We share quite a bit about acquisition but not enough about customer retention. Great marketing strategies aren’t as simple as driving more and more leads, it’s also about driving the right leads. Retaining customers is always a fraction of the cost of acquiring new ones.
With the pandemic, companies hunkered down and weren’t as aggressive at acquiring new products and services. Additionally, in-person sales meetings and marketing conferences severely hampered acquisition strategies at most companies. While we turned to virtual meetings and events, many companies’ ability to drive new sales was frozen solid. This meant that strengthening relationships or even upselling current customers was critical to keeping revenues going and the company afloat.
Leadership in high-growth organizations were forced to pay closer attention to customer retention if acquisition opportunities were diminished. I’d hesitate to say that was good news… it did become a painfully obvious lesson to many organizations that they had to shore up and strengthen their customer retention strategies.
Customer retention is extremely important to business success for several reasons:
- Cost-effectiveness: Retaining existing customers is more cost-effective than acquiring new ones. Acquiring new customers can cost up to five times more than retaining existing ones.
- Revenue growth: Existing customers are more likely to make repeat purchases and spend more money over time, leading to revenue growth for the business.
- Word-of-mouth marketing (WOMM): Satisfied customers are more likely to refer their friends and family to the business, which can lead to new customers and revenue growth.
- Brand loyalty: A high level of customer retention indicates that the business has built a loyal customer base that trusts and values the brand.
- Competitive advantage: Businesses with high customer retention rates have a competitive advantage over those without, as they have a steady stream of revenue and loyal customers.
What Issues Impact Customer Retention?
Several issues can impact customer retention, and some of the most important ones include:
- Poor customer service: Customers who experience poor service, such as slow response times, rude or unhelpful staff, or inaccurate information, will likely become dissatisfied and may leave the business.
- Product or service quality: Customers expect products and services to meet their needs and perform as advertised. If products are of low quality or services do not meet expectations, customers may look elsewhere.
- Lack of personalization: Customers appreciate personalized experiences, such as personalized recommendations, personalized offers, and personalized communication. Businesses that do not provide personalized experiences may struggle to retain customers.
- Price: Customers are often price-sensitive and seek the best value for their money. If competitors offer lower prices or better value, customers may switch to a different business.
- Competition: In a competitive market, businesses must work hard to differentiate themselves and stand out. If a business cannot compete effectively, it may struggle to retain customers.
- Changes in customer needs or preferences: Customer needs and preferences can change over time, and businesses must be able to adapt and meet these changing needs to retain their customers.
- Changes in decision-makers: Turnover is common in companies nowadays, and the decision-makers who chose your product or service today may not be there at renewal time. We often see a shift in technologies and additional services (like agencies) when there’s a change in leadership within the organization.
- Uncertainty: Economic or financial uncertainty can significantly impact renewals as your customers may seek to shed some costs. You must always provide feedback on the value you’re bringing your customers so you’re not at the top of the chopping blog.
Customer Retention Statistics
There are invisible costs that come with poor customer retention. Here are some stand-out statistics that should increase your focus on customer retention:
- 67% of returning customers spend more in their third year of buying from a business than in their first six months.
- By increasing your customer retention rate by 5%, companies can increase profits by 25% to 95%.
- 82% of companies agree that customer retention costs less than customer acquisition.
- 68% of customers will not return to a business after having a bad experience with them.
- 62% of customers feel the brands they are most loyal to are not doing enough to reward customer loyalty.
- 62% of US customers have moved to a different brand in the last year due to a poor customer experience.
Calculating Retention Rate (Customer and Dollar)
Retention metrics should be a KPI in any business that is dependent upon renewals. And it’s not just the count of customers since not all customers spend the same amount of money with your company. There are two means of calculating retention rates:
Customer Retention Rate (CRR)
CRR is the percentage of customers you keep relative to the number you had at the beginning of the period (not counting new customers). To calculate customer retention rate, you can use the following formula:
Loading formula...Where:
- CE = number of customers at the end of a given period
- CN = number of new customers acquired during that same period
- CS = number of customers at the start of that period
Here are the steps to track customer retention rate:
- Determine the period you want to track. This could be a month, a quarter, or a year.
- Determine the number of customers you had at the start of the period (CS).
- Determine the number of new customers you acquired during the period (CN).
- Determine the number of customers you had at the end of the period (CE).
- Use the formula above to calculate your customer retention rate.
For example, if you had 500 customers at the start of the year (CS), acquired 100 new customers during the year (CN), and had 450 customers at the end of the year (CE), your customer retention rate would be:
((450-100)/500) x 100 = 70%This means that 70% of your customers from the start of the year were still with you at the end of the year.
Dollar Retention Rate (DRR)
DRR is the percentage of revenue you keep relative to the revenue you had at the beginning of the period (not counting new revenue). The formula is:
Loading formula...Where:
- Loading formula...$ARR_0&s=2$ is the Annual Recurring Revenue at the beginning of the period
- Loading formula...$ARR_1&s=2$ is the Annual Recurring Revenue at the end of the period
- Loading formula...$ARR_{new}&s=2$ is the Annual Recurring Revenue from new customers acquired during the period
- Loading formula...$ARR_{expansion}&s=2$ is the Additional Annual Recurring Revenue from existing customers (upgrades, cross-sells, etc.)
- Loading formula...$ARR_{contraction}&s=2$ is the Lost Annual Recurring Revenue from existing customers (downgrades, cancellations, etc.)
This formula calculates the percentage of revenue retained from the existing customer base, considering factors such as upgrades, downgrades, and cancellations. A DRR above 100% indicates that the additional revenue from existing custom
One way to calculate this is to segment your customers by a revenue range and calculate the CRR for each range. Many highly profitable companies can actually have low customer retention but high dollar retention as they shift from smaller contracts to larger contracts. The company is healthier and more profitable despite losing many small customers.
The Ultimate Guide to Customer Retention
This infographic from M2 On Hold details customer retention statistics, why companies lose customers, how to calculate customer retention rate (CRR), how to calculate dollar retention rate (DRR), as well as detailing ways to retain your customers:
- Surprises: Surprise customers with unexpected offerings or even a handwritten note.
- Expectations: Disappointed customers often come from setting unrealistic expectations.
- Satisfaction: Monitor key performance indicators that provide insight on how satisfied your customers are.
- Feedback: Ask for feedback on how your customer experience could be improved and implement the solutions with the greatest impact.
- Communicate: Continuously communicate your improvements and the value you bring your customers over time.
Merely satisfying customers will not be enough to earn their loyalty. Instead, they must experience exceptional service worthy of their repeat business and referral. Understand the factors that drive this customer revolution.
Rick Tate, Author of The Service Pro: Creating Better, Faster, and Different Customer
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