What is Customer Retention?
Customer retention is a measure of an organization’s ability to keep customers. Customer retention rate is the inverse of churn rate; the former measures the ability to keep customers, while the latter is a measure of customers leaving.
In a subscription business, customer retention refers to users who keep their subscription active and continue paying at the specified frequency (e.g., weekly, monthly, annual, etc.). In a non-subscription business, customer retention refers to users who continue to use the purchased product or service. These users may become repeat customers by purchasing more of the same products.
How to Calculate Customer Retention Rate
Customer retention rate is measured using the total number of customers at the beginning and end of a time period, along with the number of new customers acquired. Specifically:
CE = Customers at the end of the period
CN = New customers acquired during the period
CB = Customers at the beginning of the period
[(CE – CN) / CB] * 100
If you started the period with 1,000 customers (“CB”), acquired 100 new customers (“CN”) and ended the period with 800 customers (“CE”), then the customer retention rate is:
[ (800-100) / 1,000 ] * 100
In other words:
(700 / 1,000) * 100 = 70%
Benefits of Customer Retention
Retaining existing customers is easier and more cost-effective than acquiring new customers. Studies have shown that retaining customers can cost seven times less than acquiring new ones. Customers have already used your product or service and may have interacted with your customer support or customer success teams. As a result, convincing them to stay can be easier than making the case to someone else who’s not familiar with your brand.
In addition to the lower cost of retention, existing customers might spend more with your company, increasing their customer lifetime value (CLV). They might purchase products or choose higher-priced options. In a subscription business, existing customers might extend the duration of their subscription or upgrade to a higher-tiered subscription. Customers might also become brand ambassadors and recommend your company to their colleagues, friends, family and social media followers. These ambassadors can help your company increase sales via word-of-mouth marketing (WOM marketing).
How to Improve Customer Retention
Customer retention goes hand-in-hand with customer satisfaction. If customers are satisfied with the products and services you provide, they’re unlikely to churn. However, unhappy customers are likely to leave and negatively impact your customer retention rate.
The first step in improving customer retention is to understand customers’ satisfaction during the customer journey. For a quantitative approach, you can ask customers to complete customer satisfaction surveys. When providing customer support, ask customers to rate the level of service provided. For a qualitative approach, have customer support or customer success teams interview customers about how they’re using your product or service and how it’s working for them.
In addition, education and documentation can improve customer satisfaction, especially if you have a complex product offering. Create on-demand videos to educate customers on how to use your products and provide timely, relevant and detailed documentation (e.g., product guides and product manuals).
For some types of businesses (e.g., airline, hospitality, retail, etc.), a loyalty program can retain customers and encourage them to spend more. Customers are incentivized to accumulate loyalty points, which can be applied to future rewards. Loyalty programs have been shown to increase both customer satisfaction and customer retention.