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Article 5 min read

Why is customer retention important?

Last updated August 11, 2021

Many businesses measure success by new customer acquisition or increasing their customer base: the bigger the number of customers, the better they’re doing as a business. This is a mistake though – turning one-off customers into loyal customers who return to buy your product or service repeatedly is just as important, if not more so, for your business. Let’s take a look at what exactly customer retention is, its importance, and how to calculate customer retention rate.

Customer retention meaning

Before we explain the importance of customer retention, we must understand what exactly it is.

Customer retention is, put simply, a company’s ability to turn buyers into repeat customers, preventing them from buying from a competitor. Long term customers are crucial for almost every type of business. From e-commerce retailers, where you want to keep existing customers engaged with your brand, to subscription-based companies where the number of retained customers you have directly impacts whether your business sinks or swims.

Why is customer retention important?

Of course, finding new customers is important and any business will want to grow and expand their customer base – but it shouldn’t be at the expense of customer retention. 

Keep business costs down

To start with, if you can keep your existing customers happy and ensure they come back for more, it’s going to cost you less than continually having to find brand new customers. The Harvard Business Review found that acquiring a new customer can be between five and 25 times more expensive than keeping an existing one.

That means you can spend less on marketing, as your existing customers are already fans of your products. You just need to provide a great customer experience to keep them happy and willing to shop with you again.

Increase sales through upselling and cross-selling

It’s easier to sell new products and services to existing customers than it is to prospects at the start of their journey with your brand. It’s been found that existing customers are 50% more likely than new customers to buy new products.

Improve your bottom line

When you focus on retention, you’re likely to see an improvement in your business revenue. A study by Bain & Co found that increasing retention rates by as little as 5% can improve your revenue by 25-95%. 

Find new customers through word of mouth recommendations

An increase in customer retention can directly lead to more new customers, as many people actually find recommendations from friends and family to be more important than brand marketing efforts. Yotpo found that 60% of loyal customers will talk about their favourite brands to their close contacts. So when you focus on customer retention, you can expect them to do some of your marketing work for you.

How to work out your customer retention rate

Your customer retention rate measures the number of customers your company retains over a given period, and it can be a useful metric to understand lifetime customer value.

Your retention rate is simply the inverse of your customer churn rate – so if you know that your churn rate is 60%, then your retention rate is 40%. Alternatively, if you don’t know that figure, you can work out your retention rate using three key figures:

  • Number of existing customers at the start of your chosen period (S).
  • Number of total customers at the end of the period (E).
  • Number of new customers added within the period (N).

You can then work out your customer retention rate by using this formula, where CRR stands for ‘customer retention rate’:

[(E-N)/S] x 100 = CRR

Once you’ve got your CRR, you can work on improving it with customer retention strategies.

What is a customer retention strategy?

A customer retention strategy is anything your business does to improve your CRR, whether that’s providing great customer service or offering loyalty programs. Here are some customer retention strategies that work.

Provide a great customer experience

Your customer support team is your secret weapon when it comes to customer retention. Customers expect brands to answer their questions quickly and to their satisfaction, whether that’s through messenger, email, Twitter, webchat or a phone call. 

A customer retention solution like Zendesk keeps track of all your interactions and will help you to offer a better experience for your customers, by reaching out to follow up on purchases or addressing small issues before they turn into major complaints. With fast, effective customer service, you can even turn around an email from an angry customer and ensure they shop with you again.

Create a customer-focused loyalty scheme

The key to loyalty programs that improve customer retention is offering a personalised experience. A generic scheme that offers every customer exactly the same rewards isn’t likely to encourage a customer to choose your brand over a competitor. However, one that is customer-centric and uses real-life data to provide rewards that are genuinely exciting for individual customers could win them over.

Set up a customer referral scheme

Did you know that the lifetime value of a new referral customer is 16% higher than customers acquired through other channels? This is one strategy that actually works, and you can set up the scheme to be anything you like. Choose a reward for referrals that’s related to your business, like a discount or free gift, or offer them something from a local retailer as a thank you. 

Take a look at some of our other favourite customer retention strategies for more inspiration and find a solution that works for you and your business. 

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