Customer retention can hold more weight than acquisition. It’s the leading indicator of your business’ health and key metric to determine its ultimate valuation. Retention shows that you are providing a valuable service that keeps your customers coming back. Not to mention acquiring new customers can be rather expensive yet retaining them... well, it’s a lot cheaper.
An easy way to visualize retention rate is through the leaky bucket metaphor. Trying to build a business with poor retention is like trying to fill a leaky bucket. No matter what you do, you can’t gain traction to create a healthy business. But with the right tool in place, you can be on your way to a healthy retention rate and more predictable revenue.
What is customer retention?
Customer retention, or client retention, is the process of turning one-time buyers into repeat customers. The word “retention” stems from retain, and retain is basically just a fancy way of saying keep.
So, the goal of customer retention is to keep your existing customers. The goals and methods of retaining customers vary by industry: A average company that sells high-end software will have different customer retention strategies than an ecommerce store.
But for all sectors, the idea is to provide a level of quality and service that keeps people coming back – customer retention perfected.
The goal of customer retention is to keep your existing customers.
Why is customer retention important?
Customer retention reflects the ability of a company to deliver value within its competitive market. If you’re running a SaaS business, retention rate is key. It represents average happy and satisfied customers, but most importantly it represents your monthly recurrent revenue (MRR). So what are the factors that lead to good retention?
Maintaining your customer base also means having less customer churn. Churn represents customers who leave your platform for a number of reasons, including, delinquent credit cards, unhappiness with the platform, or unfortunately, bad support. But pinpointing the exact problem and working to eliminate it, will help reduce churn.
Lower customer acquisition cost (CAC)
Higher retention also leads to lower average customer acquisition costs, meaning you and your team are wasting less revenue and time. The more happy customers you have, the easier it is to attract new customers. Don’t underestimate how useful a strong customer referral program can be.
Higher customer satisfaction
Focusing on customer retention isn’t just about saving your revenue, it’s about keeping customers happy and willing to continue their subscriptions. A lot of this has to do with the frequency of engagement with the customer. Proactively, instead of reactively, reaching out to your customer will lead to better customer engagement and customer happiness. Listening to customer feedback and putting it to good use will also lead to higher satisfaction.
When you have a solid retention rate, you have an easier time forecasting future growth, revenue, and customer count. A consistent loss of customers due to churn and a diminishing average MRR will make it extremely difficult to adequately forecast and plan accordingly, that can lead to some pretty disastrous outcomes.
How to calculate your customer retention rate
Before you start creating a customer retention plan, you need to know and understand your current customer retention rate. This number tells you the percentage of customers that are sticking around.
Your customer or employee retention rate is easy to calculate with following equation:
CRR = ((Number of customers at the end of a period – number of customers acquired during that period) / number of customers at the beginning of the period) X 100 = Customer retention rate. The result in measured in percentage.
First, define the period. The time frame is completely up to you – it could be monthly, quarterly, yearly, or whatever works best for you and your business.
Keep in mind that when you calculate the number of customers at the end of the period, you have to take customer churn into account.
Here’s an example: You have 1,000 customers at the beginning of the period. You acquired 550 new customers during that time, but lost 250 due to churn. That means that at the end of the period you have 1,300 customers.
The Customer Retention Rate would look like this:
CRR = ((1,300 – 550) / 1,000) * 100 = 75%
Why is this number so important? It tells you how well you’re able to keep your customers coming back for more. For a benchmark, our good friends at Mixpanel state that a 35 percent or higher retention rate in the ecommerce or SaaS industries means you’re doing really well.
5 ways to improve your customer retention rate
The reasons why customers leave are endless. It may be as simple as the fact that they don’t need what you offer anymore. But it could also be an issue that’s making a larger negative impact on your business—and you may not even be aware of it, if you don’t measure and calculate properly.
1. Improve how customers can reach you
Think of the last time you had a less-than-stellar customer experience with a company. There’s a good chance that it was because you couldn’t get a human on the phone. In fact, bad customer service ranks among the top reasons for customer churn.
There’s no secret here: make it easy for customers to get in touch. A reliable business phone system with simple call routing will streamline and simplify the way your customers contact you. Make sure your inbound calls are being forwarded (when it makes sense to—like during travel, or any time you need to make yourself available).
2. Check your online presence
What’s the state of your website and social channels? Are they informative and updated often? Automating transactions and capturing leads? Or are they just there, waiting for the day you’ll have a moment to spare to get to them? Your online presence is often the first place customers go for information or help. Make sure it’s easy to find and use—and gives them different ways to get a hold of you:
Just setting up social media profiles on a bunch of different apps isn’t enough. You also have to be responding to these messages—and not making your customers wait for a reply. Online customer service isn’t easy, but if you have the right tools, it can be done (even if you have a team of one handling it). These are all elements that will improve your customer retention rate, even if only for a few percentage.
3. Treat questions and complaints as extremely important
You know how you sometimes need an extra set of eyes to edit because it’s impossible to spot your own typos? The same goes for your app or store. As you’ve designed the customer journey, you built the product pages, you set the prices. In short, you understand everything about it because you’re the one who invented it.
Which is exactly why we can’t always see what we did wrong. At least not as well as our customers can. Paying attention to questions and complaints about your product or service is a great way to keep a few percentage of your customers, and a simple customer retention technique. Also, make sure customers feel comfortable enough to ask questions. The more comfortable they feel, the higher your customer retention will be.
And, as customer retention majorly depends on customer satisfaction, make sure to properly keep track of any complaint you receive, so these complaints become actionable in your customer retention process. Your customer success team could even take steps to make it simpler for customers to submit complaints by putting a contact page on your website, throw your email into the footer, and make sure that you’re available on social media.
4. Monitor your customer activities
A Dutch saying goes “meten is weten” — “to measure is to know”.
To measure what customers are doing on your platform, you need to have proper systems in place that analyses every move, from first website visit to becoming a paying customer to potentially churning. And you need to be able to acquire these metrics both on account and user level, if you’re running a B2B environment.
By tracking everything — of course, hereby respecting proper local privacy legislation as GDPR and CCPA — you get a perfect idea of key features, channels, campaigns, (web-, blog-, help-)content interactions that impact user engagement and satisfaction. And this goes both directions. If you’ve identified key impact elements, you can start grading leads and customers that have interacted with them (or not!).
Systems such as MixPanel, journy.io, Totango, Zendesk.. all have elements that contribute to improving customer satisfaction and retention. Some will focus on product adoption feedback (typically for product and engineering managers) or customer success processes (focus on support articles and ticketing), while journy.io focusses on sharing individual health, feature adoption, customer retention rate score, personas, churn detection and other engagement metrics with customer tools such as marketing automation systems, CRMs and support ticketing systems. It all comes down to making sure your existing customer workflows have metrics which allows you to focus on those that are at risk of churning.
5. Be brutally honest
Our final customer retention strategy is a simple one, and it’s one which you’ve probably been taught throughout your whole life.
Be brutally honest. It’s as simple as that.
It might sound a little vague at first, but there are a lot of people out there who have been burned by businesses before. Whether that be through faulty products, confusing returns policies, unknown charges, or something else, people are quick to lose trust nowadays. So make sure that you provide your customers with an honest experience when they’re shopping from you.
Offer fair prices for your products and services. Be clear which partnering companies you’re going to use for certain features. Don’t try to bump your prices too high initially. Nothing will make your customers skeptical more than an unwarranted high price tag.
All in all, try to treat your customers how you want to be treated – this is one of the best ways to improve customer retention rates for businesses of all shapes and sizes.