You've heard that customer retention is important. Everyone knows this. But for some reason, not everyone prioritizes it.
There are many reasons this could be the case, but the one that rears its ugly head the most often is a fundamental lack of understanding.
So, let's clear the air and dive into why customer retention is important.
What's Customer Retention?
The standard customer retention definition is a company's ability to keep — or retain — its customers over a long period and is one of the strongest indicators of success. Poor customer retention can result from various factors, including that the customer doesn't understand the product, can't realize its value or finds it difficult to use.
Customer retention is the opposite of churn. Churn is the rate at which a company loses customers. Similar to retention is a sign of good things to come, churn is the opposite and almost always indicates poor company health. Your goal should be to lower churn and improve customer retention.
Why's Customer Retention Important?
It costs five times as much money to acquire a new customer as it does to retain an existing customer.
Your current customers are 51% more likely to try a new product than new customers are.
Increasing your customer retention by just 5% can result in anywhere from a 25% to 95% increase in profits.
Your chances of selling successfully to an existing customer is between 60% and 70%, while your odds of selling to a new customer are only 5% to 25%.
What's a Good Customer Retention Rate? How to Calculate It
"What's a good retention rate?" is a common question among business leaders. It's one thing to understand the importance of customer retention, but it's quite another to understand how to calculate it.
With that in mind, here's the formula you can use to calculate customer retention:
[(# Customers at End of Period — # Customers Acquired During Period) / # Customers at Start of Period] x 100
First, figure out the time frame you want to calculate. For example, do you want to see your retention rate for all of 2021? The first quarter of the year? Maybe you want to look at retention for the past month. It’s up to you.
Once you have this, you need the total number of existing customers (E), the number of total customers at the end of the time period you identified earlier (S) as well as the number of new customers acquired during the same time period (N). Then, multiply by 100.
S: The total number of customers at the beginning of the year.
E: The total number of customers you have at the end of the year.
N: The total number of new customers acquired during the past year.
3 More Important Customer Retention Metrics
The formal customer retention rate formula above is the best way to calculate this metric; however, you can use a few other metrics to understand company health.
Net promoter score (NPS)
Your company's net promoter score measures brand loyalty and customer satisfaction. It's a great way to determine how likely your customers are to recommend your business to others and spread brand awareness via word of mouth.
Customer lifetime value (CLV)
A customer's lifetime value is the amount of revenue you'll earn from that customer over the entire period of time they're a customer. The longer a customer continues to do business with your company, the higher their customer lifetime value will be.
This makes CLV a good indicator of customer retention. Higher customer lifetime values mean customers are sticking around for longer. Measuring individual customer lifetime values can also tell you which customers are spending the most money, and therefore which ones you should really focus on retaining.
Repeat purchase ratio (RPR)
Your repeat purchase ratio is the ratio of customers who bought from you once to customers who bought from you multiple times. This tells you how many customers are giving up on your products after one purchase and how many customers are coming back for more. Improving your repeat purchase ratio directly correlates with improving customer retention.
B2B Customer Retention Strategies
To stand the best chance of improving your customer retention rate, you'll need to employ the best customer retention strategies. Most of these strategies are probably simpler than you imagine.
By definition, a customer education strategy provides your customers with the resources and knowledge they need to be successful with your product.
Don't know how to log in for the first time? A customer education program shows them.
Can't figure out how to use a new feature? A customer education program shows them.
Not seeing results? A customer education program shows them strategies they can use to start achieving them.
That said, any 'ol customer education program won't cut it. To use customer education to improve your retention rate, there are a few best practices you must follow:
Personalize the Content
One of the most frustrating experiences for a customer is feeling like they're just a statistic — nothing more than a dollar amount on a company spreadsheet. Providing customers with personalized learning experiences is a great way to make them feel seen and valued. When customers feel valued, they are much more likely to give you repeat business
Customers appreciate honesty. If you want to win their loyalty, don't use shady, misleading selling tactics. Present your products. and learning materials in the best light you can, but be forthright about the current state of the product and its capabilities. Customers respond well to being treated well, but if they feel lied to, that's a sure recipe for a decrease in retention.
Ask for Feedback
The only way to improve the customer experience you offer is to ask customers about it. After all, they're the ones who ultimately decide whether their experience was good or bad. Don't just make educated guesses about the right moves to improve retention — actually ask your customers.
Solicit feedback as often as possible and encourage detailed answers. This will give you the guidance you need to make the changes to your business model that can improve customer satisfaction and lead to a higher retention rate.
Using Customer Retention Management Software
The biggest deterrent to customer retention is a lack of customer education. When customers don't know how to use your products, they won't get value from them — and if they can't get any value from them, why would they pay for them? If you want to improve customer retention, one of the first strategies you should consider is implementing a better customer education program.