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What Is Customer Retention? Why Is It Important for Your Business

Larry VanDenHandel on February 26, 2020

The most profitable customers you have in your business do not just purchase a single product, nor do they utilize your service only once.

With excellent customer service, such patrons return to you after some time to buy more. As you can see, when it comes to business, customer retention enhances the customers’ lifetime value, as well as your revenue.

It aids in creating significant relationships with your customers, which helps them in building confidence in your brand and eventually trusting you with their money.

What does customer retention mean?

In marketing, customer retention refers to the measures that a firm performs to encourage existing customers to continually purchase products and services from their business.

As opposed to customer acquisition, customer retention does not dwell with generating leads as the latter can only occur once the conversion of customers takes place.

The finest customer retention techniques will allow you to create long-term relationships with customers who are loyal to your band. Moreover, the feedback that they give about your products and services within their friends and family can bring you a whole lot of brand ambassadors.

Let’s trace back our steps and see where customer retention actually starts. Say a customer just purchased a product or service from you, what’s next?

This is when you come up and apply the customer retention approach.

Why is customer retention important?

Over time, we have learned that customer retention is easier and more economical than customer acquisition. In fact, even the most recent statistics show this to be true.

For one, customer acquisition costs five times more than customer retention. Moreover, the possibility of selling to an existing customer is around 40% percent higher than converting customers who had zero experience of transacting with your brand.

On another note, when a customer starts building a relationship with a brand, they develop loyalty and spend 67% more than the new ones. These facts indicate why a customer retention strategy is necessary for businesses.

Calculating Customer Retention Rate

Brands can measure their customer retention rates in various methods. One can base it on the span of time that they wish to find out the rate from. However, a lot of marketers utilize numerous factors.

For instance, if you have 3,000 existing customers over a period of 3 months and 1,000 of them came back to purchase something else from you, then those two numbers — 3,000 and 1,000 — will help you determine your customer retention rate.

However, you need to provide discounts to any new customers that you got within those two months. Despite so, they are not part of the equation. Include only those who bought from your brand before the two-month start date within your existing customers.

If you are calculating your customer retention rate from October 1 to November 30, you will include those who brought from you before October 1. If somebody purchases from you on the 10th of October, he or she must not be included.

Customer Retention Formula

The customer retention formula isn’t hard, but it is very functional. It tells you how great you are at creating long-lasting relationships with your customers, inspiring existing customers to return for more purchases afterward.

Here are the steps:

  1. Begin with subtracting the number of costumers obtained at the end of the period with the number of customers acquired during the calculation period
  2. Divide the result with the number of customers at the start of the period
  3. Get the percentage by multiplying the result by 100
customer retention formula

This might be confusing to some so here’s an example:

You have 70,000 customers at the beginning of your two-month calculation period and you obtained 5,660 customers within those two months. At the end of the period, you gained 50,500 customers.

Figures:

  • Number of customers at the start of the calculation period: 70,000
  • Customers obtained during the two-month period: 5,660
  • Number of customers at the end of the period: 50,500

To get the customer retention rate:

  • 70,000 - 5,660 = 64,340
  • 50,500 / 64,340 = 0.78
  • 0.78 X 100 = 78%

Ways to Enhance Customer Retention

Now that you understand the essence of customer retention, here are some strategies and tactics that you can apply to encourage your customers to return back for more:

1. Impress upon the first contact

In the world of business, we’ve been taught that first impressions matter. If a customer gains a negative experience upon his or her first transaction, that person most probably won’t come back for a subsequent purchase.

On a lighter note, giving your customers a pleasant service even upon the first contact isn’t hard if you are genuine in prioritizing your customers’ needs. Make sure that everything — from the checkout to the delivery — is seamless.

Give a thank you email if possible to let the customer feel how much you appreciate them for choosing your products and services. Moreover, make the email worthwhile by sending guides and videos that can help them work their way around the product.

2. Be specific with what you want to achieve

A goal is required prior to discussing any marketing strategy. Otherwise, we have no clear direction of what we are aiming for.

Start with measuring your customer retention rate. You have to begin at a certain point. If you are presently retaining customers at 15%, establishing a goal of reaching 50% isn’t exactly rational. Come up with a goal that’s attainable and realistic.

Bear the size of your customer base in mind, as well as the kind of products that you offer. See which ones were particularly made for customer retention.

For example, people need to restore household supplies like toilet paper and dish soap. You can come up with a more ambitious goal in that situation, but if you want your costumers to try various products, to buy the same ones as gifts, or to buy more than what they already own, then you need a more conservative goal.

3. Examine your value proposition

The value that you bring to your customers is essential in continually keeping them on board. They have to think of your business as the key to solving a certain problem.

For example, corporate social responsibility has become a focal point for a lot of firms. Injecting environmental-friendly practices and interacting with society do not aid much in a product or a service’s actual value. However, they contribute to its perceived value.

A brand’s value proposition must relay their beliefs and their reasons for being in business.

4. Inquire for feedback

It is important for brands to ask for feedback from your customers because of three reasons:

  • Customers feel valued whenever brands ask for their opinions.
  • The comments they give provide you with information regarding the things that you need to improve on your products and service.
  • It gives you an idea of what your customers think and feel about your business.

If you’re lost with how you can ask your customers, you could send them surveys and emails asking for reviews. Try the 3 questions we curated you can use asking for a review.

5. Learn how to upsell and cross-sell

Customer retention often involves your ability to provide even more remarkable opportunities than the one that converted your leads in the first place.

Having said that, there are two known tactics that can help you encourage your customers back into your business. These techniques are upselling and cross-selling.

Upselling refers to reaching out to your audience and inviting them to try out a more valuable product or service. These people have already been acquainted with your business, so they know what value you provide even on the slightest degree.

Cross-selling, on the other hand, means motivating your customers to buy related or complementary products to the ones that they've already purchased before. Imagine being a sales associate at a kitchen store who convinces a customer to buy cooking pans along with the stove he just bought.

6. Minimize friction

If you’ve ever purchased from Amazon, you have probably observed how simple it was to obtain products from them. If you are a shopper with a credit card or a different payment option on file, you can get hold of products within a few clicks.

This is because the whole buying process is as smooth as ever. If companies modify their procedures with only as little to no problem as possible, then customers might come back to buy for more.

Even better, some companies employe sales and marketing automation to enable possibilities.

Improve the checkout process and minimize obstacles on your site. Connect related products to other product pages, and give out regular emails about your promos, new products, and items on sale.

7. Understand your customers

Turning a prospect into a customer is not easy. It takes a lot of effort and challenges. If you are collecting information about the way that the public interacts with your website and your brand, you can expect the direction that their customer journey will take in your business.

Begin with these questions in mind:

  • How did people know about your business?
  • Have they read articles about you by looking up your brand on search engines?
  • Are they following your business on social media?
  • Have they brought in some referrals?

Once you get the answers to these questions, you will have an idea of how your customers arrive at certain decisions which are indicative of their purchasing behavior. Make lead acquisition a central point so your team can obtain the information you need to serve your customers better.

Understand what pushes your customers to buy. Review the consumer insights you got. Doing so enables you to refine every stage of the customer journey and optimize customer retention in the process.

8. Establish communication with your audience

Whenever you choose not to communicate with your friends or your loved ones for a long period of time, the relationship slowly deescalates and often times end up with no contact at all.

This holds true with your customers. If your brand does not establish rapport with your audience and does not communicate with them in any manner, it would take a toll on the level of their loyalty and retention.

Connect with your audience on social media and update them with exciting offers. Respond appropriately (and effectively) to negative feedback.

9. Understand your customers’ problems

Despite having the best products in the universe, there’s a possibility you won’t be able to sell them if you have no idea what problems these products actually help with.

Above all else, it is necessary for a brand to know and understand which customers will benefit the most from these items.

Find out what your customers need. What problems are they having a hard time solving? Incorporate these points in your marketing campaigns so your customers would know that you are exerting every effort possible to understand them and their needs. This increases the chances of your customers buying from you.

10. Make a loyalty or rewards program for your customers

Loyalty programs may appear to be simple. But it has a significant impact on customer retention. If your customers realize that they will be rewarded for coming back to purchase your products, they will be encouraged to do so.

There is no need to make your loyalty and rewards program complicated nor fancy. You don’t need extravagant rewards for people to patronize your brand. Just make sure that you offer something of value.

Platforms like Lootly helps brands build great (and profitable) relationships with customers by rewarding them of their interactions with the brand.

11. Educate your customer by offering great content

Many people purchase products and services from brands that are willing to educate them. If you steadily post and share informative and extraordinary content, your audience will come back for more.

One of the ways to do this is to stay on top of the customers’ minds whenever a customer thinks of the category in which your business is in. If among conversations, your name comes first when your niche is mentioned, you’re most likely doing a great job in terms of handling customers well.

12. Be sure to train the customer retention team

Having a committed customer retention team is good. But if a brand wants to succeed in terms of customer retention, businesses must allocate a certain period of time in training these people.

Perform dry runs with your team members along with a script, especially if you depend on it for sales calls to qualify and convert leads.

Learn how to delegate tasks effectively. If training is insufficient, bad habits may disrupt your customer retention program. When you make new techniques, introduce them to those methods fully so they’d understand what to do and how to follow through.

Level Up Your Customer Retention

Customer retention does not boost up overnight. However, if you have some game plan up your sleeve, you can persuade your audience to come back for more.

Remember to reach out to your customers. Get to know them. Determine their wants and needs. Understand what makes them tick. Come up with ways to make them happy. Motivate them to buy for more. Ask for feedback, and let them feel how much you value them.

Larry VanDenHandel
Larry VanDenHandel

Larry is the co-founder & CTO of TrustSpot. When he's not developing a new feature or managing our engineering team, you can find Larry at Disney with his wife and daughter.

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