How Do You Measure and Improve Customer Retention?

What is Customer Retention?

Customer retention refers to a company’s ability to turn customers into repeat buyers and prevent them from switching to a competitor.

It is a key metric for measuring the success of a business and plays a crucial role in determining the overall growth and profitability of the company.

It indicates whether your product and the quality of your service satisfy your existing customers.

The main goal of customer retention is to strengthen the customer relationship and maintain a good environment for customers, resulting in repeat purchases, and increased customer lifetime value.

Effective customer retention strategies can lead to improving your profit margin, improved brand reputation, and increased customer loyalty.

Why Is Customer Retention Important?

Loyal customers tend to buy more frequently, and over time they become advocates of your organization. Happy customers tend to refer your offerings to their network by word of mouth and social media.

Here are some statistics on customer retention from multiple studies:

• It can cost 5 to 25 times more to acquire a new customer than to retain an existing one
• Customer retention significantly affects return on investment, with a 5% increase in customer retention resulting in a 25 – 29% increase in revenue
• Repeat customers spend an average of 67% more than new customers
• The probability of selling to existing customers is between 60 and 70%, while it is only between 5 and 20% for new customers
• Since 2016, customer retention loss has risen by 37% due to poor customer service
• Customers who have their complaints resolved promptly have a purchase intention rate of 82%; complaints resolved after some time have a retention rate of 54%; 14% of customers leave when their complaints are not addressed

We have defined what customer retention is and why it is essential. Now, we will spend time understanding the different methods used for calculating customer retention and provide tips for improving it.

How to Measure Customer Retention?

I will talk about some of the most commonly used methods of calculating customer retention.

1. Customer Retention Rate

Retention rate is the percentage of customers who continue to use a company’s products or services over a specified period.

You need to determine the period you will be evaluating, whether that is a specific month, year, or the like.

The formula for calculating the customer retention rate is as follows:

Retention rate = [(Customers at the end of the period – customers gained during the period)/Customers at the beginning of the period] x 100

Let us assume you had 100 customers at the end of the period. You started with 80 customers at the beginning of the period and added 40 new customers.

Retention rate = [(100-40)/80] x 100 = 75%

75% is the customer retention rate for that specified month.

2. Repeat Purchase Rate

Repeat purchase rate measures the percentage of customers who made a repeat purchase from a company within a specified time frame. You will have to select the period for which you calculate the repeat purchase rate.

It can be calculated as follows:

Repeat purchase rate = (Number of repeat customers/Total number of customers) x 100

For example, if a company had 100 customers and 40 of them made a repeat purchase within a specified month, then the repeat purchase rate is:

Repeat purchase rate = (40/100) x 100 = 40%

3. Churn Rate

Churn rate is the opposite of the customer retention rate. It measures the percentage of customers who leave or stop using a company’s products or services over a specified period – month, year, and the like.

It can be calculated as follows:

Churn rate = (Number of customers lost/Total number of customers) x 100

For example, if a company had 100 customers at the beginning of the month and lost 5 of them during the month, its churn rate would be:

Churn rate = (5/100) x 100 = 5%

These are three common ways by which you calculate and measure customer retention.

What is the ideal scenario for each of these measurements?

Every organization will aim to get here: 

• Close to 100% customer retention rate
• Close to 100% repeat purchase rate
• Close to 0% customer churn rate

How Do You Go About Doing This?

We will see how you make use of this measurement and improve customer retention in the next section.

How to Achieve Customer Retention?

Improving customer retention is essential for the growth and success of a business. Here are some tips.

1. Provide a Seamless Onboarding Experience

I signed up with an asset management company handling cryptocurrencies.

As soon as I signed up, I understood that they are a web-only platform and do not provide a mobile app.

When I tried to add funds, it asked me to send funds to an account, and I had to take a screenshot of the fund transfer and send it as an email to them. Within 10 – 15 minutes, they would add funds to my account.

Then I can invest those funds in various asset categories.

The entire experience was tacky. Still, I remain with them for a simple reason – they provide excellent returns on my investment.

I am sure they would have lost customers in droves because of this tacky experience.

While they are rectifying these friction points, how many customers who left them or did not sign up with them will return?

They are as good as lost.

So, your onboarding experience should be a well-oiled machine and function without hiccups.

2. Personalize Your Customer Experiences

I had a laptop whose keyboard started malfunctioning. A few keys stopped working after some water spillage.

So, I went to the authorized service centers asking them to help me with the keyboard replacement. They said they had to check if the keyboard for the particular model was available. To do that, they asked for a service fee of Rs. 890 at one location and Rs. 600 at another center.

I coughed up the money they asked for at both of these places. After about 10 days, they said they could not find the replacement keyboard.

Then, I approached an organization that refurbishes computers and sells them. They asked for a few days and responded that the keyboard was unavailable in the market.

However, they would keep seeing the market for older machines of the same model and see if they could arrange something for me.

Within a week, I got a call from them stating they had identified an old keyboard that would satisfy my needs.

I got it replaced, and it is working perfectly now.

Who do you think provided me with the personalized service that I needed?

The authorized service centers had a one-size-fits-all approach, and the money they took from me was not to provide solutions for my problem – it was their service fee.

Here, the authorized service centers did not advance the relationship between the brand and me. I don’t think I’d ever go back to that brand.

3. Build Trust with Your Customers

I was talking to a friend who has been a trader and investor in the stock markets, and today he has grown to a stage where money doesn’t excite him. He sees them just as numbers.

His philosophy of investing is:

1. Start small
2. Don’t leverage
3. Invest in large caps

I was curious about the last one about investing in large caps. For this, he responded by saying that they are large companies and they would have a robust governance model in place.

This means I can trust them to do well. So, over a while, I’d always make money.

He helps a bunch of ultra-HNI investors allocate funds in the market. So, trust plays an important part.

Reliability is vital in building customer trust, so your company should consistently deliver value to your customers.

4. Monitor and Analyze Customer Feedback

Regularly monitor and analyze customer feedback to understand what works well and what needs improvement.

Act on that feedback and communicate the changes you have incorporated to the customers.

This would increase customer satisfaction and retention.

There are multiple ways to collect customer feedback. You can use surveys to find out your CSAT and NPS scores. Try and analyze the scores for patterns to determine areas where you can enhance the experience.

Even better would be to have one-on-one customer conversations with some of your key customers to understand where you stand in terms of customer experience.

5. Communicate Regularly with the Customers

I was working for an IT services organization. We had a bouquet of services that included software development, testing, professional services, and 3^rd party solutions.

We had a visit from one of our long-standing customers for whom we were providing testing services. It was more than a decade-long relationship.

They spent the morning at our office and had lunch with us. They had a flight to catch late in the evening. So, we asked them if they wanted to spend their afternoon visiting some places in Chennai.

They said they have a meeting with their development partner

We weren’t aware of this. So, we started probing a bit further and asked them how long they had been working with this partner.

They said about two years now.

Then, we asked why they didn’t consider us for development.

They were also surprised as well, as they were unaware that we also do development. They have all along been thinking that we are a testing shop.

That’s when we realized that we must constantly keep communicating to our existing customers about what is happening.

At least plan to send out a newsletter every month. 

Better still, have a communication calendar where you track every interaction you have with your customers across channels. This would allow you to launch promotional and personalized offers.

A simple example would be if your customer’s license expires, you can send them a reminder letting them know they need to renew their account.

6. Knowledge Base and FAQs

Create a knowledge base of your product’s features and the corresponding use cases. This would allow your customers to think of creative ways of using your product or service.

The knowledge base can be text, animations, infographics, videos, or customer education courses. Besides, every question asked by customers is documented in the Frequently Asked Questions section.

This would allow your customers to self-serve themselves, and they can reach out to you for complex challenges.

7. Communicate Your Product and Services Roadmap

Customers expect that the products and services they use will continuously improve over time. Stay ahead of the curve by constantly innovating and improving based on customer feedback.

Communicate regularly to your customers about the additional features you are working on, their release timelines, and how they can use the additional features as a part of their business.

8. Provide Incentives for Loyalty

Provide incentives to customers who continue to do business with you, such as discounts, free products or services, or special promotions. This will show your customers that you value their loyalty and encourage them to stick with you.

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Measuring and improving customer retention is essential for a business’s long-term success and sustainability.

Customer retention helps a business in several ways:

• It increases profitability
• Improves customer loyalty
• Improves brand reputation
• It helps improve your offerings based on customer inputs and feedback
• Improves decision-making

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