Customer retention 101

TL;DR Customer retention starts with delivering an excellent customer experience.

What comes to mind when you see, hear and say the word ‘retention’? For some, it could mean a businesses’ efforts to ensure their top talent doesn’t quit their jobs, or on the other side of the coin—the customers.

Keeping your existing customers is more profitable, cheaper, and easier than gaining a new customer. So let’s see how you can add value to your business using different customer retention strategies focused on improving customer experience.

What is customer retention?

Is customer retention a relationship? A strategy? A performance metric? No matter what you’ve heard and how you want to define it, retention matters to your role and business because it’s all about making sure customers continue purchasing your company’s product or service.

Customer retention defined

Customer retention refers to the actions undertaken by a business to keep its existing customers satisfied, and loyal, over time. Businesses across many different industries use customer retention as a customer service metric, and it can also be at the core of any business strategy.

Although there is some strategic overlap, customer retention and customer acquisition are not one and the same. Whereas customer acquisition is transactional, customer retention focuses on relationships with customers. In other words, customer retention builds long term trust and loyalty.

Why is customer retention important for business? Customer retention is essential for companies during all stages of growth. When it comes to a healthy business, customer retention is a key player.

• Lower cost compared to acquiring new customers: Acquiring a new customer can be anywhere from five to 25 times more expensive than selling to existing customers. And you don’t need to put in as much effort into sales, and marketing since they’re already in your net. It’s less about convincing, and more about nurturing the relationship.

• Increased profits: Providing quality customer service. Increasing customer retention by 5% can increase profits anywhere from 25% to 95% and existing customers provide 65% of the company’s business.

• Greater lifetime ROI: Returning customers deliver

• Reduced costs: on marketing and sales

• Brand ambassadors: Keeping customers coming back is good for business. Customer needs that are fulfilled and loyalty rewarded more likely lead to positive reviews, great word-of-mouth marketing and more.

How do you measure customer retention rate?

The most straightforward way of assessing how effectively a company is retaining its customers over a period of time is with the customer retention rate (CRR). The result is displayed as a percentage of previous customers that a company has retained over a period of time.

To make it easier, let’s draw it out with a customer retention formula:

The formula for calculating the retention rate is ((number of customers at the end of the period – the number of customers gained throughout)) / number of customers at the start of the period)) X 100.

Start by picking a time period you want to examine (e.g. last 6 months). You can even look at shorter periods with days or weeks.

1. Number of customers at the start of the time period

2. Number of customers at the end of the time period

3. Number of net new customers added over the time period.

An example: If you had 1000 customers at the start of the determined period, lost 40 customers, and gained 65 new ones, you would have 1,025 customers at the end of the period. Thus, your retention rate would be ((1,025-65)/1,000) X 100, or 96%.

Customer retention strategies in practice

When you focus on providing a level of quality, be it customer service, or smart self-service options that keep customers engaged, happy and coming back, you’ll start to reap the benefits.

Twilio’s Chief Customer Officer, Glenn Weinstein noted the importance of examining customer relationships more holistically in his discussion of Measuring the Customer Persona

“When you start to think about your relationship with a customer as a long-running conversation that traverses different parts of the organization, it forces you to think more contextually about your customer and the journey that they’ve taken broadly and specifically to reach that interaction with you.”

Watch on-demand: Measuring the Customer Persona with Glenn Weinstein, Twilio

Your customers chose you for a reason (well done!). But celebrating too soon is premature. Your ability to play the long game depends on the quality of your product or service they received, multiplied by the customer service they might have encountered in doing business with you.

The key is not to see your customer transactions as events, but rather as moments in an ongoing relationship, just like the in-person relationship you develop with your local businesses over time. By focusing on personalizing each customer’s experience, companies are able to develop stronger, longer lasting relationships, ultimately maximizing retention.