Studies by Bain & Company show the effort to increase customer retention by 5% produces 25% additional profits through upsells, cross-sells, and customer referrals. It’s not a stretch to say your ability to retain customers reflects your ability to grow your bottom line.
So, how do you get the most out of your existing customers? In this blog, we explore how and why you should calculate customer retention rate and other metrics to enliven your customer retention.
The Importance of Measuring Customer Retention
Let’s start by looking at customer retention from a holistic standpoint. Your retention rate is more than an arbitrary benchmark. It reflects the way your actions (both intentional and unintentional) and market conditions influence your current customers. Though there’ll be slight fluctuations from month to month, any major decline in your customer retention rate should bring your business to DEFCON 1.
What are the main causes behind large instances of customer attrition? Often, the problem falls into one of these four categories:
- Poor customer service – It’s an obvious outcome. If your customers don’t get their issues solved on the first contact, receive indifferent or hostile service, or wait forever for answers, they’ll stop buying from your business.
- Ineffective engagement – Consumers expect their customer experience to be proactive, not just reactive. Companies that ignore ongoing outreach and don’t provide updates, deals, or even a friendly hello will lose out to competitors who take the time to engage customers.
- Shifts in the market – Are you keeping up with the times? Are the features of your products or services competitive and evolving with consumer demands? A drop in customer retention rate can signal your need to adapt – or you’ll continue to shed once-loyal customers.
- Issues with products or services – When there’s a defect in your products or shortcomings in your service, customer churn will speak up in ways that customers won’t. Only one in 25 customers complain before they leave, so increases in attrition can often indicate you need to take the product or service back to the drawing board.
In most of these instances, there is going to be unavoidable customer churn. Yet when a drastic exodus is happening outside of your awareness, you need to be able to catch it and rectify issues fast. That’s where calculating customer retention has its greatest value.
Calculating Customer Retention Rates
Where do we start? First, you set your timeframe. Do you want to evaluate a month? A quarter? A year? Your parameters are important because the range of your calculation will impact your insights.
Let’s say you choose to calculate customer retention for June and notice increased attrition. Is that due to seasonal or chronic customer churn? Is it the result of a snare in a product or service release or part of larger customer care shortcomings? Unless you’re testing the efficacy of a specific customer care initiative, the results might be ambiguous. We recommend that you measure retention rates frequently, but acknowledge the aggregate factors behind the scenes.
Then, calculate your customer retention with the right formula. Take your total customers at the end of a period, subtract the new customers obtained in that period, divide by the starting total, and multiply by 100. Or if you’re more visual, use this equation:
Total customers at the end of your timeframe = E
New customers obtained in your timeframe = N
Total customers at the start of your timeframe = B
What’s an ideal customer retention rate? That depends on your company, industry, and size. Often the best way to approach your customer retention rate is by comparing it to other benchmarks: either your business or your competitors. Doing so can help to determine how customer service, engagement campaigns, consumer behavior, and product/service releases impact your overall customer loyalty.
Going Deeper with Your Customers
Your customer retention rate provides you with a bird’s eye view of your loyalty landscape. But with finite resources, where should you focus on creating remarkable experiences? And which customers will yield the best results and revenue boost? Go a step further and understand your customers from the following metrics:
- Customer Lifetime Value – How much will a customer spend with you over the course of your relationship? You can get the answer through each one’s Customer Lifetime Value (CLV). By measuring the customer journey, the revenue spent at each touch point, and other factors, you can determine how much a person will spend for the duration of your relationship. Then, you can design engagement initiatives to keep these customers buying from you (whether it’s a renewal purchase or an upsell or cross-sell).
- Net Promoter Score – With Net Promoter Score (NPS), you can find out which customers will be easiest to retain (your net promoters and those on the cusp) and learn lessons from your detractors. Using these metrics, you can determine the quality of service and types of engagement initiatives that work best with customers and which send them away.
- Customer Satisfaction – One of the primary customer service metrics any program should use, Customer Satisfaction (CSAT) can help to identify what’s working (and what’s not) on a transactional level. If there’s a specific issue with an agent or your customer service, cross-comparing CSAT with your retention rate can get to the bottom of the issue – and help you take action.