Unlock the power of loyalty. Boost profits and cut costs with effective customer retention strategies.
The Gist
- Retention impact. Customer retention rate crucially affects brand profitability and repeat purchases, reducing reliance on advertising.
- Cost efficiency. Retaining existing customers costs 5X less than acquiring new ones, emphasizing efficient resource allocation.
- Service key. Exceptional customer service is vital for retention, as negative experiences can significantly reduce customer loyalty.
Loyal customers are a beautiful thing. As they grow to trust your brand, they’ll buy more, and more expensive, products over time.This enduring loyalty positively impacts your customer retention rate, as these satisfied customers not only become repeat buyers but also act as word-of-mouth evangelists, recommending your brand to friends and colleagues and promoting it on social media.
It’s no wonder then that “customer retention rate” is an important metric for CMOs. Satisfied customers are extremely cost-effective when compared to the marketing expense of finding and converting new customers. Satisfied customers also increase your brand’s profitability, as they make repeat purchases without you having to persuade them (using your advertising budget).
The rule of thumb is that it costs 5X more to acquire customers than to retain them. Recent research points out that existing customers are 50% more likely to try new products and spend 31% more when compared to new customers.
Retention Rate Challenges
But retaining customers is fraught with challenges including understanding evolving customer expectations and addressing customer service issues quickly and efficiently. This is especially true over the past five years as the pandemic and an influx of remote work have made consumers more comfortable engaging with brands via the web, mobile, social media, SMS and email.
“One of the biggest customer retention challenges these days is knowing what customers want,” said Michael Brandt, founder, senior consultant, and trainer at consulting firm, CX-Excellence. “A lot of companies take pride in their products but don’t analyze customer data enough to know if their products are actually fulfilling their customers’ needs.”
In this article, we’ll explore how to calculate and improve your brand’s customer retention rate.
Calculating Customer Retention Rate
Apologies in advance to the math haters, but determining a customer retention rate requires some good old subtraction, division and multiplication.
Here are the steps to calculating a customer retention rate:
- Choose a time period — Could be a month, quarter, a year
- Count the number of customers you had at the start of the time period (Let’s say 110 customers)
- Count the number of new customers you acquired during the time period (Let’s say 20 new customers)
- Count the number of customers you have at the end of the time period (Let’s say 100 customers)
Use this formula to figure out your customer retention rate:
[(End # – New Customers #) / Start #] x 100 = CRR
[(100 – 20) / 110] = 0.73 x 100 = 73% CRR
In this case, you retained 73% of your customers. Whatever is left (27%) is your churn rate — or the percentage of customers who stopped using your brand or canceled a subscription or service.
What is considered a good customer retention rate? It depends on the industry. The average customer retention rate in insurance is 83% because there is low competition and it’s difficult to switch to a new insurance company. However, in retail the competition is high and it’s easy to switch, so the average customer retention rate is lower at 63%.
Related Article: Using Predictive Analytics to Improve Customer Retention
Strategies for Improving Customer Retention Rate
Regardless of your industry, the following strategies will help make emotional connections and keep existing customers coming back for more.
Collect and Act on Customer Data
Data on customer retention — how customers interact with your brand, what satisfies them, and what makes them churn — is collected using a variety of tools including CRM systems, customer success platforms, customer surveys, Net Promoter Scores (NPS) and social media monitoring tools.
Merging all this siloed data for a complete view of the customer is a big challenge for marketing, data analytics and customer success teams. A common strategy is implementing a CDP (customer data platform) that uses APIs to bring disparate data together in a unified repository, giving marketers a complete, up-to-date view of each customer.
From this, they can segment customers based on demographics, purchasing history, or engagement levels and create retention campaigns such as personalized product recommendations, loyalty programs, targeted advertising and social media engagement.
“There’s so much data available from so many channels, and companies need to be proficient in pulling out insights and acting on them,” said Brandt.
“The key is to focus on what’s important to the customer. Do they want more product features? More personalized marketing? Faster customer service? Data can give you a clear understanding of what customers want and you can adjust products and services to meet those demands.”
Airbnb & Retention
Airbnb is a standout example of effectively using customer feedback data to retain customers. The online lodging marketplace combines a review system that allows guests to comment on their stays with a continuous feedback loop that generates quick insights from that feedback for both Airbnb and hosts. Airbnb’s attention to customer data allows the company to resolve issues quickly and make customers feel supported and heard.
Related Article: Customer Retention Strategies for Driving Loyalty in Uncertain Times
Provide Excellent Customer Service
Maintaining a high customer retention rate with mediocre or bad customer service is pretty much impossible. What consumers remember most, along with the quality of the actual product they purchase, is how they were treated by a customer support agent (or, just as likely these days, a chatbot).
There’s not much room for error with customer service. Fifty-four percent of all consumers would stop using a brand after just one bad experience, and the percentage jumps to 57% for millennials, according to recent research from Propel Software.
Solving problems quickly with a smile (or an emoji if it’s a chatbot) is critical to customer service, but it’s table stakes now. “Exceptional” customer service goes beyond immediate needs; it also includes building relationships and evoking positive emotions that lead to long-term customer retention.
Zappos & Retention
Online shoe and clothing retailer, Zappos, has a long-standing reputation for excellent customer service, which has led to high customer retention rates and a whopping $2 billion in annual revenue. Customer service is a true differentiator for Zappos. The company is known for its generous shipping and return policies and its agents go through four weeks of training before handling real customer calls. They never use scripts or try to upsell so they can be free to engage with customers in a friendly and natural way.
Zappos’ devoted, companywide focus on customer happiness may seem extreme, but it has helped it stand out in an extremely competitive online retail space and serves as a blueprint for today’s brands struggling with customer retention.
“It’s important to ensure that every employee is in the know about the customer,” said Annette Franz, author, and founder and CEO of consulting firm, CX Journey Inc. “Share the customer feedback with everyone and help them design, facilitate, and deliver an experience that keeps customers coming back. This should be at the root of all you do.”
