Understanding and measuring customer retention is crucial for long-term success. If you want to build a loyal customer base, extravagant marketing campaigns won't cut it. You need to find out if the customers stay with you after the initial purchase and what drives their decisions.
In this blog post, we’ll discuss how to measure customer retention and explain how to calculate customer retention rate and other customer retention metrics.
Customer Retention Definition
Customer retention is a metric used by businesses to measure customer loyalty and the company’s ability to retain existing customers.
Businesses can implement a variety of customer retention practices to keep their customers and encourage them to continue doing business with the company. Customer retention efforts help businesses maintain strong relationships, increase customer satisfaction, foster loyalty, and reduce customer churn.
By maintaining a high customer retention rate, businesses can reduce the need for constant acquisition, which requires more effort and resources than retention. Loyal customers have a higher customer lifetime value and can help businesses to maximize the value derived from their customer base, so customer retention should always be a priority.
Customer Retention Metrics
Here are the four key metrics you can use to measure customer retention.
1. Customer retention rate
The most popular metric for measuring customer retention is, unsurprisingly, customer retention rate. Customer retention rate represents the percentage of people who keep doing business with you after the initial purchase. A high customer retention rate indicates a high level of customer satisfaction with your product and customer experience. Oppositely, if your retention rate is low, you should shift your focus from acquisition to retention, evaluate your customer experience, and optimize the post-purchase customer touchpoints.
Customer retention rate formula
Customer Retention Rate = ((CE - CN) / CS) x 100
CE = Number of customers at the end of a specific period
CN = Number of new customers acquired during that period
CS = Number of customers at the start of that period
Let's say you started with 500 customers at the beginning of the year (CS), acquired 100 new customers throughout the year (CN), and ended the year with 450 customers (CE).
Customer Retention Rate = ((450 - 100) / 500) x 100 = (350 / 500) x 100 = 70%
In this example, the customer retention rate is 70%, indicating that 70% of the customers acquired at the start of the year were retained by the end of the year.
2. Customer lifetime value
Customer lifetime value is a metric that indicates the total amount of revenue you get from a customer. It represents the long-term value a customer brings to the business and is essential for measuring the profitability of customer relationships. By calculating CLV, companies can lower their acquisition costs and identify the most profitable customers, allowing for effective customer segmentation and prioritization.
Customer lifetime value formula
CLTV = Average Purchase Value x Average Customer Lifespan
Average Purchase Value can be obtained by dividing the total revenue generated from a customer by the number of purchases made by that customer. Average Customer Lifespan is the average duration of a customer relationship, measured in months or years depending on your business model. Once you have these two values, multiply them together to calculate the CLTV.
For example, the average purchase value is $50 and the average customer lifespan is 5 years.
CLTV = $50 x 5 = $250
If the customer lifetime value is $250, this means that, on average, a customer is expected to generate $250 in revenue over their entire relationship with the company.
3. Repeat purchase ratio
Repeat purchase ratio is a straightforward metric that shows the percentage of customers that made more than one purchase with your company. Effective for products, subscriptions, and contracts, repeat purchase ratio is a reliable indicator of the success of your retention strategies.
Repeat Purchase Ratio Formula
Repeat Purchase Ratio = Number of Repeat Customers / Total Number of Unique Customers
To calculate the repeat purchase ratio, you need to choose a specific time frame, determine the total number of customers in the chosen time frame, and count the number of customers who made repeat purchases in that time frame.
Let's say during a quarter, you had 200 unique customers, and out of those, 50 customers made repeat purchases.
Repeat Purchase Ratio = 50 / 200 = 0.25 or 25%
In this example, the repeat purchase ratio is 25%. This means that 25% of the unique customers made repeat purchases during the quarter.
4. Customer retention cost
Customer retention cost refers to the expenses incurred by a business to retain existing customers and prevent them from switching to competitors. It includes various costs associated with customer retention strategies, such as loyalty programs, customer support, personalized marketing campaigns, and ongoing relationship management efforts.
Customer Retention Rate Formula
Customer Retention Cost = Total Cost of Retention Efforts / Number of Customers Retained
To calculate customer retention cost, follow these steps:
1. Determine the total cost of retention efforts such as marketing costs, loyalty program expenses, or customer support costs.
2. Identify the number of customers who remained with your business during the same time period. This can be determined by subtracting the number of customers lost from the total number of customers at the beginning of the period.
3. Divide the total cost of retention efforts by the number of customers retained to calculate the customer retention cost.
Here's an example to illustrate the calculation:
Let's say you spent $10,000 on customer retention efforts during a quarter, and you retained 500 customers.
Customer Retention Cost = $10,000 / 500 = $20 per customer
In this example, the customer retention cost is $20 per customer, indicating that it cost an average of $20 to retain each customer during the quarter.
Tips for Driving Customer Retention and Loyalty
To improve customer retention and loyalty, follow these tips:
Create a customer feedback loop
The best way to retain customers is to constantly gather feedback and resolve issues that might prevent your customers from making repeat purchases. The process of organized collection and implementation of customer feedback is called the customer feedback loop. If you have a system in place that prioritizes customer feedback and gives your employees clear guidelines on how to deal with it, you’ll be able to improve customer satisfaction and retention.
Optimize customer experience
According to PWC, 54% of consumers in the US believe that most companies need to improve their customer experience. Unsatisfactory customer experience inevitably leads to low customer retention rates, no matter how successful your acquisition efforts are. By mapping out customer touch points and ensuring consistent customer experience, you can retain customers and get a competitive advantage.
Boost speed and convenience with AI
Regardless of industry, customers want speed and convenience. While some touchpoints require human contact, others can benefit from automation. For example, you can use customer service AI such as chatbots and virtual assistants to reduce waiting times and let your support team provide personalized assistance to valuable customers with complex issues.
Customer Retention Analysis
Customer retention analysis involves analyzing customer behavior, purchase history, interactions, and other relevant data to gain insights into customer retention rates and potential areas for improvement. By analyzing customer retention, businesses can identify key drivers of customer loyalty and customer churn, prioritize improvements, and adapt their customer retention strategies.
Customer feedback analysis is a key component of customer retention analytics. With tools like sentiment analysis, you can find what your customers love the most about your product and what may cause frustration and churn. Constant feedback analysis is essential, and it doesn’t have to take up a lot of time and resources. With Essense, all you have to do is link your feedback sources and set up recurring reports. After that, you can start leveraging customer insights to make data-driven decisions and improve customer retention.