Glossary

Customer Retention

The goal of any brand-new business is to acquire customers. And yet, customer acquisition on its own isn’t enough. At some point, every company needs to look inward — focusing on customer retention.

We already know acquiring a new customer can cost 5-7 times more than retaining an existing one. So, it’s clear why retaining existing customers is vital to long-term profitability. 

Plus, when you can measure business success with metrics like retention, it’s easy to see how your company is doing, what you can do to improve performance, and where your customer experience is falling short.

What Is Customer Retention?

Customer retention is best described as a strategy that focuses on retaining existing customers. Here are a few important things to consider:

• Retention rates are typically calculated as the percentage of a company’s client base that stays with the organization over a specific period. 
• High retention rates show a company is able to keep customers “on board” and away from competition.
• The inverse of customer retention is churn rate, the ratio of customers who leave the business after a successful sale. Sales teams aiming to boost retention rates naturally lower churn rates.

How To Calculate the Customer Retention Rate?

Start by gathering statistics from your sales department. Choose a period your business was active and find out how many customers were with you at the beginning and end of that period. 

Label these values as B and E, respectively. Then find out how many new customers you acquired during that time, which we will label N.

The formula for customer retention rate (CRR) is: (E – N) / B x 100. 

CRR is the percentage of customers you’ve managed to retain over the studied period.

What’s a Good CRR?

In an ideal world, it’s 100%. But that’s nearly impossible in practice as no company is perfect.

It’s important to set realistic goals based on competitor data to serve as a benchmark for what’s acceptable in your industry.

According to recent studies:

• Industries with an average retention rate above 80% include professional services, transportation, IT, construction, and insurance.
• Industries with an average retention rate between 75% and 80% include finance, telecom, software, healthcare, and banking.
• Industries with an average retention rate below 75% include retail, travel, restaurants, and hospitality.

The target CRR really depends on the nature of the industry. For instance, it makes sense for travel and hospitality businesses operating in a vacation spot to see high churn rates since most people visit different places each time they travel for pleasure.

Don’t be discouraged if your numbers are low compared to market benchmarks. As we’ll discuss, there are many strategies for boosting retention.

What Are Some Similar Metrics to CRR?

Customer retention rate is only one of many key performance indicators sales teams use to measure success. Others you might hear about include:

• Average revenue per account (ARPA), the average amount of revenue a business receives from a single product line or customer. ARPA helps sales teams figure out where to focus efforts.

• Customer lifetime value (LTV), the total amount of money a single customer spends with the business throughout the entire relationship.

• Market penetration, or market share, shows where your business lies compared to expected growth rates.

• Net promoter score (NPS), the likelihood a customer will recommend your business to a friend or family member. As we’ll discuss, NPS is important because referrals are one of the best ways to increase retention.

• Win rate, the number of successful sales deals compared to the total number of opportunities received. Win rate measures how effective your sales teams are at continuing negotiations and closing deals.

What Factors Impact Customer Retention?

Retention largely depends on how your customers perceive you as a brand. Various elements impact retention and churn rates in this regard, including:

• Trust in your brand: Show your clients you can be trustworthy and transparent. Clients are likely to buy from a brand with minimal hidden fees, return policies, a sense of accountability, and other pro-consumer business practices.

• Quality of your customer service: Consumer-centric companies also enjoy high retention rates. Have properly-trained and attentive customer service agents to show that you care about customer success.

• Your sense of community: There’s a reason why businesses emphasize building a community around your brand. If your customers can socialize amongst each other in a customer forum or chat room, they’re more likely to engage with your brand more often. Humans are naturally attracted to being part of a group.

• Corporate values and social responsibility: 7 out of 10 customers prefer to work with brands that reflect their personal values. If marketing teams tell you that your clientele values fair working environments and sustainability, incorporate those values into your organization to boost engagement.
• Price: The most obvious factor that keeps customers coming back is a low price. Consider offering special promotions, free samples, and incentives like free shipping.

Sometimes, high retention is simply due to convenience. A restaurant located near an apartment complex or university will likely have the same primary clientele just because of proximity.

Why Is Raising Customer Retention Necessary?

CRR is more than just a KPI on a marketing team’s quarterly report; it’s practically a core goal of any organization regardless of size or industry.

And it all comes down to customer retention costs. Remember, acquiring a new customer costs far more than retaining an existing one. While capturing new customers is essential too, you can’t deny the cost advantage of ongoing customer satisfaction compared to market acquisition.

Loyal customers are more receptive to cross-selling and up-selling tactics, as you’ve already built a solid foundation with them. They’re also more likely to help you acquire new clients through personal referrals.

Best of all, CRR is a metric that you have a strong degree of control over. Read up on the most impactful strategies for raising retention to support your bottom line.

Find Out How To Improve Customer Retention

Customer retention programs revolve around understanding the customer journey. Build a detailed map of all interactions a client might have with your brand. Once you have a roadmap, you can start optimizing it by looking at these aspects.

Improving Customer Onboarding with Training

In complex markets like software, the path to success isn’t always clear. Customers often need help understanding your product features and learning how to use them effectively.

Churn rates are high for companies that fail to address these concerns during onboarding. Use customer retention software to provide training sessions, where clients learn standard workflows and best practices to help them get the most value out of your service.

Reel Back In Inactive Customers

Just because a few customers haven’t interacted with your business in a while, doesn’t mean you should give up on them.

A common strategy is to use automated emails to rekindle that interest in your brand. Offer educational content like video tutorials or showcases of new features and software updates they might find useful.

Use this opportunity to upsell as well. A premium service package might spark a subscription renewal. Just don’t overdo it, as too many emails can come off as annoying.

Jump-Start Retention Programs

Grocery stores, coffee shops, and convenience stores often offer loyalty programs, where customers get free items or discounts when they continue to purchase from the same business. Clients not only receive savings but also feel a stronger personal connection with the storefront this way.

Another type of program is the referral program. Incentivize customers to refer friends, colleagues, or family members. This strategy turns your current customer base into a marketing juggernaut, boosting retention through ambassadorships.

Listen To What Clients Have To Say

Never underestimate the power of consumer feedback. Through surveys and polls, ask what your customers think of your brand and what pain points currently exist. Address any issues they bring up to encourage more clients to stay.

CRR is especially vital in the software-as-a-service market, where it directly contributes to subscription renewal rates. Learn about more customer retention strategies for markets like this.

Next Steps: Learn How To to Boost Your Customer Retention

Looking to improve your customer retention rates?

Start by learning how to accurately measure and incorporate customer retention metrics into your overall business strategy.

Not sure what to measure? Don’t worry — we’ve got you covered. Read our “How to Measure Customer Retention” blog and learn the exact steps to take, the basics of customer retention, and other key insights you’ll need to create a sustainable customer retention strategy that reduces churn. Click to read it now.