Customer retention measures what percentage of your customers stay with your business over time.
It’s essentially your brand’s ability to turn customers into repeat buyers without them churning or switching to a competitor. Focusing on retention helps you form lasting relationships with your customers so they spend more money and become loyal to your brand. Plus, selling products or services to existing customers is easier and less expensive than acquiring new ones.
Fortunately, customer retention isn’t that difficult or time-consuming. You can start boosting your retention rates immediately by making some minor, low-cost adjustments to your strategy—and that’s exactly what we’ll cover in this guide.
How to Calculate Your Customer Retention Rate
Customer retention is calculated over a set period of time, such as annually, quarterly, monthly, or weekly. Once you’ve determined the time window you want to focus on, you just need three pieces of information to calculate your customer retention rate:
- Number of existing customers at the start of the time period (S)
- Number of total customers at the end of the time period (E)
- Number of new customers added in the time period (N)
Customer Retention Rate (CRR) = [(E – N) / S] x 100
Let’s say you want to calculate CRR for the calendar year. For this example, we’ll assume you started with 1,000 customers on January 1, added 200 new customers during the year, and ended with 650 customers on December 31.
Using our formula for customer retention, the calculation would look like this:
[(650 – 200) / 1000] x 100 = 45%
Always remember to subtract the new customers you acquired during the measurement period (N). This is something that many businesses forget, which ends up throwing off the data. Those customers will be included when you calculate your CRR for different periods, like monthly or quarterly.
Other Customer-Centric Metrics to Keep an Eye On
Beyond retention, here are a few other closely-related KPIs to help you better understand your relationship with your customers.
Repeat Purchase Rate = (Number of Returning Customers) / (Total Number of Customers)
Measuring repeat purchase rates helps identify which percentage of customers buy again after their first purchase. It’s important to keep an eye on this metric because repeat buyers are ultimately more valuable and more likely to make larger purchases.
Revenue Churn = (MRR Lost in a Time Period) / (MRR at the Start of the Time Period)
Revenue churn goes a bit deeper than your churn rate (which is just the opposite of your retention rate). With revenue churn, you’re looking specifically at how the loss of customers impacts your bottom line with monthly recurring revenue (MRR). This is invaluable information for subscription services, membership models, and SaaS businesses—as it adds much more context to your churn rates.
Customer Lifetime Value (CLV) = (Average Order Value x Repeat Purchase Rate) – Customer Acquisition Cost
Also referred to as LTV, the customer lifetime value measures how much profit your business gets from the average customer throughout their entire lifecycle. There are lots of different formulas for CLV—some simple and some a bit more complex (this one falls on the simpler end of the spectrum). Always try to account for your costs of acquiring the customer when calculating this metric because it helps add more perspective to your ROI.
Noteworthy Experiences Lead to Customer Retention—Here’s How to Ensure It
The key to boosting retention rates starts from day one, even before the customer first converts. Positive experiences at each stage of the purchasing process can impact whether or not you succeed in retaining that customer. From deciding what to buy through onboarding and ongoing support—experiences play a huge role in whether a customer will do business with you again.
These basic elements below must be in place before you start spending tons of money on lead generation or customer acquisition. If you can make people feel confident that they’ve made the right purchasing decision, they’ll remember it.
Build Trust and Transparency
Make sure all of the information on your website is accurate and up to date. Be honest about your products and services, and don’t over-promise something that can’t be delivered. Outline exactly what the buyer should be expecting when they purchase something from you.
Don’t delete bad reviews. Customers expect some people to have negative experiences with your brand, and that’s totally fine. But if they only see five-star reviews, it often feels a bit fishy. Even worse, if a customer who wrote a bad review sees that you’ve deleted it, it’s unlikely you’ll get their business again.
Just think about the things that make you NOT trust a brand when you’re shopping for a product or service—then avoid doing those things for your business.
Seamless Buying Experience
The buying experience should be as easy as possible. This holds true for both in-person and online sales across every industry.
The fewer obstacles you create for your customers, the more willing they’ll become to buy your products again and again. Smooth out the checkout process, add links to related products on your product pages, and send regular emails about new or on-sale products.
Don’t force people to fill out long forms with unnecessary information. You don’t need their mother’s maiden name or their birth city to sell them a jacket.
Friction-Free Customer Onboarding
The onboarding process covers each step a customer takes to get set up and begin using your product. It covers everything from the initial sign-up and purchase through its activation and first use.
Similar to the buying experience, the onboarding needs to be just as seamless—if not more.
Try to deliver value immediately during the onboarding process, and don’t overwhelm people with things they don’t need to get started. Even if you’re selling a complex piece of business software, aim to onboard the customer in a matter of seconds. You can always provide them with additional resources and tutorials later on.
For example, allowing customers to create an account using their Gmail or Facebook credentials means they can sign up with just one click. Something easy like this can significantly cut down the requirements to get started and eliminate potential frustrations on day one.
Anytime Customer Support
Your customers should be able to get help 24/7. Whether they’re having a problem or just need a question answered, you can offer support through a combination of live chat, phone, email, or self-service. The more, the better—just make sure you’re actually doing it well.
You need some type of centralized support system to monitor, track, and respond to everything in one place. This ensures that if one person reaches out via email but another reaches out through social media, neither gets overlooked.
Offering and promoting phone support is an excellent way to improve the customer experience. It’s super easy to set up a virtual call center just by getting a basic business phone system that can be deployed remotely from anywhere with an internet connection.
So even if you’re small and don’t have a team of dedicated phone reps, you can still offer phone support and even supplement it with self-help tools like interactive voice support (IVR).
An Open Line of Communication
Your customers want to feel heard. So make it as easy as possible for them to provide feedback and voice their opinions.
Feedback is a good thing. The vast majority of the time, customers who submit feedback aren’t complaining or done with your business for good. They’re simply suggesting things that would improve their experience—which is exactly what you’re trying to accomplish in the first place.
Businesses spend countless hours and dollars just trying to figure out ways to improve the customer experience. But by keeping an open line of communication with your customers, they’re handing you the answers on a silver platter.
Now it’s just a matter of actually listening to what they’re saying and implementing the suggestions (within reason).
Continuous Iteration and Improvement
Providing noteworthy experiences is not a one-off initiative or set-it-and-forget-it strategy. It’s an ongoing and never-ending process.
There’s always room to improve on it. So continue to observe, iterate, and improve on all of the factors mentioned above.
For example, you may start by only offering live phone support Monday to Friday. But after a few months, you realize you’re getting tons of inbound calls over the weekend. So you may want to reconsider your availability during those days.
What’s Next? 9 Customer Retention Strategies to Raise the Bar Even Higher
You shouldn’t focus on any of these strategies below until you’ve nailed the elements discussed above. But once you have all of those in place and you’ve built a solid process for continuous improvement, the tactics below will help you take retention to the next level.
All of these strategies are low-cost and easy to implement.
1. A/B Testing
There’s nothing wrong with making an assumption. But if you never test that idea, how do you know if you were right?
A/B testing is the answer. Let’s break it down.
You might hypothesize that sending out weekly emails to existing customers with in-depth content will increase customer retention rates. You create an email drip campaign for that purpose and start it.
Maybe your customer retention rates increase. Maybe they don’t. But what if you could do better?
To challenge yourself, create another email drip campaign for half your audience. Send those emails out every two weeks instead of every week. Compare the difference.
You can also do A/B testing on your site. Maybe you use a related products plugin to suggest more items for customers to buy. You could A/B test the placement of that widget to see which layout results in more conversions.
Check out our favorite A/B testing solutions to learn more about them or snag a Crazy Egg free trial to try it for yourself.
2. Create a Customer Loyalty Program
Loyalty programs seem simple, but they can have a huge impact on customer retention. If your customers know they’ll be rewarded for returning to shop at your online store, they’ll feel compelled to do so.
You don’t need a complicated or fancy rewards system, and you don’t need expensive rewards for people who “level up.” Just make sure you offer something of value.
3. Use Upsells and Cross-Sells
Upselling and cross-selling are fantastic ways to bring customers back to your business. Customer retention often relies on your ability to offer an even more fantastic opportunity than the one that got those customers to convert in the first place.
Upselling involves inviting your customers to try out a more expensive product or service. They’ve already been introduced to your business, so they know what value you provide.
Cross-selling means inviting customers to purchase related or complementary products to the ones they already own. It’s kind of like the sales associate at the clothing store who says, “Oh, those pants are a great choice. We have some comfortable socks to go with them. Can I show you?”
4. Map Out the Customer Journey and Look For Ways to Improve It
The route from prospect to customer isn’t always a straight line. In fact, it’s more likely to take lots of unexpected curves. If you’re gathering data about how people interact with your website and business, however, you can anticipate their customer journey toward converting on a purchase.
Start with these questions:
- How did people become aware of your business?
- Do they track down your articles via Google search?
- Are they following you on social media?
- Do you get lots of referrals?
Once you know that, you can figure out how they make their decisions. Focus on lead acquisition so you can get prospects’ contact information and market to them more effectively.
Then analyze what convinces your customers to buy. Once you understand the customer journey, you can optimize each stage and improve customer retention in the process.
5. Surprise People in a Good Way
If you do something nice for your customers, they’ll remember it and come back for more. Think about how you’ve experienced this while interacting with different businesses.
It’s like when the baker throws a 13th doughnut into your box of one dozen. Or when you get a 20% off coupon emailed to you on your birthday.
These surprises don’t always have to be expensive or crazy. Just anything that keeps your customers loyal and happy. It could be a free upgrade, a new feature release, or maybe you’re automatically moving customers to the next tier of your loyalty program to start the new year—even if they fell shy of the program requirements.
6. Improve Your Documentation
For any product or service, the instructions for using it should be crystal clear. Plus, if you have excellent documentation, it will significantly cut down on your customer support inquiries.
Some products are pretty self-explanatory. But this is really important for any type of software product or SaaS.
How does someone add a new song to their playlist? How do they import data from a spreadsheet into your software?
You should have a searchable and easily accessible knowledge base with quick and simple answers to these types of questions.
7. Produce a Great Unboxing Experience
First impressions matter.
You might have an amazing product. But if it’s haphazardly thrown into an unbranded brown box with a few packing peanuts, it’s not going to “wow” anybody.
Instead, aim to create an unboxing experience that aligns with your branding strategy. Use custom branding. Include a free sample. Small touches can add a sense of luxury or prestige to a product that’s otherwise unchanged.
“Unboxing” applies to virtual products and services as well. Even though there’s nothing tangible, you can apply these same concepts to your onboarding flow, welcome emails, and anything else the customer sees the first time using your product.
8. Lean Into the Demand For Convenience
The demand for convenience has never been higher. That’s why people are happy to spend an extra 25% to have food or groceries delivered to their door, instead of driving a mile down the street to get it themselves.
Ask yourself—how can you make things more convenient for your customers? There are dozens of examples to consider here.
Here’s one. Think about what’s convenient for someone when they need a question answered. Looking up your email address online, then opening up their email tool, copying and pasting your address, writing a message, then waiting a day for a reply. There’s nothing convenient about this.
Picking up the phone and dialing your call center is much more convenient.
You can even take this one step further. Waiting on hold or being transferred to multiple people? Also not very convenient. Set up an IVR so customers can get routed to the right department. Or if you have a high volume of inbound calls, your call center can use ACD (automatic call distribution) to quickly route inbound calls to the next available agent.
9. Reconsider and Reassert Your Value Proposition
Perceived value is almost as important as actual value. Your customers have to see your business as the ultimate solution to a problem.
For instance, corporate social responsibility has become a primary focus for many companies. Subscribing to green practices and engaging with the community don’t contribute to a product’s or service’s actual value, but they add to perceived value.
Your value proposition should convey what you believe and why you’re in business.
