As a business owner, you rely on your customers. Without them buying your products or services, your company wouldn't be able to survive. Customer loyalty and customer retention are both critical to your ongoing success. While you might think these terms are identical, they actually refer to two different things. Read on to find out how these terms differ and why they both matter to your business's success.

What Is Customer Retention?

Customer retention refers to the various steps your business takes to retain (keep) existing customers and increase your ratio of repeat customers. Since it focuses on existing customers, retention directly contrasts customer acquisition, which is all about finding and acquiring new customers.

Examples of customer retention strategies could include consistently communicating with existing customers (e.g., via social media, email marketing, or a monthly newsletter), implementing customer education programs, and instituting customer loyalty programs (e.g., every 10th purchase is a certain percentage off).

The Importance of Customer Retention

Customer retention is a valuable investment for businesses, saving them time, effort, and money. The cost of retaining current customers is overall less than that of acquiring new ones. Depending on the industry you're in, acquisition can cost anywhere from five to 25 times as much as retention.

This is because you've already skipped over many other stages of the sales funnel — the series of steps required for customer acquisition — by the time you've reached the stage of customer retention. A typical sales funnel can be broken down into four broad steps:

  • Awareness: Grabbing the potential customer's attention, for example, by pressuring a pain point (i.e., a need or lack in the customer's life)
  • Interest: Keeping the potential customer's attention so they don't go seeking the same product or service from a competitor
  • Decision/Evaluation: Getting the prospective customer to choose your business
  • Action/Commitment: Getting the customer to "convert" and buy your product or service, concluding the deal

This entire process can require a significant investment of time, money, and energy. For example, let's say you run an e-commerce website. What might your sales funnel look like? Here's an idea:

  • To get the customer's awareness, you might pay for online search engine advertising to drive them to your website.
  • To retain their interest, you might have your website designed to feature a pop-up box with a promotion deal once the customer is on the homepage.
  • To encourage a favorable decision, you need to invest in top-quality product pictures and straightforward web design (e.g., a streamlined payment process, well-written product descriptions, and easy navigation).
  • Even with all of those steps done, you still aren't guaranteed that a customer will convert.

With an existing customer, you can skip through the sales funnel and simply focus on retention — basically, keeping the customer happy. This is generally easier, faster, and more cost-effective. Retention activities like those mentioned above (e.g., an email newsletter) are often relatively low-maintenance, especially with modern automation tools.

Logically, repeating customers also means more sales, boosting your business's bottom line. A positive customer retention rate can also increase your customer lifetime value (CLV). CLV is a metric determining how much your business makes throughout your entire relationship with a customer. CLV benefits from minimal acquisition and retention costs and maximum customer spending.

Finally, customer retention is valuable because it can lead to customer loyalty. More on that below.

What Is Customer Loyalty?

Customer loyalty refers to an ongoing business relationship with a customer who consistently chooses your company over competitors, returning repeatedly to purchase your products or services. Loyalty is demonstrated and nurtured over time. Usually, an amalgamation of positive customer experiences leaves the customer feeling like they can trust your business.

These positive experiences could range from a superior-quality product or service experience to an above-average customer service experience. These elements allow the customer to form a positive view of your business overall and foster a faithful, committed connection.

The Importance of Customer Loyalty

A loyal customer base means you have a following of dedicated consumers who opt to support your business instead of your competitors. Customer satisfaction is critical to building loyalty and growing this valuable customer support.

Why is loyalty so important? Beyond the basic fact that this means an ongoing cycle of sales, driving profits, loyalty also has the benefit of encouraging customers to act as advocates. Committed customers may become champions of your brand, recommending your new products or services to friends, family, co-workers, and acquaintances.

This kind of organic word-of-mouth marketing has some distinct advantages. First off, it doesn't cost you a thing. Second, referrals from real-world people are often seen as more trustworthy than an advertising or marketing strategy coming from a company. Finally, this type of natural marketing is a means of building a community around your brand.

A community allows you to further build brand advocates and glean valuable insights directly from customers. You can nurture a digital customer community via online forums like social media. Further, ongoing interaction between your business and its followers provides social proof for your brand, highlighting your business and implicitly encouraging others to join its following.

Customer Retention vs. Customer Loyalty

While customer retention and customer loyalty are distinct, they are related. To recap the above, here are the quick definitions for easy comparison.

  • Customer retention: The various steps your business takes to retain (keep) existing customers and increase your ratio of repeat customers.
  • Customer loyalty: An ongoing business relationship with a customer who consistently chooses your company over competitors, returning repeatedly to purchase your products or services.

Customer retention — the efforts your business takes to retain existing customers — can breed repeat customers. Over time, repeat customers can build customer loyalty, placing their trust in your brand without question or thought of seeking out a competitor.

Customer loyalty is further distinguished by the advocacy aspect. Loyal customers often become informal spokespersons for a brand or business, telling other people about its products or services. This provides useful testimonial marketing that the broader public is more likely to trust than top-down advertising or marketing efforts.

Why Customer Retention and Loyalty Are Both Important

Customer retention and loyalty both offer benefits for your business. Retention can help save money, time, and effort compared to acquisition efforts. It can also help improve your CLV and lay the foundation for long-term customer loyalty.

Meanwhile, loyalty can support an ongoing sales cycle, build a customer community, and create a legion of brand advocates — who essentially provide free marketing for your business. Taken together, customer retention and loyalty can help your business save money, maintain sales, boost profits, and nurture a strong, community-oriented customer base.

Investing in customer retention and nurturing customer loyalty is clearly worth your while. Here are some ideas for successful retention and loyalty practices:

  • Give fantastic service. Customers will come back and remain dedicated if they're happy with your products and/or services.
  • Resolve potential problems quickly. If a customer has an issue, listen to their concerns and take steps to address them. This can help you keep a customer.
  • Maintain regular contact. Don't let existing customers forget about you. Maintain engagement via newsletters, social media, and similar marketing measures.
  • Reward loyalty, for example, using loyalty rewards programs.
  • Say thanks. Sending holiday greetings or giving customers a perk on their birthday (e.g., a little freebie) is a great way to thank them and connect personally.

How can you know if your efforts are working? You can calculate customer retention using a simple formula:

  • Define a set period of time, like a month, quarter, or year.
  • Check how many customers you have at the end of that period.
  • Subtract any new customers acquired during that period.
  • Take the resulting number and divide it by the number of customers you had at the start of the period.
  • Multiply the total by 100 for your customer retention rate.

So, how do you measure customer loyalty? There are many ways to assess this, like checking your social media activity, soliciting qualitative customer feedback via surveys, and calculating your net promoter score (NPS). This score is based on a survey asking customers how likely they are to recommend your business to a friend (on a scale of 1 to 10).

Keep Your Business Finances on Track With Skynova

As you implement customer retention and loyalty efforts for your small business, you want to stay on top of your finances. Tracking how much you spend on these initiatives (for example, by hiring expert marketers) will allow you to gauge the success of your efforts and determine whether you're getting a sufficient return on investment.

Skynova helps small business owners like you stay on top of their money matters. Our accounting software lets you monitor income and expenses, follow up on unpaid invoices, and more. When you don't have to stress about finances, you can focus on delivering top-quality products and services, creating the customer success stories that result in retention and loyalty.

Notice to the Reader

The content within this article is meant as a general explanation of the differences between customer retention and customer loyalty and may not apply to your business. When it comes to business finances, accounting needs, or bookkeeping, always consult a professional accountant to ensure that you're following accounting best practices and meeting legal requirements.