What is customer retention?
Published on: October 24, 2023
Updated: October 24, 2023
Customer retention is the ability of a company to retain its customers over a specific period. It’s a metric for determining how well you can engage existing shoppers and maintain long-term customer relationships.?
How do you calculate customer retention rate?
As a KPI or metric, customer retention is expressed as a percentage. You calculate it by subtracting your end number of customers from the number of new customers for a given time period. Then, divide that by the number of customers at the beginning of the period.?
Here’s the formula for calculating your customer retention rate:
Customer Retention Rate = (End number of customers ? Number of new customers during the period) / Start number of customers x 100
Let’s break down how this equation works.
- Start Number of Customers – This is the number of customers you had at the beginning of the period.?
- End Number of Customers – This is the number of customers you had at the end of the period.?
- Number of New Customers – Here, you calculate how many new customers were acquired during that period.?
Plug these numbers into the formula to find your retention rate.
For example, let’s say you want to calculate your retention rate for the month of January.
- You started January with 1,000 customers.?
- By the end of the month, you had 1,100 customers.?
- During January, you acquired 150 new customers.
You would calculate your customer retention rate as follows:
Customer Retention Rate?
= 1100 – 150 = 950
= 950 / 1000 x 100?
This means your customer retention rate for January is 95%.
Why is customer retention important?
Customer retention is important because it can lead to higher profits and improve your lifetime customer value. Multiple studies have shown that retaining customers is far more cost-effective than acquiring new ones, so investing in retention also makes you more efficient with your marketing and advertising budget.?
The Harvard Business Review points out that “acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.” What’s more, industry data shows that “increasing customer retention rates by 5% increases profits by 25% to 95%.”
All this to say that a strong customer retention strategy leads to a healthier bottom line and a better business overall.?
How do you improve customer retention?
There are a handful of ways to improve retention. Here are some of the steps you can take to get more customers to stick with your brand.?
- Understand your customers. Not all retention strategies are created equal. The best way to determine which initiatives are right for you is to understand your customers. Use surveys, social listening, and direct customer communication to learn more about their needs, preferences, and pain points.
- Enhance the post-purchase experience. You invest a lot to acquire customers and get them to make their first purchase. One of the best ways to ensure they keep buying from you is to create top notch experience after the sale is complete.? In other words, understand the post-purchase evaluation journey of your customers and invest in a solid post-purchase experience. You can do this by implementing branded order tracking, timely shipping notifications, and omnichannel returns.??
- Offer exceptional customer service. Ensure fast, respectful, and effective responses to customer inquiries and complaints. Train your customer service team well and empower them to solve issues. Another great way to enhance customer support? Be proactive about sending post-purchase communications to reduce WISMO inquiries. This helps free up your team’s time so they can spend more energy helping customers who need additional support.?
- Engage customers regularly. You know what they say, “Out of sight, out of mind.” Maintain strong brand visibility among customers by communicating on a regular basis. Use email marketing, newsletters, and social media to keep your brand top-of-mind and inform them of new offerings, updates, or company news. (Pro tip: You can do this easily with the right ecommerce marketing automation tools.?
- Provide value-added content. Retaining customers isn’t about being on “sales mode” 100% of the time. Strive to provide value in other ways. Offer tutorials, blogs, webinars, or resources that help customers get more out of your product or service.
- Personalize interactions. Customers are more likely to jump ship if they feel like just another number to your company. So, use data analytics to tailor marketing messages, product recommendations, and communications based on individual customer preferences and buying habits. (As always, any communications with your customers must adhere to consumer privacy laws, so make sure to get your legal ducks in a row.)
- Monitor churn. Proactively track customer engagement and identify those who are likely to churn. Think: dormant customers or those who are having issues with your product or service. Use analytics to identify these signs and quickly address concerns to keep them from jumping ship.?
- Offer competitive pricing. Price isn’t the only factor in retention. However, it’s a good idea to keep an eye on the market and ensure that your prices are competitive and offer good value for money. Note: if you’re an ecommerce luxury brand, this may not necessarily apply to you.?
What is a good customer retention rate?
The best customer retention rate is, of course, 100%. However, maintaining perfect customer retention is extremely difficult (if not impossible) to achieve.?
You can, however, look at industry benchmarks and see how your retention rate measures up. Statista shows the following retention rates across different verticals:
|Industry||Customer retention rate|
|Automotive and transportation||83%|
|Construction and engineering||80%|
|Hospitality, travel, and restaurant||55%|
|IT and software industry||77%|
Once you know how your business compares to industry averages, strive to continuously improve your customer relationships using the tactics above. In doing so, your business can enjoy increased loyalty and sustained growth, which then positions you ahead of your competitors in the long run.
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