Customer Retention

Updated on March 19, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

Customer Retention Meaning

Customer retention is a practice of businesses that involves retaining customers over time and extracting additional value from them. This practice’s main objective is to convert first-time buyers into repeat customers, ensuring they do not choose a competitor’s product or service.

Customer Retention

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The customer retention rate is a key performance indicator (KPI), as a business’s ability to retain its customers is fundamental to its short-term and long-term success. This metric can reflect or predict repurchase behavior and customer engagement. In addition, it can help businesses identify loyal customers and adjust their product offerings.

Key Takeaways

  • Customer retention definition refers to a business organization’s ability to retain its customers over a particular period. It is more cost-effective than acquiring new customers.
  • There are various benefits of customer retention. For example, up-selling and cross-selling products become easier for organizations. Furthermore, this practice can positively impact an organization’s bottom line.
  • Businesses must utilize different strategies, like collecting feedback, building loyalty through shared values, and offering easy refunds to increase retention.
  • One significant disadvantage of this practice is that organizations are likely to ignore new customers owing to the primary focus on existing customers.

Customer Retention Explained

Customer retention definition refers to the practice of turning first-time customers into repeat purchasers. The retention rate indicates whether a company’s products and services can satisfy existing customers. This practice is the lifeblood of service providers and organizations with a subscription-based model.

After measuring customer retention, businesses can use the data to analyze customer success and experience components. For instance, if a report suggests a fall in customer retention, the organization can analyze it to find its root cause.

One of the most critical features of this practice is that it is more cost-effective than customer acquisition.

According to SmallBizGenius, 65% of an organization’s business comes from existing customers. Moreover, a business can boost its bottom line by 25%-95% if it can increase customer retention by only 5%. Hence, the more loyal customers become to an organization, the more likely they will try new offerings or actively participate in word-of-mouth marketing.

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Strategies

Businesses can use the following strategies to increase customer retention:

#1 – Build Customer Loyalty Via Shared Values

Besides having easily identifiable values, businesses must try to share them with their customers. If customers can relate to the values, the relationship with the company can strengthen.

#2 – Refunds And Returns Must Be Easy

Whether one makes a purchase online or offline, mistakes happen. Therefore, businesses must ensure easy returns and refunds to build long-term customer relationships. Note that typically, customers never purchase the products or services of a company that refuses to offer refunds or does not accept returns.

#3 – Become Irreplaceable For Customers

Businesses must try to offer unique products. Selling valuable items no one else offers can set an organization apart from its peers. Resultantly, customers stick to the company as they fail to find a replacement. An organization can also be one-of-a-kind through its customer service. Retaining customers becomes more straightforward when individuals understand that they cannot get a similar experience from other companies.

#4 – Consider The Value Proposition

Perceived value has almost the same importance as actual value. For example, while subscribing to green practices does not impact a product’s actual value, it adds to the item’s perceived value. A company’s value proposition must convey its purpose of doing business.

#5 – Communicate With Customers And Ask For Feedback

If businesses do not communicate with their customers, they will fail to establish a connection with them. As a result, the organization will be unable to form a longstanding relationship. Besides communication, asking for feedback is a vital part of customer retention.

Feedback serves two purposes: It makes customers believe that the company values their opinion. Moreover, it gives businesses insight into what customers are feeling. Organizations can analyze the data gathered from customer feedback and make the necessary changes to their products or services.

Customer Retention Rate Formula

The formula used to compute the customer retention rate is as follows:

Retention rate = {(E – N)/ S} x 100

Where:

  • S is the number of customers at the beginning of a period.
  • E is the number of customers at the end of the period.
  • N is the number of customers acquired by the business over time.

Examples

Let us look at a few customer retention examples to understand the concept better.

Example #1

Suppose at the beginning of a 1-year calculation period Company XYZ has 40,000 customers. At the end of the period, the organization had 30,000 customers. During the timeframe, Company XYZ acquired 2,000 customers.

We can use the above formula to get the rate at which the business retains its customers.

Customer retention = {(30,000 – 2,000)/40,000} x100, i.e., 70%

Example #2

In November 2022, Macquarie Telecom announced that it assisted Rose Only Group in achieving the highest customer retention rate. The former provided access to SD-WAN, VoIP, and cloud services, thus helping Australia’s leading online flower delivery service to deliver double the quantity of orders during the COVID-19 pandemic. After this achievement, Rose Only is looking to expand its portfolio’s brands.

Advantages And Disadvantages

The benefits of customer retention are as follows:

  • Retention of existing customers is cheaper than acquisition
  • The existing customers help businesses earn more word-of-mouth referrals
  • It supports sustainable business growth.
  • Reports suggest that repeat buyers yield higher profits.
  • Existing customers ensure better cooperation.
  • It is easier for companies to cross-sell and up-sell.

Let us look at some of the disadvantages of this practice.

  • Businesses primarily focusing on this practice may ignore new customers’ requirements.
  • Retention requires a significant investment concerning time and price.
  • Businesses must have a collaborative culture is necessary. Moreover, the practice requires a concerted commitment.

Frequently Asked Questions (FAQs)

1. How to calculate customer retention cost?

Businesses must identify the costs incurred due to the retention of customers to the customer retention cost (CRC). Usually, the costs involved are as follows:
– Costs associated with software and tools used to retain customers
– Expenses related to customer loyalty programs
– Onboarding and training costs
– Cost of marketing campaigns designed for existing customers
– Staffing costs for account management, customer success, etc.
Although several factors influence the CRC, most businesses compute the average CRC for each customer per year by dividing the overall CRC by the number of active customers.

2. What are customer retention metrics?

Customer retention metrics are customer churn, retention rate, and lifetime value.

3. Is customer retention essential?

Yes, customer retention is crucial for businesses’ short-and-long-term success.

4. How do you maintain customer retention?

Organizations can take the following measures to maintain the retention rate:
– Start a loyalty program
– Collect feedback frequently
– Utilize customer accounts
– Send a discount coupon after the first purchase
– Introduce a referral program

This article has been a guide to Customer Retention and its meaning. Here, we explain its strategies, formula, examples, advantages, and disadvantages. You may also find some useful articles here –

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