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Customer Retention

What is Customer Retention?

Customer retention is a term used in sales and marketing to describe companies’ actions and strategies to keep their customers coming back. It is said that acquiring new customers costs more than keeping existing ones, making customer retention a vital part of any business’ growth strategy. Customer retention is also a business metric that indicates a company’s ability to retain its customers over time. Customer retention is calculated by how many new customers a company acquires and how many existing customers leave, or churn. The churn rate includes customers who cancel subscriptions, close contracts, and leave without a purchase.

What is Customer Retention Management?

Customer retention management is the process that keeps existing customers happy while encouraging them to repeat a purchase. A company accomplishes this by keeping customers satisfied with its products and services, ensuring that products meet the needs of its ideal buyer, and ensuring customers receive excellent customer support.

Customer retention management also works when companies encourage customers to return to a business by sending regular emails and newsletters containing helpful information and updating them on products and services.

Customer Success Manages Customer Retention

The customer success team typically manages customer retention. The role of customer success primarily focuses on working with and delighting your existing customers. Customer success is responsible for helping build and nurture relationships with your customers over time.

A customer success team does not just focus on one aspect of the customer experience; and will need to collaborate and work with sales, product development, and marketing teams to achieve and manage customer retention. The customer success team’s goal is to work across departments to ensure that every part of the customer journey is positive. 

How to Measure Customer Retention and Key Metrics

Customer retention is usually defined as the percentage of existing customers retained over a given period of time. However, it is important to note that some organizations use different definitions for customer retention. For example, some companies define customer retention as the percentage of customers remaining active within a specific timeframe. Others define customer retention as the ratio of the total number of customers acquired during a specified period to the total number of customers at the beginning of the same period.

The first step to measuring customer retention is identifying the length of time you want to track. This can range from a few months to a full calendar year or longer. In addition, you must consider whether you want to calculate customer retention based on the number of customers acquired during the period or the number of customers still active at the end of the period.

Customer Retention Rate

Your customer retention rate helps you understand your customer’s behaviors and what keeps them loyal to your company. You can use customer retention data to develop strategies to improve customer satisfaction and increase repeat purchases.

To calculate the customer retention rate, you need to take the number of customers you have at the end of a specific time, remove the number of new customer acquisitions and divide that by the number of customers you started with. 

KPIs related to customer retention include customer lifetime value, repeat customer rate, average order value, and purchase frequency. Each of these is defined below.

Customer Lifetime Value

Customer lifetime value (CLV) is one of the most important metrics used to determine the profitability of a marketing campaign. One approach is to take the total revenue generated by a customer over their lifetime and subtract the costs associated with acquiring and servicing that customer

Another common method is to look at the customer’s value over time. This can be done by looking at how much revenue a customer brings in, divided by the number of months (or years) they remain a customer.

Yet another approach is to use a cohort analysis which looks at the revenue generated by a group of customers who join at the same time. This can be useful in understanding how different customer groups behave over time.

Repeat Customer Rate

Repeat customer rate is an essential business metric because it tells you how many customers return to your site to purchase. To calculate the repeat customer rate, divide the number of repeat customers by the total customers of the business. Then, multiply this by 100 and turn it into a percentage. 

A high repeat customer rate indicates that your brand provides value to consumers and that they trust you enough to return to your website repeatedly. Conversely, a low repeat customer rate could mean that your customers aren’t satisfied with your product or service or that your branding isn’t resonating with them. 

Average Order Value

The average order value tracks the average amount spent each time a customer buys from your business. Knowing a company’s average order value helps you evaluate your marketing efforts and sales process. To calculate your company’s average order value, divide the total revenue by the number of orders. Implementing a CPQ solution can help increase average order value and reduce churn.

Purchase Frequency

Purchase frequency measures how frequently customers return to purchase from your online store. Here are a few ways to measure purchase frequency:

1. Calculate the average number of purchases per customer by taking the total number of purchases made over a certain period of time, and dividing it by the number of customers during that same period.

2. Look at the distribution of purchase frequencies. This can give you a more detailed picture of how often your customers are purchasing and how many are making multiple purchases.

3. Use customer segmentation to break down your data further and look at the purchase frequency of different groups of customers.

4. Use retention analysis to track how often customers return to make new purchases. This can be a valuable metric for assessing the health of your business.

Customer Retention Strategies to Reduce Churn 

Another indicator of customer retention is churn rate which measures the percentage of customers who leave a company during a given period. Churn rate is an important metric to track because it provides insights into whether a company is losing or gaining customers. The customer churn rate formula is:

((Number of customers at the beginning of the period – Number of customers at the end of the period) / Number of customers at the beginning of the period)) x 100

For example, if a company has 100 customers at the beginning of a month and 90 customers at the end of the month, the customer churn rate would be ((100-90)/100)) x 100 = 10%.

Low retention or high churn rates signal an issue with the customer experience at some point in the buyer journey. To reduce your churn rate, consider offering a loyalty program or dedicating additional customer success team members to focus on subscription management.

Implementing a strong customer loyalty program can be a perfect customer retention strategy. You can reward retained customers with things that reinforce your company mission and encourage more purchases, visits, or uses over the long term. It also gives the customer a sense of more value and that the brand is giving back to them.

There are several benefits to using subscription management to improve customer retention. First, you can keep track of your customers’ subscription status and ensure they are always up-to-date. In addition, you can see which customers are still active and which have canceled their subscriptions. The customer success team can use this information to reach out to customers who may be at risk of canceling their service.

Finally, subscription management can help you improve your customer service, increasing customer retention. You can offer customers personalized recommendations and deals and resolve any billing issues they may have. 

Synonyms

  • Customer acquisition and retention
  • Logo retention
  • Customer loyalty
  • Client retention
  • Continued business

People Also Ask

Why is customer retention important?

Customer retention is critical because it is much more costly to continue to acquire new clients than to retain existing ones. Retention is also a good indicator that you are providing products and services that meet your customers’ needs and that your customers are loyal to your brand.

What are the types of retention strategies?

There are several different types of customer retention strategies. The most common are:
1. Improved customer service
Improving customer service is one of the best ways to reduce churn and keep customers happy. You can ensure that customer service is responsive and helpful, offer features like live chat, and make it easy for customers to contact customer service.
2. Churn reduction
Churn reduction is when a company reduces the number of customers who cancel or do not renew their subscriptions. Targeted marketing, special offers, and improved customer service can reduce churn and increase subscription revenue.
3. Improved product
Improving the product is another great way to reduce churn and keep customers happy. Adding new features, fixing bugs, and making the product easier to use will increase customer satisfaction and retention.
4. Win-back campaigns
Win-back campaigns are when a company reaches out to customers who have canceled their subscription or let their subscription lapse. The goal is to win them back as customers. 
5. Loyalty and referral programs
Loyalty and referral programs are when a company rewards customers for their loyalty or referrals by offering points, rewards, and special offers.
6. Personalization
Personalization is when a company tailors its product or service to a customer’s specific needs.
7. Customer segmentation
Customer segmentation is when a company divides its customer base into groups based on common characteristics to target its marketing and product development efforts to specific groups of customers.
8. Customer profiles
Customer profiles are when a company creates detailed profiles of its best customers. This helps companies target their marketing and product development efforts to specific groups of customers.
9. Retention bonuses
Retention bonuses are when a company offers customers a discount or other incentive to stay with the company. This is a great way to keep customers from canceling their subscriptions or switching to a competitor.

What is good customer retention?

In SaaS, the average churn rate is 5%. However, a monthly churn rate of less than 3% is considered good. Churn varies by industry, and considering the industry benchmarks is crucial to understanding what an acceptable level of churn is for your business.