’s overall health, there are many other metrics to calculate. Depending on your business, you should consider calculating Repeat Purchases, Days Sales Outstanding, Net Promoter Score (NPS), Time Between Purchases, and Customer Lifetime Value (CLV).
You can get the RPR by dividing the total number of customers who have made multiple purchases by your total number of customers. For example, if you have 100 customers and 50 of them have made multiple purchases, your RPR would be 50%.
Repeat Purchase Ratio = Number of Returning Customers / Number of Total Customers
Days Sales Outstanding is the average number of days it takes for you to receive payment for a sale. A low DSO is a great indication of customer happiness and satisfaction as it shows how committed they are to maintaining a healthy working relationship.
Annual Days Sales Outstanding = (Accounts Receivable / Annual Revenue) × 365 Days
Net Promoter Score is the holy grail for many companies and something you see measured often (see below for a typical way a company does this). NPS measures customer satisfaction, brand loyalty and how likely a customer is to recommend you to others (word-of-mouth advertising).
Net Promoter Score = % of Promoters - % of Detractors
Time Between Purchases tells you how long the average customer goes between making a purchase. While this will vary on an industry-by-industry basis, TBP lends light to customer happiness and their likelihood of exploring competitor products or services.
Time Between Purchases = Sum of Individual Purchase Rates / Number of Repeat Customers
Customer Lifetime Value (CLV or LTV) tells you how much money (revenue) you’ll earn from a particular customer over the lifetime of your business relationship. Said another way, CLV tells you how much a customer is “worth” and how important it is for you to hold on to them (i.e., you would prioritize customers with a greater CLV).
Customer Lifetime Value = (Customer Value * Average Customer Lifespan)
You already know the primary reason customer retention is important, but there are a few more nitty-gritty statistics that demonstrate its impact.
The probability of selling to an existing customer is between 60% and 70%, while the probability of selling to a new customer is only between 5% to 20%.
Existing customers are 50% more likely to try a new product.
Existing customers are 31% more likely to spend more on their average order value.
Acquiring a new customer can cost 5X more than retaining an existing customer.
Increasing customer retention by 5% can increase profits from 25-95%.
U.S. companies lose $136.8 billion per year due to avoidable consumer switching.
It’s also worth noting that good customer retention will turn regular customers into brand advocates who’ll sing your praises to their peers.
Think of customer retention as a puzzle unique to your business. Eventually, you’ll put all of the pieces together to complete it, but it’ll take some time to figure out exactly what it’ll take to do that. These five advanced strategies can help you do that.
Relationships are inherently human. It doesn’t matter if you have unequivocally the best product or service on the market — although that certainly helps — if you fail to build and maintain meaningful relationships with your customers, you’re telling them you really only see them as a source of revenue. At the end of the day, you want your customers to associate a face with your company just as much as they do with your product or service.
Keep detailed notes on your customers’ lives. For example, their favorite out-of-work activity or important dates such as their upcoming wedding. With this information, you can have more authentic conversations that strengthen your relationship.
Connect with them on LinkedIn to stay up to date on their professional lives (e.g., changing companies or getting a promotion). This is also your opportunity to share company content and updates with them that start relevant conversations.
Host webinars or other virtual events that bring your customers together and foster discussions around centralized topics that are important to them.
Make it known that not only do you want their feedback, but you need it. You can do this by sending quarterly surveys or dedicating time on your regular calls to discuss what’s working, what’s not as well as what they’d like to see in the future.
Then, take this feedback and act on it. As cliche as it is, you can’t just talk the talk. You need to walk the walk, too. When your customers give you feedback, let them know that you’re listening and sharing their input with other organizations within the company.
Pro Tip: If you made changes based on a specific customer’s feedback, make sure you communicate it back to them and let them know that they were a driving force behind the update.
Retaining customers is just as much about selling them on the current state of your product as it is about painting a picture of a prosperous future. This is why it’s imperative that you’re open and honest about what’s coming — even if it isn’t good news.
For example, if a customer is asking for a new feature, but it’s not something that’s on the current roadmap, share that with them and set expectations. Honesty is more valuable than bending the truth to make them happy in the short term.
The last thing you want is for your customers to get the sense that they’re just a number; that they’re no different from anyone else. Every interaction you have with them should be unique and tailored to them.
For example, instead of sending them a generic email about a recent product update, give them a call and explain how it applies to them. Another good example is sending success plans curated for each industry vertical (e.g., real estate, gig, and SaaS customers) that give each of them unique knowledge and resources to succeed in their industries.
Customer happiness will always elude you if your customers don’t know how to use what you sold them. This is why customer education is so important. To retain customers, especially the ones with the greatest CLV, it’s imperative that they have every resource at their disposal to fully take advantage of your product. I’m talking about a help center, webinars, videos and more.
Customer onboarding plays a huge role here. By reducing the time-to-value (value realization), you’re getting your customers up and running quickly. The quicker you do that, the quicker they become brand advocates.
Pro Tip: Customer education can get unruly pretty quickly for a growing company, especially if you’re trying to personalize the experience every step of the way. With a learning management system (LMS), you can automate all of these processes to ensure your customers are getting exactly what they need, exactly when they need it.
Chewy adds a personalized touch to its customer relationship strategy. For example, Chewy will often send hand-painted pictures of new pets following their owner’s first purchase.
Canva hit the nail on the customer-retention head by investing a hefty dose in customer education. While the design technology is relatively intuitive, Canva’s customers still have access to a help center that provides them with in-depth articles and resources to help them take full advantage of the product.
Similar to Canva and Chewy, Whoop separates itself with an incredible product. However, Whoop doesn’t stop there. The company also fosters a strong sense of community among its customers. With one simple click in the Whoop app, customers gain access to the “Community”, which consists of member stories and groups based on specific interests. For example, there’s a “Road Runners” group with over 22K customers.
A great product or service will only get you so far. The same can be said about only setting your sites on customer acquisition. For decades into the future, your longevity and profitability as a company will rely on your attention to customer retention and doing absolutely everything in your power to make them happy — and never high-tailing it to your competitors.