Customer Retention Rate: How to Calculate & Improve It

“New” is exciting.

We browse new books as though they hold more wisdom than the ones we are currently reading.

We test-drive a new car as if this one is gonna go over 40km/h in our daily commute stuck in traffic.

And clients & customers? We focus our marketing and sales efforts on new ones as this is the only path to increasing revenue.

It’s time to make customer retention, and its rate, cool again.

So let’s take things back from the start.

What is ‘customer retention rate’?

Customer retention rate is an essential metric that reveals the percentage of customers a company maintains in a given period. It’s all about how efficiently you can retain your customers.

Simply put, it’s the percentage of customers you keep over a given time, minus the number of new customers you acquire.

We can calculate it by using the following formula:

Benefits of a High Customer Retention Rate

Customer retention is more than just keeping a steady revenue; it offers several advantages that can lead to success in your business. here are some of the advantages of having a high customer retention rate.

1. Cost savings compared to acquiring new customers

Gaining new customers is another factor that usually comes with a lot of costs in terms of marketing and sales. On the other hand, customer acquisition costs are relatively higher than the cost of customer retention. No costs are incurred for advertising, promotions, or other expenses required to attract customers to your business. This cost efficiency leads to higher profit margins as the product manufacturing cost is reduced.

2. Increased customer lifetime value (CLV)

Customer lifetime value (CLV) refers to the amount of money that a particular customer will spend at your company for their entire lifetime. Customer loyalty often leads to more frequent purchases and higher-value purchases. Since you keep customers for a longer period, you enhance the CLV, thereby making the revenue streams more predictable and reliable.

3. Enhanced brand loyalty and advocacy

Brand advocates are customers who are satisfied with your brand and are more likely to stick with your brand. Not only do they keep buying your products, but they also recommend others to do the same. Customers who are satisfied with your product or service can become powerful ambassadors, influencing others to buy your product or service.

Key Strategies to Improve Customer Retention Rate

Improving your customer retention rate requires a few strategic approaches. These are the most common ones.

1. Offer exceptional customer service

The key to customer retention is to provide customers with the best customer service they can have. Ensure the customer support team is always available to address the customer’s complaints. This will help achieve customer loyalty to the brand

2. Implement a customer loyalty program

Keeping customers engaged and rewarding them for repeat business is the goal of a well-designed customer loyalty program. Give value to the customer through vouchers or coupons that can be redeemed against products, sales, or other privileges. This will make customers feel appreciated.

3. Personalize customer interactions and communications

The customer can feel special if you personalize their communications and offers to their preferences and behaviors. By sending personalized emails, recommending products, and making special offers, you can significantly improve the customer experience.

4. Gather and act on customer feedback

It is important to collect feedback from your customers on a regular basis so that you can understand their needs and pain points. When it comes to identifying how you can assist the clients with what is being offered or sold, it is crucial to use surveys, reviews, and feedback. 

5. Utilize growth marketing techniques

Growth marketing is trying different solutions to find the best approach to keeping customers. It’s data-driven marketing that uses rapid experimentation and low-budget tactics to determine the most effective ways to grow a business. Therefore, growth marketing techniques can make your retention strategies more dynamic, as you constantly analyze the data to improve them.

6. Leverage customer data for targeted marketing

Use customer data to develop a strategic marketing plan. By segmenting your customers you can develop tailor-made messages for each segment. This approach is more effective because it targets only those who could become loyal customers.

7. Implement referral programs

Referral programs turn your clients into promoters of your company by providing them incentives to refer new clients to your business. Promotions are also popular in this context; you can offer your current customers an opportunity to earn discounts or other bonuses for recommending your brand to others. This not only aids in the provision of new customers but also in maintaining those who have been loyal to the brand.

8. Develop a strong onboarding process

Processes matter. And a strong onboarding process ensures that new customers understand how to use your product or service quickly. Accordingly, you should offer detailed instructions, FAQs, and customer assistance to ensure new buyers are fully satisfied with the product they bought. A well-done onboarding process minimizes friction, thus increasing the level of frustration and, in turn, increasing the likelihood of long-term retention.

Measuring and Analyzing Customer Retention Rate

Customer retention rate is more than a vanity metric; it’s crucial for making informed business decisions. 

Tools and software for tracking retention metrics

First, several tools and software allow for tracking customer retention rates and other related indicators. Some popular options include:

• Google Analytics: This information gives users information on how they interact with the website, such as revisits and time spent.
• Customer Relationship Management (CRM) systems: Record customer dealings, sales, and retention information.
• Retention-specific tools: Tools such as Mix panel, Amplitude, and Kiss metrics provide insights into the retention and engagement of users.

With these tools, you can obtain detailed information on customers’ behavior and the tendencies of their retention.

How to interpret retention data

Next, analyzing retention data means identifying the most important values and what they suggest about customer interactions. Here are some essential metrics to focus on: Here are some critical metrics to focus on:

• Churn rate: In customer retention, churn rate refers to the number of customers who drop your product or service in a given period. A high churn rate means that your retention efforts need to improve.
• Customer lifetime value (CLV): The total sales amount a customer brings to the business throughout their patronization period. A higher CLV means that customers are retained within the industry; hence, the company’s customer loyalty and retention strategies are efficient.
• Repeat purchase rate: Customer return rate is a metric that helps you understand how often customers buy from you again. This metric will assist you in determining the frequency of repeat purchases by the customers.

Using retention data to inform business decisions

Last but not least, retention data should be informative regarding business strategies and plans. Here’s how you can leverage this data.

• Identify patterns and trends: Find out what distinguishes retained customers from those who churn and adapt your retention efforts accordingly.
• Optimize marketing campaigns: Use retention data to refine your marketing messages and campaigns. Target customers with personalized offers and content based on their behaviors and preferences.
• Enhance product or service features: To boost customer satisfaction and loyalty, analyze retention metrics to find out which aspects of your product are most valued by your customers. Focus on improving these attributes.

This way, you can set goals for Customer Retention rates and create measures that will strengthen customers’ loyalty and bring more profits to the company in the long run.

Predicting Customer Retention Rate

Customer retention can be predicted so that you can prevent churn and instead take necessary actions to retain the customers. In this section, we will discuss how you can use predictive analytics to predict retention rates and which metrics are essential to track.

Overview of predictive analytics in customer retention

Predictive analytics is a process of making forecasts based on past events, statistical analysis, and machine learning. As for customer management, predictive analytics provides information on which customers may leave and the reasons behind it. If these patterns are detected early enough, you can implement measures to help prevent churn.

Relevant metrics for customer retention prediction

Several measures can be useful in identifying the factors that can aid in the analysis of customer retention. Here are the most important ones to consider. Here are the most important ones to consider:

• Customer satisfaction scores: CSAT or customer satisfaction scores represent customers’ satisfaction with a product or service. Collecting CSAT data in the form of surveys regularly allows the identification of dissatisfied customers who can potentially churn.

Source

• Purchase frequency: By using this metric, you can determine how frequently customers make purchases throughout a particular period. Decreases in purchase frequency can signal a decrease in customer engagement and potential churn.
• Engagement levels: Measuring customer-acquired engagement level, that is, their login frequency, usage of features, or engagement with the product/service, tells about the level of engagement and satisfaction of customers. Disengagement is commonly associated with churn because it is a cause-and-effect relationship.

By evaluating these parameters, you can get a better understanding of customer behavior, see the signs of churn in advance, and try to prevent it.

Conclusion

Hopefully, through analyzing customer retention rate we’ve made customer retention and its strategies as interesting as customer acquisition.

If you have to remember only one thing from this blog post, then that’s the fact that retaining customers is less flashy than acquiring new ones, but is often more important.

And if you need help with growing your customer retention rate, or any other metric for your business, contact us, and let’s find out how we can help you.