The What, Why, and How behind Customer Retention

- Haasshim

August 21, 2021

Loyalty plays an important role in the world of business. There can be no compromises to brand loyalty in your company. You can create a killer product but without reliable customers, you are planning for the product’s failure beforehand. The communication between your product and the customer is crucial for the customers to showcase their loyalty to your company.
“Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves” These are famous words by Steve Jobs, the mastermind behind Apple who are currently worth $2.08 trillion. Customer loyalty is extremely vital for a company’s growth as seen by Apple’s sincere and loyal fanbase all over the world.
An important aspect behind gaining the loyalty factor among your customers is how well you retain them. This is because retaining a customer means to ensure they continue buying products from your company.
This factor of retention is important because it decides how well the company is seen by the customers. Let us now dive deeper into what and how customer retention is and the impact it has on a business.

What is Customer Retention?

Customer retention is defined as the process of reducing the amount of customer defections in your business. Customer defections are the attributes that are dissatisfactory for the customers like high prices and poor customer service. These defections can lead to losing your customers. Therefore, it is important to retain your customers for the longer run.
The goal of Customer Retention is to improve the relationship between the business and its buyers. A higher customer retention rate can be attained by providing perks and loyalty initiatives.

The most important part of customer retention is its lifetime. Customer retention begins the moment a consumer has contact with the company. It goes on till the entire lifetime of the relationship between the two. Hence, it is necessary to know that the first click on your online advertisement or the first phone call from a customer should ideally develop into a lifelong relationship with your company.
But does this mean gaining more customers is not important? Does it mean that customer loyalty is more important than new customers? We shall answer these questions and explain why Customer Retention is paramount for a business

Importance of Customer Retention

It is important to understand that customer retention does not only include satisfying existing clients but also gaining new customers. The reason customer retention is value is its more cost-efficient than gaining new customers.
Statistics have proven that companies spend five times less in retaining customers than gaining new customers. Additionally, it is 40% more easier to sell to an existing customer than to pitch your product and gain a new customer.

Loyal customers are also 50% more likely to buy a new product launched by you company. While customer acquisition is a vital part of the process of building a business, ensuring the retaining of these customers is just as important.
The numbers do not lie, and the numbers are heavily in favor of customer retention. It is also proven that increasing customer retention by just 5% can increase your marginal profits by 25%-95% which is a massive marginal rate for an up and coming business.

Another reason why customer retention must be taken seriously is the free marketing you acquire from the customers. Existing customers are more likely to put a word for your company among their circles and bring in new customers.
One must be well versed in retaining customers for their company in order to sustain in the modern market. The building up of a strategy that involves improving your customer retention rate is essential for your business to thrive.
We shall now see what goes into building the strategy behind customer retention and the formula that help in creating the strategy.

The Customer Retention Formula

There is a very powerful formula used to calculate customer retention.

It is a simple formula yet holds utmost values

The formula starts of with subtracting the new customers gained in the given time period from the total number of customers at the end of the given period. You divide this number by the customers you had at the start of the time period. Multiply this number by 100 to get the Customer Retention Rate.
An example of this formula would be if you had 10,000 customers at the start of measurement and gain 2,000 in the given period. Let’s assume you are left with 7,000 customers at the end of the period.
You subtract 2,000 from 7,000 to get 5,000. Divide 5,000 by 10,000 to get 0.5. Multiply with 100 and you are left with 50% which is a fairly good rate of retention. It is to be understood that higher the rate of customer retention, higher the profits you gain.
But what are the other metrics can affect and influence customer retention? Let us take a better look into the metrics behind customer retention

The Metrics behind Customer Retention

While playing hide and seek with your blindfold on can be the best way to play the game, business is not the same. Your company needs to have a logical understanding of your customer’s needs and satisfactions.

Customer retention metrics ensure your business sustains for a long period of time. Here are 5 important customer retention metrics one must understand clearly.
1. Customer Churn – The rate at which customers stop doing business with you. Failure to retain a customer leads to customer churn.
It is important to reduce customer churn rate.
Annual Churn Rate = (Number of Customers at Start of Year – Number of Customers at End of Year) / Number of Customers at Start of Year

2. Customer Lifetime Value (CLV): The measure of how much a customer will spend over the entire time of business. CLV must ideally be increased for better growth
CLV: Average revenue per user / Customer Churn

3. Customer Acquisition Cost (CAC): The cost for acquiring a customer. It should be less than CLV.
CAC: Total cost of sales + Marketing/number of customers acquired

4. LTV/CAC ratio: This is the golden ratio of business. Decides your overall growth. It should be high.
Ratio = LTV/ CAC

5. Loyal Customer Rate: The number of customers who make additional purchases divided by total customers gives loyal customers rate. It must be high.
Loyal Customer Rate = Repeat Customers / Total Customers

Knowing the metrics is important to improve your Customer Retention but there are other non-technical ways to increase your retention rate. Let us look into how we can improve customer retention.
How to improve Customer Retention
There are a few ways a business can appeal to their audience and understand them better.
1) Customer personalization can help a company immensely. Consumers yearn for a personalized experience with the company. They choose their loyalty depending on the experience they receive. Therefore, it is vital to provide personalization in return for consistent and loyal consumers

2) Customer segmentation helps in understanding different demographics of your audience. A demographic segmentation can help you in tuning your message depending on the segment of people. This can provide better customer loyalty and awareness for the company.

3) Customer insights are extremely valuable for a company. Getting feedback from your audience helps you understand where you are going wrong and how to change it. This also helps in providing a personalized experience for the customers.

Drive your Business to Success with Loyalty

We have proven that customer retention is undoubtedly one of the key factors that go into building your business. The advantages customer retention can provide will keep you ahead of the curve. Your existing customers are extremely important for your growth. Keeping them should always be the priority.
Understand the points given above and implement them wisely to retain your customers and keep your audience till the end.

We hope you understood the importance of customer retention and loyalty. Start your company the right way and develop your audience organically.

You have a company to develop and Enalito can help you with that