Understanding Customer Retention and 7 Effective Retention Strategies | #customersupport #supporticket

Customer retention is a crucial part of any business’s operations. You’ve heard it all before – it’s much easier to get an existing customer to buy from you again than it is to win new customers. Your chance of selling to an existing customer is between 60–70%, compared to 5–20% for a new customer. 

Do you spend time marketing to your current customers and drawing them back into your sales funnel? If not, now is an excellent time to start developing a customer retention strategy to increase sales. 

What is customer retention?

Customer retention is the range of activities aimed at keeping customers for the long-term and turning them into loyal purchasers. It also aims to improve the profitability of each existing customer. 

Customer retention strategies are there to help you extract more value from your existing customer base. You’re trying to make sure the customers you worked hard to acquire in the first place stay with your business, have an enjoyable customer experience, and continue deriving value from your products. 

Customer acquisition focuses on building a foundational customer base, while customer retention strategies focus on developing relationships with those customers. An example of a customer retention activity would be personalized email campaigns designed to encourage idle customers back into using the product or app. 

Why is customer retention important in the new decade?

Customers are spoilt for choice when it comes to choosing from brands, and your nearest competitor is just a click away. The ease of switchability for customers means you need to work hard at satisfying them.

And that hard work pays off. Retaining customers costs less than acquiring new customers – it’s 5–25 times more expensive to acquire a new customer than it is to hold on to an existing customer. Retaining customers is good news for profitability, especially when you consider that increasing customer retention by 5% can result in anywhere from 25–95% increase in profits. 

Secondly, customer loyalty leads to higher spending (ie. more business) because customers have learned the value of a quality product or service. Retained customers buy more and spend more than newer customers. 

Finally, loyal customers are likely to become brand ambassadors and share their positive experiences with others. This is a valuable way to attract new customers who might be interested in purchasing from you. 

How to calculate customer retention

Before considering any customer retention strategies, we need to be able to work out what our customer retention rate is first. Define a period of time, such as monthly, quarterly, or yearly, before proceeding with your formula. Most SaaS businesses will calculate monthly customer retention, but if your customers tend to purchase annually, that may be a better metric for you to use.

To calculate customer retention, you’ll also need to know:

• Number of customers at the end of the period
• Number of customers acquired during the period
• Number of customers at the start of the period

The formula for calculating customer retention is: 

( (# Customers at End of Period – # Customers Acquired During Period) / # Customers at Start of Period) ) X 100

For most industries, the average customer retention rate is less than 20%, so if you get anything above that then you’re doing well.

Customer retention metrics that matter for any business

We’ll now go through some metrics that relate to customer retention and how to calculate them. 

1. Customer churn

Customer churn rate measures how many customers are lost in a given time period. No matter how good your business is, unfortunately, it’s unlikely you will have a churn rate of zero. 

To calculate customer churn, you need to know the total number of customers lost in a given period, and the total number of customers you had at the start of that same period. 

The formula looks like this: 

# subscribers lost / # starting subscribers

2. Repeat customer rate

Repeat customer rate measures the percentage of customers who have made a second purchase from you, and is the foundation of customer retention. If you measure your repeat purchase rate you can evaluate how well your customer retention strategy is actually working. The higher your repeat customer rate, the more willing customers are to keep buying from you. 

Calculating your repeat customer rate requires taking into account two factors: 

• Number of customers with more than one purchase – we recommend looking at a year’s worth of data.
• Number of unique customers – the number of different customers who purchase from your store within a given time frame. This is different from the number of orders you received. 

The formula looks like this: 

# of customers with more than one purchase / # unique customers

3. Purchase frequency

Purchase frequency tells you how often your customers are coming back to purchase. Repeat customers are often responsible for a significant amount of your annual revenue so you want to take the time to calculate this metric. 

Calculating your business’ purchase frequency is similar to calculating repeat customer rate. Use a time frame (such as a month) and divide your total number of orders by the number of unique customers. 

The formula looks like this: 

# orders places / # unique customers

4. Average order value

Your average order value calculates how much customers spend on each transaction or order. Use the same time frame as your purchase frequency to calculate the average order value. Divide your revenue by the number of orders processed. 

The formula looks like this: 

Total revenue earned / # orders placed

5. Customer lifetime value

Customer lifetime value (CLTV) measures the total revenue a business can expect to receive from a single customer account. It takes into account a customer’s revenue value and compares that to the customer’s predicted lifespan. 

The longer a customer continues to buy from a company, the higher their CLTV becomes. 

Here’s how to calculate CLTV: 

• Calculate average purchase value – Divide your company’s total revenue in a year by the number of purchases over the course of that same time period. 
• Calculate average purchase frequency rate – Divide the number of purchases by the number of unique customers in that same time period. 

• Calculate customer value – Multiply the average purchase value by the average purchase frequency rate. 

• Calculate average customer lifespan – Average the number of years a customer continues buying from your company. 

• Calculate CLTV – multiply customer value by the average customer lifespan to find out how much revenue you can expect an average customer to generate for your company over the course of their relationship with you. 

6. Net Promoter Score

Net Promoter Score® (NPS) is a single-question survey that measures how loyal customers are to your brand. The question is: On a scale of 1-10, how likely is it that you would recommend [company name] to your friends, family, or business associates?

Once you’ve sent out your surveys and collected some responses, it’s time to calculate your NPS. Customers that rate you 6 or below are detractors, 7–8 are passives, and 9–10 are promoters. You simply subtract your percentage of detractors from your percentage of promoters, which will give you a score between -100 and +100. 

The formula looks like this: 

% promoters – % detractors

7 Highly Effective Customer Retention Strategies

Now we’ll look at some customer retention strategies that you can use to positively impact your customer retention rates. 

1. Send personalized email campaigns

Email is still most customers’ preferred communication medium. Emails give you the opportunity to continue building relationships with customers before and after their purchase. Constant communication with a customer is key to retention. 

Send regular, personalized emails with engaging content to keep your relationship with your customers active. Get started with follow-up emails a week after a customer’s first purchase, acknowledging and thanking them for their purchase. It will make customers feel good about their decision to buy from you, and your brand seems more approachable. 

You can even add recommended products to your follow-up email, which complement the original purchase. You might also include customer reviews that increase the perceived value of the recommended products and inspire customers to buy again. 

After your follow-up email, be sure to send personalized emails regularly recommending new products or sales. A good rule of thumb is to email every two to three weeks to avoid bombarding your customers with messages. 

2. Offer a well-defined rewards program

Rewards programs, or loyalty programs, are a great way to increase customer value because they motivate customers to purchase more frequently. It’s a mutually rewarding exchange for you and your customers as they get more value each time they buy, and you earn repeat business. 

When customers sign up for a new account, encourage them to invest in the program by giving them welcome points. If you make it easy to earn rewards, then they’ll be inspired to return to your store to repeat the process. 

Creating a rewards program can be simple, and you can offer customers points on their second purchase, or after they hit a set dollar figure in spending. You can also choose to set up automated loyalty apps that reward your customers for taking certain actions in your store. 

3. Provide a great customer experience

Offering an exceptional customer experience (CX) is a great way to increase customer retention rates. CX starts from when customers obtain their first impression of your brand, all the way through the purchase cycle and to when they (unfortunately) stop doing business with you. 

Do anything you can to differentiate your customer experience from your competitors’. You can delight your customers with discounts and freebies, although this can end up getting quite costly. Consider creating reciprocity through small gestures like sending a hand-written thank you note to your best customers. If you can make people feel good about using your product, they are less likely to churn. 

Customer experience support isn’t just about delighting customers but also about getting the basics right when it comes to providing service. Consistently meet customer expectations of customer support by providing it in a timely manner on the platforms that make the most sense for your business. You might consider live chat, email, phone, or a self-service knowledge base. 

4. Identify churn triggers

The most obvious way to improve customer retention is to prevent customers from leaving. It’s important to recognize the warning signs for when a customer is about to churn. 

To identify these warning signals, you’ll need to hone in on the key variables of customer behavior that predict churn; such as purchase patterns, product usage, and customer support messages. You’ll need to analyze these signals and then take direct action to catch customers before they churn. 

If someone hasn’t purchased anything from you for six months, this may be a sign that they are quitting your services and taking their business to a competitor. Create a list of all the customers who haven’t purchased from you in half a year and then send follow-up emails to these customers to find out why they’re thinking of leaving your company. You can even include a re-engagement offer to entice them back to your business. 

5. Gather regular and high-quality customer feedback

Gathering customer feedback is one of the most powerful methods you have to increase customer retention rates in your business. If you want to know more about how customers feel about your brand, it helps to go directly to the source. 

Collect customer feedback by sending out regular surveys, such as a simple customer satisfaction survey asking for a thumbs up/thumbs down rating after a support experience. These are the easiest surveys to complete, but sometimes you might want a bit more information. 

Questions you can ask your customers include: 

• How would you describe your experience with our product? 
• What is your preferred customer support channel? 
• Is there anything that’s not working for you, and why?

Alongside your surveys, you can also gather feedback from your customer support team who work the most closely with customers. They can identify common complaints and queries for you to address. 

6. Account segmentation and management

No two customers are exactly alike and you shouldn’t be talking to all your customers in exactly the same way. Segment your customers according to relevant data to make your communications more personalized and effective.

Account segmentation is the process of dividing customers up into groups based on common characteristics so your company can support them more effectively. You might want to focus more of your efforts on the most profitable customers for your business in order to get the best return on investment. Identifying high-value customers that need more hands-on support like account management can make sure you’re spending your valuable time in the right place. 

7. Product innovation

You might know all about exciting improvements being made to your products, but it’s worth taking the time to share the news with your customers. Generate anticipation by showing customers what your latest product features will help them achieve. 

As you introduce major improvements, run a series of preview posts to let customers know what they can now do with your new tools. Not only does this create a groundswell of excitement for upcoming releases, it also continues to showcase the value that customers gain from continuing to invest in your company. 

Conclusion

Once you’ve measured your customer retention rates and taken a look at the data, you should be ready to start working on improving them. 

The strategies mentioned above should hopefully give you some inspiration for approaching retention. Improving customer retention takes time and effort, but it’s well worth the investment. Your existing customer base is the most valuable resource your business has to grow revenues, so take the time to nurture these relationships.