Customer retention is concerned with keeping existing customers and turning them into repeat customers who purchase your products and interact with your brand on a regular basis. Keeping your current customer base allows you to tap into an existing revenue source without incurring the acquisition costs associated with targeting new customers.
And while most business owners are familiar with the benefits that a loyal customer base offers, few know how to measure customer retention. Keep reading as we show you a simple way to calculate and measure retention for your business and outline the customer retention metrics you should know about.
How Customer Retention Affects Your Business
There are many reasons you should prioritize customer retention and rely on it as a viable business growth strategy. Besides increasing your customer lifetime value and boosting your bottom line, customer retention offers the following benefits:
- It is cheaper than acquisition. One of the obvious advantages of customer retention is the simple fact that it is considerably cheaper than customer acquisition. Unlike the latter, customer retention strategies do not involve the costly marketing campaigns or extensive advertising that are needed in order to reach new customers.
- Loyal customers generate more revenue. Not only is customer loyalty more affordable than customer acquisition, but it is also more profitable in the long run. Customers who are familiar with your products and trust your brand are less price-conscious than new customers. Loyal customers are more likely to refer their friends and family to your business, which ends up driving new customers to your business as referrals increase.
- You will get more valuable feedback. Gathering feedback is important for any business that wants to improve the way it offers products or services to customers. Unlike an average customer who is interacting with your business for the first time, a repeat customer has had a lot of experience with your products or services and is keenly aware of what must be done in order to improve them. Feedback from such customers is extremely valuable and critical to the growth of your business.
- It gives you the flexibility to try new things. Trying new marketing strategies and offering new products is something you will have to do multiple times throughout your business lifecycle. Establishing a loyal customer base makes this easier. Loyal customers are more receptive to new offerings from a brand they trust and more forgiving if something does not go as planned.
- You will stand out from your competitors. Since most businesses focus on customer acquisition, the mere fact of prioritizing customer retention will help differentiate you from other competitors in the space. The more customers you have, the greater the chances are that your business will grow.
How to Measure Customer Retention
As we mentioned above, customer retention is a measurable metric that can be calculated using a simple formula. But before breaking down how to calculate it, we must first identify the variables that make up the formula. Here is what you need in order to calculate customer retention for a calendar year:
- The number of current customers at the start of the year
- The number of total customers at the end of the year
- The number of new customers gained within that year
Once you have compiled this data, the next step is to calculate your customer retention. The section below outlines how this is done.
Calculating Customer Retention
Customer retention for a business is calculated using the following formula:
|Yearly customer retention rate|
|× 100 to get percentage|
Figure out the number of total customers at the end of a given period of time: If you are calculating your customer retention rate for a calendar year, this figure represents the total number of customers you have at the end of December.
Subtract the number of new customers gained within that year: Since we are trying to determine the rate of retention for a specific period of time, the new customers you gained during that time must be subtracted in order to isolate the number of existing customers you retained.
Divide by the number of customers at the start of a given period of time: This is the number of customers at the start of the year.
Multiply by 100: The result is a percentage that indicates how effective your business is at retaining existing customers within a specific time frame. The higher the number, the better your customer retention.
Other Metrics You Should Know About
While customer retention rate is the main metric of concern, it is important to note that there are other relevant metrics that pertain to customer retention. Here is a brief overview of the main ones with which any business should concern themselves:
- Customer churn rate: This is simply the inverse of your customer retention rate. For example, if your CRR is 70%, your churn rate is 30%.
- Repeat purchase rate: This is the percentage of customers who made another purchase after their initial interaction with your business.
- Customer lifetime value (CLV): This represents the amount of profit the average customer has contributed to your business throughout their lifespan. The formula to calculate CLV is (Average order value x Repeat purchase rate) - Customer acquisition cost.
Improve Your Customer Retention Rate
There are many strategies that can help you get repeat purchases from your existing customers. The common thread between all of them is that every strategy is focused on improving customer experience and ensuring customer satisfaction after each purchase.
Here are some effective ways that can help you improve your customer retention rate:
- Build a community on social media. One key to a successful customer retention strategy is building an online community that makes customers feel valued and prioritized by the business they patronize. Creating positive interactions with customers and providing value to them via helpful and personal social media posts will boost brand loyalty and foster a sense of trust in your business.
- Refine your onboarding process. If you want your customers to make additional purchases, you need to make the onboarding process very convenient and painless. This is especially crucial when operating SaaS companies or online businesses, such as Shopify stores and other e-commerce sites. Simplify the sign-up process and provide ample documentation to help customers navigate their initial interaction with your products or services.
- Create a loyalty program. Loyalty programs are one of the most straightforward approaches to ensuring customer retention. Offering rewards to customers who have purchased your products on a regular basis will increase the likelihood of retaining them permanently. Examples of the rewards you can offer include coupons, special discounts, and exclusive access to new products.
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Notice to the Reader
The content within this article is a general guide and may not apply to your specific situation. Always consult with a business adviser to ensure you are getting the necessary professional guidance.