GuidesCustomer researchHow to improve your customer retention rate

How to improve your customer retention rate

Last updated

28 February 2023

Reviewed by

Miroslav Damyanov

Your customer retention rate (CRR) is one of the most critical metrics for your business. Retaining customers is at least as important as acquiring them in the first place.

In this article, we'll look at why customer retention is so important, how to calculate CRR, and guidelines for how to hold on to your customers.

The importance of customer retention

Any business obviously needs a steady stream of customers to thrive or even survive. We can identify two main categories of customers —new customers and returning ones. A vital fact to know is that it's far less expensive to ensure that your existing customers remain loyal than to acquire new customers.

Customer acquisition cost (CAC) is a basic metric that every business needs to know. If you engage in paid advertising, for example, it's crucial to know whether your campaigns are profitable. CAC varies depending on your industry and how you acquire customers (i.e., if you focus on paid advertising or lower-cost methods such as social media and search engine optimization). However, it's six to seven times more expensive to acquire a new customer than to retain an existing one.

In addition to saving money on CAC, retaining customers has additional benefits. A loyal customer is more likely to refer your business to others. Enthusiastic customers can become brand ambassadors who can contribute a great deal to your reputation. In addition to referrals, they may write positive reviews, share your content on social media, or discuss your products on their blog or video channel.

Recurring customers are also more likely to purchase your products or services in the future. In fact, the probability of selling to an existing customer is up to 14 times higher than that of selling to a new customer. Still another advantage of returning customers is that they tend to spend more than new customers. A study by Bain & Company found that American customers spent 67% more between 31 and 36 months than they did in the first six months of shopping.

How to calculate your customer retention rate

Calculating your CRR is a little more complicated than CAC. However, it's fairly straightforward if you take the following steps.

  • Decide which period of time you're measuring

  • Keep track of new customers you acquire during this period

  • Count the number of customers you have at the start and at the end of the period

For example, suppose you are measuring the period from January 1 to July 1. On January 1 you have 100 customers. During this 6-month period, you acquired 10 new customers but lost 5. So at the end of the period, you have a new total of 105.

Now subtract the new customers from the total, giving you 95. Then divide this by the number of customers at the start of the period. 95/100 = .95. Multiply this number by 100 to get your CRR. In this case, it will be 95.

CRR can vary depending on many factors, including economic conditions and seasonal fluctuations. You need to consider the particulars of your own situation when deciding which period to calculate.

What is a "good" CRR? It would be ideal to have a perfect CRR of 100%, meaning that you never lose any customers. This, of course, is not realistic. Customers' needs and preferences change over time. Some customers may move, which is relevant if your business is locally based. Others may die.

Most businesses try to maintain a CRR of 85% to 95%. You can research CRR for your industry, though it may be hard to find statistics on specific competitors. Your main goal should be to consistently monitor your own CRR and look for ways to improve it. 

Customer retention vs acquiring new customers

As noted, it's cheaper to sell to existing customers than to find new ones. This doesn't mean, however, that you should not also want to acquire new customers. As HubSpot points out, customer acquisition and retention should not be seen as mutually exclusive, as they are both important.

Other essential metrics to track

The simple formula for calculating CRR is useful for quantifying your customer retention rate. However, there are other metrics that are worth tracking for a more comprehensive understanding.

  • Churn rate — the percentage of customers you lose over a certain period. The formula for calculating churn rate, where B is the number of customers at the beginning of the period and E is the number of customers at the end of the period is  B-E/B x 100. 

  • Frequency of purchases — not all return customers are the same. Someone who orders from you weekly or monthly is more valuable than someone who only returns annually. It's worth creating multiple categories to differentiate the types of returning customers. This, of course, will vary based on your business model.

  • Order value — another metric that differentiates customers is the value of their orders. Calculating the average order amount lets you compare customers on a spectrum.

  • Average customer lifespan — the average amount of time between a customer's first and last orders. This type of metric will seldom be perfectly accurate, as some customers may leave for a time and then return.

  • Customer lifetime value – lets you measure the overall value of your customers over time. CLV is calculated by multiplying 3 variables: purchase frequency x average order value x average customer lifespan.

Best ways to improve your customer retention rate

Let's look at some of the most effective ways to improve your CRR.

Optimize customer service

Customer service is the most important factor when it comes to attracting return customers and building customer loyalty. Salesforce Research reports that 89% of customers are more likely to make repeat purchases if they have a positive experience with customer service, and 78% will continue to patronize a business after a mistake if they receive excellent service. HubSpot reveals that 68% of customers are willing to pay more for products if the company offers great support.

There are several actions that can improve customer service. Whether customers reach you via email, live chat, or phone, it's important that they receive timely replies. Customers also want to feel that they are receiving personalized attention. Make sure there's a process in place to resolve issues rather than just sending out canned replies.

Encourage repeat business with accounts and subscriptions

Signing up for an account gives customers a way to connect with you on a long-term basis. Offer an incentive to sign up, such as a discount on their next order and faster checkout. For some products or services, it makes sense for customers to subscribe. This includes software and digital services as well as many physical products such as health supplements and personal care items.

Signing up as a member can also be a way for customers to give permission for you to send them emails. Sending a newsletter lets you stay in touch, offer coupons and specials, and provide links to online content such as blog posts or videos.

Set clear expectations

If customers are disappointed or feel that a business hasn't delivered what was promised, they are unlikely to return. That's why it's crucial to be clear and transparent about what you're offering. Never make unrealistic promises just for the sake of making quick sales. It's always better to underpromise and overdeliver.

Solicit customer feedback

Asking for customer feedback accomplishes several things. It lets you collect valuable and actionable data that you can use to improve products and services. Sending out polls and surveys or posting them to your social media channels is a way to engage with customers and remind them you exist. They also indicate that you care what your customers think.

There are several ways to get helpful feedback from customers:

  • Engage in social listening  – In addition to monitoring comments on your own social media pages, keep track of topics relevant to your products and industry. 

  • Monitor your online reputation – This includes monitoring any review sites on which your business is listed. Negative reviews can't be avoided. However, you can pay attention to what customers are complaining about and look for patterns. In many cases, you can resolve issues by contacting the customer and taking appropriate action. 

  • Interviews and focus groups  – A focus group is useful during the initial stages of a research study. It can also be used to create a plan of action during research as well as after the completion of the study to establish the results. Interviews can be held in the exploratory stage or post-launch to get a general idea of what your audience thinks, believes, and needs.

  • Monitor customer behavior – It’s helpful to track what customers do on your website and social media pages. A heatmap is a useful tool that lets you identify exactly where visitors are spending the most time. Similarly, track which social media posts, videos, and other content get the most traction. These all provide clues on how to better serve customers going forward.

Watch your competition

Your competition provides valuable insights for understanding customer preferences. Even if you don't have access to your competitors' customer retention rates, you can find clues on their social media pages and on review sites.

Other businesses in your industry with similar target audiences can help you identify potential issues and problems. For example, if you notice that many people are complaining or praising a competitor's customer service, you should take note.

Create a loyalty or referral program

A loyalty program directly incentivizes customers to make more purchases. A common example is a coffee shop that rewards customers with a free beverage after 10 purchases. It's also used for higher-priced items, such as airline tickets.

A referral program rewards customers for new sign-ups. This is actually both a strategy for attracting new customers and keeping existing customers. If someone gets a discount or financial reward for signing up new customers, they have an incentive to remain active with you. There's also the psychological factor. When someone is acting as a brand ambassador, such as sharing social media posts or verbally recommending something, it reinforces their feeling of loyalty. Additionally, you get the benefit of new customers.

Offer customers several options

Customers are getting ever more demanding. They want and expect to have a variety of choices in areas such as ordering, paying, and shipping. A customer who finds it difficult to order from you or who doesn't like the options you offer may complete a single purchase but may not return.

Offer as many payment options as possible and the same with shipping. Some people are glad to pay extra for faster delivery. Of course, in the age of Amazon Prime, customers often expect fast delivery without paying extra.

Engage with customers on social media

Social media sites such as Facebook, Twitter, Instagram, and others give businesses a chance to interact with customers in a friendly and informal way. Of course, they can also be used for more serious purposes such as answering product and service-related questions.  Posting regularly to social media and engaging with followers helps to build stronger relationships with customers.

Offer personalization

Personalization gives customers a more relevant shopping experience and is another way to show them that you are attuned to their needs. McKinsey found that companies that offer personalization earn 40% more revenue than those that don't.

There are several ways you can offer more personalization:

  • Recommend relevant products

  • Publish content such as blog posts, videos, and social media posts that target different stages of the customer journey

  • Create targeted landing pages that cater to the particular concerns of each audience

  • Segment your email lists based on customer interests and buying history

Improving CRR takes time and consistent action

Every business that wants to succeed in the long term has to make an effort at retaining as many customers as possible. Boosting customer retention is less about a single quick fix and more about the overall experience you provide.

You need to prioritize customer service and listen carefully to customer feedback. Tracking metrics such as CRR, churn rate, and CLV can help you identify areas that need improvement.

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