In the vast ocean of performance metrics available to business owners, one particular measurement is somewhat neglected when compared to more “obvious” indicators, like acquisition costs or raw sales. Retention rate, which is related to churn rate, is a curious creature that’s a little tough to calculate customer norms in retention because there’s no real industry standard for measuring it. On top of that, the different variants that can be calculated can confuse anyone who’s used to hearing about the basic formula. However, knowing how to calculate customer churn and retention will provide you with valuable insights about how your business is doing that might not be immediately apparent from other figures. As a marketer, you may not immediately realize this, but retention rates are directly tied to your marketing budget. We’ve touched on this aspect of retention in our post, why your clients are churning if you’re interested in learning more on that. Today, we look at the importance of retention strategies and the steps you have to take to get a pulse on this important metric.
What is a Retention Rate?
Customer retention rate isn’t the most intuitive metric, as it takes a look at customers you’ve lost rather than the customers who are helping you and buying from you, but as the saying goes, a penny saved is a penny earned, a customer saved is a customer gained, even if the gain comes from an existing customer.
Customer retention rate refers to the percentage of customers who continue to do business with you over a given period of time, compared to those who stop doing business with you. The related term churn rate, in turn, refers to the proportion of customers who have stopped doing business with you over a given period. In effect, if you want to know how to calculate churn rate, it’s pretty much the inverse of retention rate. Because it relies on products and services that allow for observable repeat business, customer retention rate is especially useful when talking about subscriptions with regularly recurring fees.
However, retention rates aren’t just for subscriptions. Any business can benefit from understanding how loyal their customers are, and what they can do to improve their own standing in their industry against the competition.
Churn Rate Formula
Customers Lost in a Given Month / Customers at The Start of Month
Customers Lost in a Given Month / Ending Customers in a Given Month (15 lost in August / 1050 Customers by End of August = 1.42% churn)
Retention Rate Formula
([X – Y] / Z) x 100
In other words,
Total Customers at end of the month – Customers Gained that month ÷ Beginning of Month Customer Count
1000 customers at end of month = X
50 customers gained that month = Y
1005 customers at beginning of month = Z
So let’s do the math.
1000 – 50 = 950 –> 950 ÷ 1005 = 94.5%
There are a variety of other metrics that can be very helpful in making retention calculations, such as the cost of acquiring a customer, or customer lifetime value (LTV), but we won’t go into these for now.
Why Should You Know Your Retention Rate?
Knowing how loyal customers are to your business can help you determine satisfaction with your products, the effectiveness of your customer service and customer success personnel, and the strength of your brand, in a way that can be quantified.
Brand loyalty is important because repeat customers are much more valuable than new customers. Data from several studies show that returning customers are as much as 70% likely to convert into paying customers, compared to just 5-20% for new customers. Customers also spend 67% more money on a business to which they’re currently loyal, relative to new customers. On top of all this, it costs 6-7 times more to get a new customer, than it does to sell to an existing customer.
Overall, combining all these figures, the numbers show that you can improve your bottom line by anywhere between 25 and 95%, just by improving your customer retention rate by 5%.
These numbers show that retention rate, tied as it is to brand loyalty, is an important metric to understand, and to work towards improving! If you need even more statistics to drive home the importance of retention, small biz trends put together a compelling list of statistics that further illustrate the importance of rention rates.
Determine a target retention rate for your business.
A good churn rate for most startups is 5% – per year! You might have heard a figure of 5% per month, but if you kept this up, due to compound effects, you’d end up with a horrifying 46% churn rate every year.
Every industry has its own average or acceptable annual churn rates. In 2017, the travel industry had a 15% churn rate, online retail had a 21% churn rate, retail had 27%, and cable had 31%. Do research within your industry to figure out what a good target is, and of course, also look into your own metrics and financial targets.
The question of how you can improve your retention is basically the same as, “How can I improve customer loyalty?” There are some measures you can enact at every step of the buying process to help keep customers coming back.
Reassure customers of their purchase
You can start reinforcing your churn rate from the very moment a new customer comes on board. Send them emails about your product, including case studies and success stories, as well as feature breakdowns. You may also include a free trial or promotions. These will help bolster a customer’s confidence in their purchase of your products and services and will not only strengthen the chance of the first sale but also help promote repeat business.
Implement a loyalty program
One of the quickest ways to ensure customer loyalty is to incentivize repeat business. You can provide your customers with loyalty points and discounts on future purchases, the loss of which represents a switching cost if they decide to take their business elsewhere. You need to balance the rewards you offer against the value of retaining these customers, of course, so it’s not as simple as throwing money at the problem. Keep in mind that you can also provide incentives for them to further engage with you through social media shares and referring others.
The more positive interaction with your company, the better.
Provide returns, warranty, and great customer service
Aftersales support is a huge component of retention. After all, if someone buys a product from you and it turns out to be defective, if they can’t conveniently and quickly have their item replaced, they’re not going to come back! On top of that, interacting with customer service must be as easy and helpful as possible, so that customers are assured that if they have a problem, they’ll be attended to promptly and effectively.
Engage with your customers
Customer engagement correlates to retention, as sometimes all they need is a little reminder or nudge to keep buying. Send reminder emails and discounts to customers who haven’t bought anything in a while, and inform your mailing list of deals that they’d like to see.
Having high retention rates isn’t a magic bullet that represents success in business. It could simply mean that you offer a unique selling proposition that other companies haven’t yet exploited, or that competition is currently weak and budding. That halcyon age of brand loyalty has come to an end, and consumers are more discerning than ever. You need to constantly measure your churn and retention rates and be ready to pounce on problems as they arise. You need to start planting the seeds of loyalty long before your customer purchases your product.
It’s a great thing to simply have superior products and services on the market, relative to other offerings, but that alone isn’t enough. You need a solid marketing strategy designed to uphold your leadership position and make sure customers keep coming back for more.