Customer Retention Rate Explained for Dummies (Updated for 2022)
It’s not news that customer retention is important – in fact, it’s the lifeblood of any business. You may think that if you’re doing a good job with your current clients then they won’t leave for another company. But what happens when someone has been happy in the past but still decides to go elsewhere?
The inability to retain old customers does not look good on a company with the goal of existing in the long run. It all comes down to retention rates and how quickly new customers are brought on board. Customer retention rates can be enhanced with the right formula which includes combining an excellent sales system and customer retention strategy. Because higher retention rates indicate happier customers, you can know that as your retention rate increases, so will your overall customer satisfaction.
What is a Customer Retention Rate?
Customer retention rate is the percentage of customers that remain loyal to your business for a certain period of time. If customer retention refers to how well you are able to keep your customers loyal to your brand, then retention rate can be calculated by dividing the number of remaining customers at the end of a time period by the number of initial customers (including those who left during that same time period). You can calculate customer retention rate weekly, monthly, or annually, depending on your business structure.
For any business that offers a service or product, customer retention is considered to be the percentage of customers who continue to purchase from you after their first purchase. So, if you wanted to know your monthly customer retention percentage, you would divide the number of returning customers this month by the total number of customers at the beginning of this month and then multiply by 100%.
For instance, if you have 100 customers and 90 of them make a second purchase from your company, then your customer retention rate for this group would be 90%. Keep in mind that a high customer retention rate means that most people continue to do business with you after their first experience , which greatly helps grow your revenue.
Why Is Customer Retention Important?
Customer retention rates are metrics your company needs to grow in order to improve customer retention. A high customer retention score means that most people are loyal to your brand, while low scores mean that few people are sticking around and may indicate problems with customer service or product quality issues.
How to Calculate Your Customer Retention Rate
You can calculate your company’s customer retention rate using this formula:
[(E-N)/S] x 100 = CRR
E – The total number of customers at the end of a given period.
S – The number of existing customers at the start of a given period.
N – The number of new customers added within the time.
CRR – Customer Retention Rate Formula
Let us look at a basic illustration:
Mr. Jim started his business with 10 patrons and lost 3.
Using the retention rate formula given above, CRR becomes:
(6 – 0)/10 x 100 = 60%
Customer retention rate shows a company’s ability in building relationships and retaining existing customers.
Customer Satisfaction Vs Customer Loyalty
Loyal customers are always returning customers, and they are your biggest brand ambassadors. They are existing customers that will always patronize and convince others about your company much more than your sales team does in their marketing campaigns.
It’s important to keep a high profile of retained customers because they always choose your brand over others. As much as you can, appreciate them and help them have an enjoyable customer experience. Make them know you appreciate their patronage!
Depending on your business model and how many customers you’ve acquired, you can choose to celebrate them on their birthdays, anniversaries, and some other celebrations. Plus, you can also choose a loyalty package/program for them. By doing so, you make it an easier choice for customers to return to your business, meaning a higher retention rate.
That said, it is paramount that you start measuring your customers’ loyalty, and not just their satisfaction.
Customer churn, or churn rate, is the rate at which customers stop doing business with a company over a given time. It is the inverse of your customer retention rate. For instance: if you calculate your customer retention rate and it is 75 percent, then your churn rate is 25 percent.
Every company experiences churn despite the quality of its customer service/product.
The simplest way to determine your churn rate is to take the number of churned customers during a given time and divide it by the total number of customers at the beginning.
Here is an illustration:
If Company X had 300 customers at the beginning of January and 250 customers at the end of January, its customer churn rate would be 10%.
Basically, an increase in churn rate causes a decrease in customer retention. While a decrease in churn rate causes an increase in customer retention.
Revenue churn is a measure of lost revenue. Essentially, it shows you missed opportunities, had you retained those customers.
How to Calculate Revenue Churn
Revenue churn rate, also known as MRR (Monthly Recurring Revenue) churn rate, measures the rate at which a company loses revenue as a result of the churned customer(s).
Here is how to calculate the percentage of revenue that has churned.
Take all your MRR at the beginning of the month and divide it by the monthly recurring revenue you lost that month minus any additional revenue from existing customers
By comparing revenue churn and customer churn, a business can see if customer retention rate is consistent throughout the customer base.
In most SaaS companies, a net revenue retention rate of 110% or higher is considered world-class.
Customer Lifetime Value
This metric measures how much value you get from an average customer, across multiple purchases. This one is fairly easy to calculate – divide your revenue by the number of customers you have.
Best Customer Retention Strategies
Customer retention doesn’t increase overnight. However, excellent strategy coupled with prompt action and consistency ensures that your current customers will come back for more.
You have to know your customers’ likes and dislikes, turn-offs and turn-ons, etc. Engage self service by intentionally delivering what they need and not what you like or think they need. Customers leave when they are not given adequate attention. So, get in touch. Ask for feedback and attestations for products/ services rendered.
Listed below are 4 amazing customer petition strategies we believe can help you get your current customers coming back for more.
Offer Value, not Just Product/Service
Successful customer retention rate goes beyond satisfying customers’ expectations over a given period.
It stretches to offering the customer irresistible value they can’t easily get elsewhere. Anything without a defined value will recoil.
Here is an instance:
● Jane sold her ice cream at $10.00 to a few buyers.
● Taylor had better ice cream, she added two extra scoops (that probably cost $1.50 for each one), increased the price to $15.00, and said: “For every two you buy, you get one for free”
In a short while, customers stood in a long queue waiting to buy from Taylor.
What is the difference? It’s simple – she made an offer that allowed customers to receive more value! (On top of that, they got the most bang for their buck by being a loyal customer.)
Good Employer to Employee Cordial Relationship
A good employer-to-employee cordial relationship can improve your customer retention.
The employees of a company should be well-groomed on the onboarding process – the ‘Mission’ and Vision of the company, as well as its values and ethics.
They should have a superb cordial relationship with their employer as this will give them a sense of belonging, good self-esteem, and a team spirit so that they can be highly productive and render premium service to the customers.
Here’s an instance:
A certain employer was known to be surly to his Chief of staff and heads of department. He in turn becomes hostile to the lower grade employees. This did not turn out well as the employees who were directly accountable to the customers also became hostile and unwelcoming to the customers.
This affects the customer service rating as it moved from average to poor, making them lose customers. As a company, you can make efforts to improve your customer retention with a good employer to employee cordial relationship.
Use a Customer Feedback Questionnaire
The importance of a customer feedback questionnaire cannot be overemphasized. Through a net promoter score, you can be able to measure the loyalty of customers through single survey questions.
A customer feedback questionnaire helps you know how your customer feels after doing business with your company. If they are simply satisfied, value satisfied, and so forth. Be sure to take a holistic approach to customer feedback.
Customer Loyalty Programs
Companies can grow their customer base by offering them timely and enticing offers.
A loyalty program is a marketing strategy designed to encourage recurring customers to continue to shop at or use the services of a business.
These incentives and benefits often result in the customer becoming a more regular consumer. It ranges from rewards, coupons, membership, and other alluring packages.
Popular Types of Loyalty Programs that Companies Offer:
● Sephora Beauty Insider Membership
● Tartes Point-Based Rewards – Tarte gives club members early access to sales and nudges you to shop before others
● Starbucks Rewards
● Anthropologie’s AnthroPerks – access to promotions and new products to compelling incentives such as annual free shipping
● The Sill’s Green Rewards
● Abercrombie & Fitch’s my Abercrombie
● Amazon Prime
● Virgin Red
● The North Face XPLR Pas.
● REI Co-op. US$20 for lifetime membership
● Kohl’s Rewards — featuring Kohl’s Cash
● Walgreens Balance Rewards, where shoppers receive back 10 cents for every $1 spent on purchases
Major Benefits of Customer Retention for Businesses
1. Customer retention increases your customers’ lifetime value and boosts your revenue.
According to Bain and Co., a 5% increase in customer retention can increase a company’s profitability by 75%.
Every time a company loses a customer, it pays for it either in the short run or in the long run.
2. Customer retention helps you build long-term relationships with your customers.
When your customers trust you, they’ll keep coming back. They will feel safe to tell their friends about your product/service and invariably bring more customers. They indirectly become your brand ambassadors. Trust is currency, and a good relationship is invaluable.
3. Your customer retention rate helps you know what keeps customers coming back to your company.
“The rat goes where the cheese is”. In this context, the cheese represents your customer retention prowess – what keeps your customers loyal to your business.
4. Customer retention is cost-effective.
It is far more expensive to acquire new customers than to keep existing ones.
Notable Causes of Customer Churn
Some customer churn is inevitable, but understanding why customers churn can help you keep more of them happy.
Ignoring customer feedback and complaints
Everyone wants to feel accepted, be heard, and know they’re valued. So listen to your customers, let them know through your words and actions that they are valued. This is how you turn new customers into repeat customers. Use feedback from questionnaires to create a wonderful customer experience for all your customers. Failure to do this might make them churn with time.
Not delivering premium customer service
This factor can never be overemphasized. As you know, customer loyalty is also achieved when you identify customers with challenges and help bring solutions to such challenges. You can’t be rendering low-quality service and expect your customers to keep coming back. A premium customer service can make your new customers find you again.
Taking loyal customers for granted
When you take your loyal customers for granted, with time you’ll lose even your most loyal customer to your competitor. Customer loyalty requires hard work, and you can go as far as creating a customer success team to ensure they get the attention they need (which in return will bring you a good number of new customers).
Being reactive instead of proactive
Proactivity here entails focusing on stopping problems from happening. You can achieve this by implementing anticipatory service. You do not have to wait for a problem to arise before you plunge into action. Instead, be prepared and armed with ideas and plans to sort things out as soon as they pop up.
Not delivering on your promise
Most businesses that fail to keep to their promises can loose existing customers even faster than they gain new ones. The integrity of your business matters, and you must always keep to your word.
Ignoring your competitors
Proper updates on business news can help you know what your competitors are up to. Don’t ignore your competitors. Know what they are up to and stay ahead.
Offering outdated and boring customer loyalty programs
It is pertinent that you follow the loyalty trend to achieve good customer success. You can be creative in keeping customers. You can also be innovative with your loyalty programs to keep attracting your new customers. Most loyal customers like it when they are being offered current loyalty programs to explore.
Also, ensure your loyalty programs are flexible. Flexible programs help make your customers have an amazing customer experience.
Use of automated machines
Keep automated recordings down to just a few seconds (while still giving them important information). Nothing annoys a customer more than listening to long automated recordings that keep them waiting and frustrated. This can make customers cancel their deals with brands.
Actions and reactions are equal and opposite. The same goes for businesses. Your business activity will either churn your customers or make your customers stay. The best way to get your customers to stay is to make sure they’re happy with your brand, with your customer service, and with the value they receive over time.