Why customer retention is important
Absolutely anyone who has worked in business would have heard the phrase ‘customer retention’ more than a handful of times. Often, in business, there are multiple discussions based on why customer retention is important, the benefits of customer retention, and likely an entire customer retention strategy. There may be meetings about new customers VS current customers. It is something that should be important in any business. This article should help you understand an overview of why it’s so important.
What is meant by Customer Retention?
Customer retention refers to the process of engaging or keeping current customers interested in your business. Whether that’s by continuing to buy your product or service or simply just being loyal customers. It means any strategies you may brainstorm to help you build and keep client relationships and keep current customers on board, even when bringing potential customers in too. Luckily, you can find plenty of examples online to help you and your business. Customer retention also refers to keeping a customer’s loyalty and trust: if a customer trusts the product and the brand, they are more likely to stick around and purchase again in the future – which is great for revenue.
What is customer loyalty?
Customer loyalty is an important part, but there is a difference between the two. Customer Retention refers to the company’s agility to gain repeat business from a customer, whereas customer loyalty goes beyond financial transactions – it also refers to customer satisfaction – for example with the service they get from your company, either by fantastic customer service or customer loyalty programs.
That being said, the two often come under the same roof: although they differ, customer loyalty is still an important part of the same strategy.
Why is customer retention so important?
First and foremost, it saves you money. 81% of customers trust recommendations from family and friends over those from companies, whereas a 5% increase in retention correlates with at least a 25% increase in profit [Source]. Basically, it’s cheaper to keep your current customers loyal than it is to devise a marketing plan or invest money to bring on new customers. A retention strategy also refers to keeping customers on board so they spend more at your business over their lifetime, whereas a new customer may make a one-off purchase. To grow your business sustainably relies on keeping loyal customers around for a long time, and the importance of customer loyalty has an impact on almost every metric that is important to running a business.
What is a retention process?
A retention process is a formula or strategy you use to keep your loyal customers returning back to your business multiple times. Like most things in business, it takes time and research to get the ideal process just right – and even then it can vary based on different customers.
A retention process usually involves collating a small team who will, first of all, evaluate everything they need to know about your business and it’s customers. They will calculate your current retention rate before brainstorming different strategies moving forward. A retention process also involves setting sales goals (based on your current retention rate, the percentage you aim to be at, the size of your customer base, and the type of product or process you sell). Then, you (or your dedicated team) will map the customer journey (for example, how a customer found your business and their behaviour leading up to making a purchase) before implementing their ideas.
Of course, this all falls in line with other areas of customer service: engaging with your client base regularly, offering loyalty programs and asking for feedback.
What are some customer retention rate formulas and strategies?
There are plenty of formulas and strategies to keep loyal customers on board for longer and which will benefit your business in the long run. Although it is recommended that you spend some time researching for a customer retention strategy that works for your company, there are some ideas we can share.
- Loyalty programs
A customer loyalty program is a great way to incentivize customers to keep coming back – a person always likes to be rewarded for their loyalty and this is key for customer satisfaction. A points system, subscription program, or even some form of an exclusive club is a great way to keep loyal customers. Tesco Clubcard is just one popular example of a loyalty program/club that keeps customers coming back time and time again: the more they spend in-store on products, the more they get back in terms of discounts or rewards.
- A company newsletter
When implemented correctly, a company newsletter can be very beneficial. An e-shot can send your customers company updates, special offers, and discount codes to encourage them to spend with the business. Setting up a newsletter is simple, but if you want to keep in mind the best ways to engage with your customers online – and improve their customer experience – it may be worth outsourcing to a company in terms of creating a full marketing plan.
- Referral programs
Referral programs offer further advantages as it encourages customers to refer a friend to your company – and rewards them at the same time! Again, the rewards could be free products or exclusive discount codes. If loyal customers refer a friend, this also brings further business to your company, without you having to put the hard work in yourself. This is a classic retention example that also brings in new service at the same time.
How do you calculate Customer Retention Rate?
Your retention rate is another way to look at how successful your company is at not only acquiring new customers but satisfying existing customer relationships too. Retention rates can be calculated in a variety of different ways, based on different time periods. Many companies choose to calculate either quarterly or yearly, but this may vary depending on what type of business you run or what formulas and strategies you are looking to implement.
Although it sounds complicated, the standard formula that most businesses use is this:
Customer Retention Rate = ((# Customers at End of Period – # Customers Acquired During Period) / # Customers at Start of Period) X 100
Once this reveals your rate, you can then evaluate this by discovering the reasons why customers might leave or look ahead to re-evaluating a referral program, for example, to get that percentage higher.
You can also use a free rate calculator here.
What is a good customer retention rate?
A good retention rate varies by industry, but, for the most part, the average rate is below 15%. On the other hand, in the media or finance industries, anything over 25% is deemed above average, to ensure you are reaching a good rate. The absolute ideal, is, of course, 100%: but it’s best to aim for something a lot more achievable, if even at first. There’s nothing wrong with aiming to hit a target of 10% higher by your next quarter – you could always expand this number (and these goals) as time goes on and more customers come on board.
How do you increase retention?
Going back to the previous question, it’s worth trying different strategies to see what works for your company. This means creating (or hiring) a team specifically in place for customer and business growth, who will work together to brainstorm and create different formulas – like the ones mentioned above. Once these are implemented, you should ensure you regularly evaluate your customer retention rate to see what is and isn’t working. Whilst some popular formulas may work for some companies, these specific methods may not be ideal for your loyal customers. That’s why it’s worth thinking outside of the box and putting research into different ways you can keep your customers loyal.
What are some customer retention examples?
Although the most popular formulas are things like loyalty programs or newsletters, tuning into your customer’s behavior and thoughts are also important things to keep in mind when you want to increase retention. You should aim to build trust through your client relationships, make use of customer feedback surveys and engage with your customers and consumers too. Some examples from successful companies include:
- Sharing your mission and brand story: when customers can relate to a brand, this often leads to them feeling a deeper sense of loyalty to the company.
- Educate and help customers: customers like to know a brand cares about them, even if it’s not an obvious financial gain for the company. Things like cheatsheets or free courses are some examples that can help educate and benefit your customers further. For example: you could offer a free cheat sheet or infographic on your website but then allow customers to sign up to your mailing list in return for free resources.
- Identify and engage with your target audience: it seems simple, but taking the time to really understand your customer and their thoughts and behaviours is essential to keeping your customer happy. No two customers are the same. Staying engaged with them, whether that’s via social media or picking up the phone to catch up with them often is also essential to raising your retention rate. Collate Systems offers a set of tools to help engage and retain customers across a wide variety of channels including email, text message, letter, LinkedIn, Twitter, Instagram & Facebook.
What are some further benefits of customer retention?
Other than the obvious: keeping your customers returning to your business to make further purchases, there are plenty more advantages. We’ve already discussed how it’s cheaper to look after your loyal customers than bring in new ones, and this also leads to the point that loyal customers are more profitable. On average, engaged customers buy 90% more frequently!
Loyal customers will bring in other potential customers through word of mouth and will often be willing to share helpful feedback more often. Once a customer is a regular consumer of your business, they’re also open to more change: if you want to bring in a new product or explore a different marketing process, you’ll find long-term customers will not only be open-minded to these changes but often excited about them too.
We all make mistakes
We all make mistakes. It’s just a part of life. Luckily, a customer you’ve had for a number of years will be more likely to accept and forgive these mistakes, especially if you’ve always treated them well. On the other hand, brand new customers may be less forgiving when their first point of contact with your team goes entirely wrong. This isn’t starting off in the right foot and may send that potential customer running in the opposite direction. If their first instance of you is a bad one, it’s going to be much harder to change their perception of your business than, for example, customers that have been treated well for years and experiences just a small mishap.
In conclusion, customer retention is extremely important for any business – no matter how big or small. Many new businesses tend to invest their time and money into bringing in new customers – and this is okay, especially if you’re just starting out and need to grow your customer base. However, it won’t be long before they start to realize that it’s just as important – if not more important – to take care of loyal customers. The benefits of investing in customer relationships are endless: not only is it better for your business financially, but it also ties into helping to bring in new customers through word of mouth and keeping your entire customer-base happy.
If you haven’t taken the time to invest in your retention strategy yet, why not? Hopefully, this article will leave you feeling like you understand the subject in further detail and help you put some measures in place to look after your loyal customers and grow that customer retention rate in 2021.