It takes a lot to earn a customer’s loyalty. And once you bring someone into your company’s ecosystem, the last thing you want to do is lose them. That’s why customer retention is an important key performance indicator (KPI) for all businesses to measure and improve.
In this article, we’ll break down the definition of customer retention, how to find your customer retention rate, the significance of customer retention, and provide 4 ways to help retain your customers long-term.
What is customer retention?
Customer retention is the ability of a company to keep customers coming back over a period of time. Retaining a customer’s business indicates that a company’s product, service, or brand is pleasing to the existing customer enough for them to stay with the company rather than switching over to a competitor.
What’s your customer retention rate?
Before you can focus on improving customer retention, you must benchmark how you’re currently doing in this department. You might have a feeling about how you’re doing, but you need an objective measurement that takes the emotions out of it. And one of the best ways to do this is by measuring your customer retention rate.
While there are different formulas for calculating retention, the standard equation looks something like this:
Retention Rate = ((CE-CN)/CS)) X 100
If that looks a little complicated, don’t worry. Once explained, you’ll find it very simple and intuitive.
Here’s what those variables stand for:
CE = The total # of customers when the period ends
CN = The total # of new customers that you acquired during the period
CS = The total # of customers at the beginning of a period
Let’s use an illustration to see how this equation can be used in the real world. In this scenario, you start the year/month/quarter with 1,000 customers. You lose 200 along the way, but you also gain 300. So at the end of the period, you have 1,100 customers.
The math would look like this:
1,100-300 = 800 → 800/1,000 = .8 → .8 X 100 = 80 percent.
Now, you’re probably asking: Is 80 percent a good retention rate? And the answer is, it depends!
In some industries, 80 percent would be incredible. In other industries, it would indicate that something is seriously wrong. At this point, you have to bring context into the matter and evaluate how you’re doing and what your goals are.
But regardless of whether your retention rate is 10 percent or 95 percent, there’s always room for improvement. And anything you do to improve your customer retention will significantly enhance your business.
Why customer retention matters
Nobody wants to lose a customer, but just how important is having a high customer retention rate?
According to data curated by Harvard Business Review, onboarding a new customer is somewhere between 5x and 25x more expensive than retaining a customer you already have. And with a simple five percent increase in retention rates, you can grow profits by 25 to 95 percent.
When you think about it, these data points make a whole lot of sense. When you retain customers at a high rate, you don’t have to expend nearly as many resources on marketing, sales, customer training (depending on the industry), and all of the other onboarding costs. Plus, customers who stick around tend to be happy, which makes them walking billboards for referrals.
At the end of the day, healthy customer retention makes every aspect of running your business cost-effective and efficient – it’s a game-changer.
4 ways to improve customer retention
Have we sold you on the idea that customer retention is important? If so, you’re probably thinking about what it takes to go from a below-average retention rate to a healthy rate that benefits your balance sheet. We have a few tips for you:
1. Retain customers with a smooth onboarding process
First impressions are everything. After the initial excitement of getting the new product or acquiring the new service, most customers will default back to the first experience they had with your brand. If it was positive, they’re much more likely to stick around.
A good onboarding process can set you up for success for years to come. It should be personalized (as much as possible), hands-on, and focus on removing as much friction as possible.
2. Close the loop on customer feedback
One of the biggest keys to retaining customers is to know how they feel. When you understand customer sentiment and what they like/dislike, you can refine your approach and better meet their needs.
The beauty of the NPS methodology is that it’s extremely simple to implement, and consists of one simple question: “How likely are you to recommend [your brand name] to a friend?” on a 0-10 rating scale. After providing a score, the customer can then use their own words in an open-ended feedback question to give an in-depth explanation for their rating.
It’s important to note – not only is gathering feedback beneficial to your retention strategies, but closing the loop with your customers is just as crucial. Consider customizing a Thank you message on your survey and responding directly to customer feedback to show them that you’re listening and using their feedback to improve.
For more tips and tricks on closing the customer loop, check out our Help Center’s Closing the Loop guide.
When you use Delighted, you can send out NPS surveys and close the loop with customers via an email survey, link, in-app, or kiosk. This allows you to constantly collect data wherever your customer interacts with your brand – so you can feel confident that you’re “in the know.”
3. Keep your products and services top of mind
You can’t stop marketing to someone just because they’re a customer. In today’s marketplace where competition is high and loyalty is low, you must stay top of mind.
You can do this via any number of techniques and strategies. Good options include weekly email newsletters, running contests on social media, and producing high-value content (like videos, podcasts, or downloadable PDF resources).
4. Reward promoters and loyal customers
If a customer doesn’t feel appreciated, all it takes is one mistake or a “better opportunity” with a competitor for them to jump ship. It’s important that you don’t take your loyal customers for granted. Reward them for sticking around.
Rewarding loyalty may look like grandfathering-in prices when rates increase or sending bonuses and surprises when a customer places their tenth or twentieth order. If you gauge loyalty in terms of how long a customer has been with you, you might consider sending bonus gifts at important intervals, such as six months and a year. Setting up a loyalty program is also always an option.
Or, say thank you and encourage promoters to refer their friends by incorporating rewards directly within your survey feedback. Delighted + Friendbuy integration allows you to embed referral links and reward info directly into your customized survey without you having to lift a finger.
Improve customer retention with Delighted
Want to collect customer feedback so that you’re able to gauge customer satisfaction and ultimately improve the overall customer experience? Sign up for a free trial of our experience management software and we’ll arm you with the feedback you need to improve your retention rate and grow your bottom line!