Customer retention – definition, metrics, strategies

Businesses focusing on sales and marketing often overlook customer retention and instead focus on recruiting new customers to their brand, and to purchase their products and services. We know that it’s always cheaper to hold on to existing customers and have them repeat their custom rather than to recruit and convert new customers, but there’s lots of questions companies to need ask themselves to focus on just that. So, what is customer retention? Is customer retention Important? How is best to measure and manage customer retention? This is an area Feefo knows all about… so let us share us our knowledge!

What is Customer Retention?

The starting point of this discussion is to delve into the definition: what is customer Retention? Put in simple terms, Customer Retention is the ability of a company to, and the activity of a company to, retain customers after a purchase or interaction. Once a new customer is acquired, it is in the business’ best interest to retain them for future purchases of products or services, rather than have them leave (to either purchase elsewhere or cease their purchase behaviour).

When we talk about customer retention in terms of a measure or number, this is often a metric calculated that refers to the number of customers who chose to stay as patrons of the business compared to those who left, over a set time period.

Is Customer Retention Important?

Customer Retention is hugely important, but often underrated. When companies search into the question “is customer retention important?” the first – and often sole – business case for retention over recruitment is that its activities come at a lower cost. It is estimated that well over 80% of companies already understand this, but this pure financial benefit is not the only one.

A loyal, repeat customer is more likely to spend more as their time interacting with the business goes on. Continued customer research demonstrates that those who hold a sense of brand loyalty spend up to 30% more over the customer lifecycle, significantly increasing their profitability.

Indeed, data also shows that increasing customer retention has positive impacts on a business’ bottom line in many ways. Loyal customers are more likely to recommend a business and to share their positive experiences, resulting in effective word-of-mouth and social proof marketing. Some studies suggest that increasing customer retention rates by just 5% can increase a company’s profits by anything from between 25-95% - and that isn’t an increase to be taken lightly!

Customer Retention Metrics

Customer Retention is often a business focus that falls by the wayside because it doesn’t strictly fit into either a marketing department or a customer service department. Marketers are more likely to focus on customer recruitment than retention (and are usually measured on such), and customer service teams are less likely to be rewarded for upselling in a similar manner to sales teams.

However, this isn’t to say its metrics should go ignored. Customer Retention metrics should sit with equal footing across all relevant business areas and they should have a practical, tangible working plan to improve all.

So what are the most common customer retention metrics? Let’s go through them.

Customer Churn

It is natural that not all customers will stay with a business forever, but the customer churn rate can help companies understand better just how many hold loyalty toward them as a brand. A customer churn rate is often given as a percentage; that is, the percentage of the overall customer base who have not returned or been retained over a given time period. The new customers onboarded throughout this time period are not included.

How often customer churn should be measured and over what time period depends on the customer base. Small businesses can calculate customer churn annually or semi-annually, but bigger firms with more customers may need to do so monthly or quarterly.

A customer churn rate is calculated as: the number of customers at the start of the time period minus the number of customers at the time period, over the total number of customers at the start of the time period.

What is considered a good customer churn rate is very industry dependent, but for most B2B operators nothing higher than 7-10% would be acceptable.

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Revenue Churn

Revenue Churn is the overall percentage of revenue lost from not retaining existing customers, again, across a given time period. Revenue Churn may occur from cancelled subscription, halted repeat purchases, downgrades on plan levels (and therefore payments) or an altogether end to the business-customer relationship. While customer churn allows a business to understand the amount of customers leaving, the revenue churn gives a picture of the financial detraction of their not returning.

Revenue Churn, no matter the size or income of the business, should be calculated monthly as other finances would be. Take the monthly recurring revenue amount at the beginning of the month and subtract from it the monthly recurring revenue at the end. Then, further subtract any revenue as a result of upselling or cross-selling from existing customers before dividing the figure by the original monthly recurring revenue amount. This may be a positive or negative percentage, but should not include revenue from new customers throughout the month.

Some businesses also choose to calculate revenue churn in line with the time period of their customer churn figure, to give a practical indication of the monetary impact.

Customer Revenue Growth Rate

Customer Revenue Growth Rate is the rate of revenue growth from existing customers within a set time period. The revenue itself (at the beginning and end of the time period) are monetary figures, but the rate compares the two, as well as a comparison made to previous rates. An increasing customer revenue growth rate indicates that the company is doing a good job and motivates customers adequately to repeat purchase, increase spending and demonstrate loyalty behaviours.

To calculate the customer revenue growth rate, the revenue generated from existing customers at the end of a time period should be compared to either the revenue generated from existing customers at the start of that period or that revenue from a previous period.

Purchase Ratio

A purchase patio demonstrates the percentage of a business’ customer base that returns to make a repeat purchase. It typically applies to products and subscriptions, but can be used to judge the efficiency of marketing and customer care for other services too.

To calculate the purchase ratio, the number of customers who have returned to make another or further purchase should be compared to the total number of customers overall.

Return Rate

For product-based businesses, a simple customer retention metric is the return rate of their products. Although there a myriad of reasons for returns, of course, this number should be kept as close to zero as possible; as product returns are not profitable. The average return rate for businesses varies between industries, but the average rate for a retail store is around 15%. In B2B focussed businesses, the rates are considerably lower – unless something has gone significantly wrong.

A product return rate is easily calculated by working out a percentage from the number of units sold that are later returned from the total number of units sold. The timeframe the Return Rate is calculated over is likely to depend on sales volumes and other metric figures.

Sales Outstanding

Sales Outstanding is a customer retention metric that is measured on the average number of days that payments from customers are left outstanding before they are paid. This metric works best for businesses who invoice their customers or have subscription payments or bills that become due and aren’t automatically deducted from an account. This metric can give an overview of the performance of an accounts department as well as of a firm’s Customer Retention efforts. Those who pay late or leave payments a long time are less likely to stay a loyal customer.

The sales outstanding can be worked out as the accounts receivable over the total annual revenue, multiplied by 365 (for the days in a year).

Net Promoter Score

A Net Promoter Score (or NPS) gives an accurate depiction of customer satisfaction, and therefore the likelihood of customers to stay loyal to the brand. This figure can be anywhere from -100 to +100, with the higher the better set as a general rule. What is considered a ‘good’ number varies widely by industry?

NPS is calculated by asking those who are a verified customers of the business how likely they are to recommend the company, product or service to a family or friend, on a scale of 1-10. Those who rate 9-10 are considered ‘promoters’, 7-8 ‘neutral’, and 1-6 ‘detractors’. The overall score is then worked out as an aggregation of all scores given.

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Between Purchases

‘Between Purchases’ refers to a metric that measures the time it takes on average from a customer to repeat buy from a business. This metric isn’t appropriate for all businesses but works for those who understand their product lifecycle. It’s a customer retention measure that is best used in conjunction with others.

How between purchases is worked out depends on a business’ individual sales insights system.

Repeat Customer Rate

The repeat customer rate refers to the ratio of customers who have given a business their repeat custom within a given time period; it gives a percentage of customers who demonstrate loyalty to the brand, product or service.

The total number of customers over the stipulated time period (including new ones who have been recruited throughout this time) should be the second figure in the calculation, with the first the number of customers who made an additional, or multiple purchases, throughout the time. Divide the first by the second for your percentage figure.

Customer Lifetime Value (CLV)

Customer Lifetime Value (usually abbreviated to CLV) is a measure of the average overall revenue generated by a single customer across the average client lifespan. This metric can fluctuate over time and businesses should aim for it to increase or maintain; as a decrease in the figure suggests customers are being lost or that those being recruited are too low in value.

To figure out the CLV, the average revenue from a single customer over a year should first be determined (gross annual sales divided by total number of customers in that same year), and then multiply that figure by the average lifespan of a customer in years.

What is Customer Retention Rate?

Whilst all of the above customer retention metrics should be measured and considered as appropriate for the business, the customer retention rate is the most common and most easy to understand. Customer Retention Rate is a percentage of the business’ overall customers that remain loyal and are ‘retained’ by the business across a set time period.

What is a Customer Retention Strategy?

A customer retention strategy is a business strategy written and enacted in order to encourage increased customer loyalty (and therefore retention), increase profitability and decreased turnover. It should be as detailed and prioritised as other business strategies and include analysis of current activity (using the relevant customer retention metrics as detailed above) and its progress and/or success, areas for improvement, research into industry standards, competitors and market trends, and a full tangible, targeted plan that imparts activities and objectives in order to increase the overall Customer Retention rate.

Where to start in building highly effective Customer Retention Strategy?

Before any activity, amends or business developments in order to increase customer Retention is planned, first it is imperative that a business understands where it is currently falling short and why customers are ‘churning’ and not returning. Only a thorough in-depth analysis of customer data including behaviours and honest, impartial feedback will turn the relevant statistics into business intelligence and highlight areas to be improved upon, changed or trialled afresh.

Here at Feefo, we suggest beginning with the following:

  • Churn Analysis - evaluating a business’ customer loss rates and understanding the reasons behind it is known as a Churn Analysis. This benchmarks not just the existing churn rate in order for it to be improved upon, but also allows for the reasons for non-repeat custom to be examined.
  • Industry Trends and Benchmarking – understanding a business’ performance is important, but without being able to benchmark it as good or bad against competitors or similar firms leaves an incomplete picture of performance. Industry benchmarking allows for businesses to better understand their place, and performance, in a market.

Where customers don’t return to a business for further or additional custom, it’s key that the business understands the reasoning for it. Where does the customer go? Why did they go there? What differentiates another business from the first for them to shift their custom to? Such information helps to discern the following areas for potential growth or development:

  • Competitors – which business/es is/are the fiercest competition? What are they offering that the original business isn’t – or what are they perceived to offer that the original business doesn’t?
  • Products or services – what isn’t meeting or exceeding customer expectation in order for them to repeat purchase?
  • Business processes – what internal business processes or procedures are more efficient elsewhere or could be made more efficient to the benefit of the customer?
  • Portfolio – are there products or services missing from the business portfolio that customers want or need?
  • Communication – are customers receiving the correct or relevant information from and on the business? Do customers have the desired perception of the business from the information they receive and brand communications they see?
  • Customer Experience – are there areas of the overall customer experience that could be improved upon? Are there areas of the overall customer experience that fall short of those offered by competitors?

One of the most famous examples of successful Customer Retention activities as a result of behavioural and industry analysis was led by Amazon and Google. Their research found that 100ms of latency on Amazon.com cost the business 1% of sales, and every .5seconds added to search page generation time saw traffic drop by 20%. This showed that the overall customer experience was lacking, and so improving it increased customer retention and, therefore, profitability. The digital transformation projects that resulted in the resolution of these issues are indicative of a wider move toward experiential transformation in order to benefit the end customer, but such initiatives need not be digitally-focused.

One Feefo customer learnt through customer feedback on reviews that their logistics processes (delivery and returns) were considered too cumbersome and so customers were unlikely to return. The company recognised this and moved to invest in easier and simpler logistics as part of their wider customer retention strategy, and increased their retention rates.

Tools and Ideas to Help Businesses Best Master Customer Insights and Improve Customer Retention

Feefo has a whole host of products and programs that help businesses analyse and interpret their customer data into business intelligence. These include, but are by no means limited to:

Customer Reviews

The ultimate in social proof and the ‘bread and butter’ of Feefo, customer reviews allow not just for businesses to demonstrate their authenticity, reliability and trustworthiness, but also to analyse the feedback given and utilise it to improve the overall brand, products and services.

Customer Surveys

Customer surveys are more targeted feedback mechanisms and can be carried out at various stages of the customer journey. Rather than a standard ‘one size fits all’ approach, Feefo offers several different types and features of customer surveys for customisation.

  • Satisfaction surveys – customer satisfaction surveys are comprised of targeted questions that aim to derive customer satisfaction levels within set areas of business. These can be segmented and specifically focused as appropriate for the company and customer.
  • Surveys insights – customer survey insights give the opportunity for businesses to properly analyse and work through the feedback given by customers in their survey responses, including splitting responses by demographic, behaviours and purchases. This includes Smart Themes, a program that automatically tracks customer sentiment, increases conversions and uses AI to learn more and Insight Tags to tag and track common or reoccurring themes.
  • Pop-up surveys – in order to capitalise on the momentum a business has as a customer already interacts with them, a pop-up survey can be inserted into an appropriate point on their website to prompt the customer to complete a survey and give feedback.

Exit Interviews

Not quite akin to the exit interviews carried out by employers but of a similar sentiment, businesses can seek some last-minute ‘final’ feedback from customers before they leave the business to either cease purchasing altogether or to shop elsewhere.

Analysis of Customer Retention metrics

All of the abovementioned Customer Retention metrics should be analysed and included in regular reporting and measurement of Customer Retention activities, as relevant for the business.

Marketing

Marketing is often overlooked as a communication method with the aim of retaining existing customers rather than just recruiting new ones but is critical to the ongoing positive management of the customer base. As such, marketing teams should be targeted on customer retention as well as recruitment.

Programmes

Customer programmes and loyalty schemes can help encourage repeat custom and an increase in overall spend if managed correctly. Such programmes must be managed in line with customer appetite as well as benchmarked alongside other similar initiatives in the industry.

Subscriptions and accounts

For businesses where it is appropriate, the adequate management of subscriptions and accounting can help retain customers through the seamless experience of ongoing services.

Discounts and Coupons

Incentivising repeat custom, either regularly or as a ‘surprise and delight’ one-off, can increase customer retention. This may be in the form of discounts or coupons, advance notice of sales, exclusive offers or the transaction of providing data (ie. signing up to an email list) in exchange for a discount code.

If you’d be interested in learning more on converting insight into intelligence and recruitment into retention, the Feefo team are always on-hand to discuss the features and solutions relevant to your business. Get in touch to see a demonstration and to understand how Feefo can work with, and for, you!

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Net Promoter® and NPS® are registered trademarks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld.


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