What is customer retention?

Customer retention is the series of practices and strategies that businesses use to turn customers into repeat customers and maintain their loyalty.

On the surface, the goal of business appears to be to sell a product or service to a customer. The completed sale tends to sit at the end of almost every sales-funnel model, and is represented as the culmination of all customer touchpoints. But the reality is that businesses that focus only on that single sale seldom reach success. The real measure of effectiveness lies beyond that first sale, in how well an organization is able to retain its current customers while also attracting new ones.

The best customers are those who return again and again. They trust your business, and are excited about new offerings you make available. They share your brand with their friends and associates, and promote it across social media and review sites. In short, they demonstrate improved, ongoing value, and should be a major focus on your business strategy.

Loyalty

It’s been said that all things considered, customers prefer to do business with a friend. And while it may not be possible to build social relationships with every person who purchases from you, you can build positive business-customer relationships that inspire loyalty. A loyal customer returns to purchase or use a product or service many different times, extending the value they bring to the company, and resisting competitor marketing efforts.

ROI

Guiding a prospect along the path from first contact to completed sale can be an expensive prospect. On the other hand, customers who have already made that journey and return to use a product or service again generally require less guidance and prompting. This means less of an investment from you, and a likely increase on the return on investment (ROI). In other words, returning customers are less expensive to maintain—approximately five-times less expensive than new customers—and don’t require the same onboarding costs (source: Invesp).

Referrals

Marketing is an ongoing expense for most businesses. But what if you could have your satisfied customers market your brand for you? A happy customer will naturally refer your business to their friends, family, and associates, and will share their positive experience and feelings. And not only are referrals a more effective form of marketing than almost any other, they also require essentially zero investment from you. Referrals can be an effective and inexpensive way to acquire new customers.

Affordability

It’s common business knowledge that it costs significantly less to keep an existing customer than it is to gain a new one. Helping prospective customers transition into paying customers involves marketing, sales, and sometimes even contracts—all with their own associated costs and time investments. Repeat customers demand only a fraction of the investment.

If you plan on improving your customer retention, you first need to be able to accurately gauge it. How effectively are you keeping the customers you have? How often are customers leaving to pursue other options? The following are several important metrics to track:

Customer retention rate

Customer retention rate is the measure of the quantity of customers that continue to do business with a company over a period of time. This may be calculated by establishing a set period of time (such as a three-month business quarter) and dividing the number of active/ongoing customers at the end of that time period by the total number of users at the beginning of the time period.

Customer churn rate

The opposite of retention rate, customer churn rate indicates the percentage of customers that have been lost over a specific period of time. Calculate this by taking the total number of lost customers at the end of a predetermined time period, and dividing it by your entire customer base.

Customer lifetime value

Customer lifetime value represents the total revenue that a customer is expected to spend on products and services during their lifetime. This is calculated by averaging the value of a purchase multiplied by the number of times a customer will likely buy each year, multiplied by the length of the customer relationship measured in years.

Repeat customer rate

This is a measurement of customers’ willingness to make a second purchase or use the product or service again. The repeat customer rate is calculated by dividing the number of customers who made more than one purchase by the number of unique customers.

Purchase frequency

This metric indicates how often customers return to purchase products or services in a set amount of time. Purchase frequency is a particularly important metric, as a significant portion of revenue comes from repeat customers. Find the purchase frequency by taking the number of orders in a specific period of time, and dividing it by the number of unique customers.

Average Order Value (AOV)

Average order value is an indicator of the average value of each individual order. This is calculated by dividing the yearly revenue by the number of orders that were processed, which gives an idea of how much money was gained from each order.

The benefits of customer retention are nothing to ignore, which is why keeping your proven customers should always be a focus in your business strategy. However, different businesses at different stages of development may need to put more of a focus on retention. Here we take a look at the different points in the business lifecycle, and what kind of an emphasis on customer retention you should have for each.

Getting started

It’s difficult to retain customers when you haven’t actually gotten any yet. When you are just getting started, your primary focus should be on finding new leads and helping them become customers. That said, you can lay the groundwork for future retention by providing a positive experience, offering reliable support, and including onboarding programs. Work on growing your customer base, and show those new customers why they should continue doing business with you later on.

Growing

One you have earned a growing customer base, you can now gradually begin to introduce retention strategies. These may include email campaigns, loyalty programs, and customer feedback options. Encourage past customers to continue buying from you, but make sure that you are still heavily pursuing new leads as well.

Becoming established

As your business comes into its own and has carved out a space in your industry, continued growth becomes more difficult. This is where you will want to shift a large portion of your efforts from acquisition to retention. Retaining a significant percentage of customers while still bringing in some new business will help you continue to grow. The more established your business becomes, the more you should emphasize customer retention in your business strategy.

Nearly every action you take as you interact with customers will have an impact on overall customer retention. However, you may be able to boost retention by employing proven customer retention strategies. The following are several strategies that many businesses employ to help promote loyalty in their buyers.

Focus on customer success

Customer success is about understanding the goals of the customer and helping to achieve them. Providing resources, tools, and services that customers may use to reach their desired outcomes, particularly in a B2B setting, will help firmly establish your products and services as essential factors in the customers’ success.

Provide exceptional service and support

A good support system effectively communicates with customers and provides them with the right proactive solutions. It can help customers throughout the buyer’s journey with communication and by quickly addressing customer issues. Live chat, help desk, contact centers, and self-service options offer various channels through which customers can seek support when needed. Personalized service, both for live support and self-service, helps customers avoid the frustration of generic support options, and promotes an ongoing customer relationship. Resolving problems while also demonstrating your commitment to the customer helps inspire loyalty.

Send engaging emails

Email contacts provide the opportunity to build a customer relationship before, during, and after the purchase. It is important that each email sends an impression that customers are valuable and can benefit from further business with your company. Also, keep in mind that messages don't have to be marketing/sales focused; they can instead provide maintenance tips, expert insights, product or service best practices, etc. Again, the important point is to promote customer success, and email may be an effective channel to help educate and inspire your customers.

Provide a discount or credit to return

Discounts are a great way to incentivize a second purchase, even if they need a small motivation to return to a shopping cart. Customers can feel that they are landing a good deal vs. having to pay full price, which can incentivize further purchases or a larger initial purchase.

Map the customer journey

Customers don’t always follow a straight line from prospect to customer. It’s important to gather data from the interaction along the customer journey, from beginning to end. Understanding how customers become aware of your business, whether they are following you on social media, or if they originate from referrals can help you develop a clearer picture of how they make their decisions. With that knowledge, you can create an accurate depiction of your customers’ journey, and develop tactics to help retain them at each stage.

Make a good first impression

A first impression is the most important point of contact for a customer. Ensure that the checkout and delivery process is smooth and efficient, as first-time and returning customers are likely to base their impressions on this process. Send out an email expressing gratitude for their business and asking for any feedback they may have, and provide helpful guides or resources for the product or service.

Look at your value proposition

Customers must see a business or service as the solution to the problems they face. Often, this goes beyond just the specific issues that your product or service is designed to solve. Your perceived value—the customer’s evaluation of the overall advantages of doing business with you—will play a major role in determining whether they want to come back. Consider your value proposition. Does it address perceived value as well as actual value? Does it recognize and address the benefits that actually matter to your customers? If not, then it may need to be revised.

Reduce friction

Often, a new customer who has already begun the purchase process will put up with certain obstacles, such as difficult checkout processes, annoying and unnecessary forms, confusing processes, unintuitive interface, etc. But once the purchase has been finalized, the customer will remember the friction points, and will be much less likely to return. Streamlining each of your customer-facing processes to reduce the amount of time, action, and information demanded from the customer will help encourage them to come back again and again.

Communicate and engage

A relationship can deteriorate if there isn’t frequent communication between parties. Provide opportunities for customers to check out blogs, connect with the organization on social media, and engage them with offers and additional services. In other words, don’t be content to simply sell them your products or services, and don’t wait for them to reach out to you.

Educate your customers

An organization that educates a customer on products and services is more likely to see the purchase or repurchase of products and services. Consistently staying top-of-mind ensures that when customers talk about your industry, niche, or the problems your product solves, your business becomes an essential part of the conversation. Top-quality content can not only help educate your customers to better understand relevant issues, but can also give them valuable resources and insights to help them achieve their goals.

Create a loyalty program

Although better suited to B2C than B2B, loyalty programs are an effective way to bring back customers who might not otherwise be convinced. Essentially, customers will feel more compelled to shop if they are rewarded for shopping. Provide something of value for current customers, and let them know that the more frequently they do business with you, the greater loyalty returns they can expect.

Ask for feedback

Asking for customer feedback allows customers to feel like their opinions are valid, and it provides insight into customers and their perception of how they think and feel about a product or service. Ranked feedback, such as answering how satisfied they are with your business on a scale of one to five, helps provide a basic idea of whether customers will return, but does little to address specific problems or hurdles. Asking for in-depth feedback, and providing customers with an easy channel for providing that feedback, will help you identify the issues that may be preventing customer retention.

Offer an upsell

If your customers are enjoying one product or service, or if they are demonstrating a need that can be further addressed with other services you offer, then be sure to let them know. Up-selling and cross-selling provide an opportunity to increase sales, and to plant a seed of interest that may bloom into return business. At the same time, sharing important information about related products demonstrates that you understand your customers' unique needs, and want to offer them a solution.

Do A/B tests

Are your current strategies effective? Maybe, but are they as effective as they could be? A/B testing allows you to create and follow up on multiple versions of strategies, webpages, content, advertisements, emails, and more, comparing the results and determining which options are the most effective. For example, if one version of your weekly email is resulting in more click throughs than another, then you will know to focus your energy on creating similar emails to the successful version.

Train a customer retention team

Customer retention should be the responsibility of everyone in your organization, from the CEO on down. Still, having a specialized team capable of charting and promoting customer retention using a variety of metrics and strategies can be invaluable. Customer retention teams allow those who are less experienced in handling customers to delegate important tasks and processes to those who are more capable of connecting and building meaningful customer relationships.

Make customer service flow

Results-driven solutions to help your company reach its full potential.