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What is customer retention? 9 Proven strategies to keep customers

Last updated

15 February 2023

Reviewed by

Miroslav Damyanov

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Although casting a wide net may work wonders for fishing, it cannot do the same thing for businesses. After all, it is impossible to keep a company afloat with one-time clients alone. You need repeat customers because they spend more money and are easier to sell to.

Today, we take a deep dive into customer retention. Read on to explore the benefits of customer retention, top customer retention metrics, and the best strategies for ensuring your customers stay loyal.

Customer Retention – What is It?

Customer retention is the process of engaging your current customers to keep on purchasing your products or services. Companies leverage different tactics to ensure their first-time clients become repeat shoppers. Therefore, customer retention lets businesses increase customer profitability while maximizing their lifetime value.

Put simply, customer retention is all about convincing an existing customer to keep on buying your products or services. Because this consumer has already purchased in the past, it is different from customer acquisition and lead generation. Instead of focusing on capturing the contact information of people likely to buy your product or service, you strive to build customer loyalty through product value and excellent customer service.

Why Businesses Need to Focus on Customer Retention

Acquiring new customers is key to ensuring the future growth of your company. However, the acquisition should never come at the expense of your current customers. Here is an in-depth look at the top four reasons why your business needs to focus more on customer retention:

Increase Profits

Your loyal customers purchase more frequently and in greater quantities than new customers. Therefore, focusing on customer retention will help increase your sales which translates to more profits.

According to The Harvard Business Review,  a simple 5% increase in customer retention produces more than a  25% increase in profit.  This is because existing customers know the value of your service or product. They will, therefore, keep coming back to purchase from you over and over again.

More Cost-Effective

Focusing on selling more to existing customers helps reduce your costs. Typically, marketing costs are higher when targeting new customers. Your business has to increase exposure and content marketing, which is rather expensive and time-consuming.

Instead of increasing your advertising and marketing budget, focus on offering excellent customer service to your existing clients. They will stay loyal to your business without needing you to break the bank. Equally, existing customers are more likely to refer their friends and family.

Fosters Better Relationships with Brand Ambassadors

Repetitive customers tend to become brand ambassadors. They are more likely going to market your product or service to their friends and family. Loyal customers feel good when talking about the quality of service your business provides. Equally, people tend to respect the opinion of those close to them.

Focusing on client retention includes building long-lasting relationships with your customers – which includes brand ambassadors. They will feel like part of the business family, which makes them more effective word-of-mouth marketers for your brand.

Rectify Faults with Your Company Procedures and Policies

Loyal customers are an excellent reference point for making company policies and procedures. Unlike unhappy first-time customers who vent online, loyal customers offer you their honest opinion. You can, therefore, make the necessary changes to improve your company policies or procedures.

Repetitive customers want your business to succeed just as much as you do. They are invested in the company's progress and will tell you what they think you can do better. Finally, they will try to keep everything private which helps maintain your brand reputation.

When Should I Focus on Customer Retention?

Every business should implement strategies to retain its customers from day one. For starters, gaining new customers is a time-consuming and costly process. Therefore, keeping these customers will ensure you get valuable returns from your investment.

Give every customer you acquire a reason to keep coming back. Therefore, you have to establish a customer retention strategy right from day one. Doing this will also help you build consumer trust and establish you as an industry leader.

How to Calculate Customer Retention Rate

The customer retention rate (CRR) is used to measure the number of customers that a particular company has retained over a specific period. It is expressed as a percentage of customers that remain loyal to the business within that time frame. For instance, a company that loses three customers from the ten they started the year with has a retention rate of 70%.

However, the customer retention rate entails a bit more than that. Remember you have to account for any new customers that the business acquired. Here is how to calculate the customer retention rate to get you started:

  • First, determine the study's time frame

  • Next, know the number of current customers at the beginning of the period (S)

  • Then, find out the total number of customers at the end of that period (E)

  • Finally, determine how many customers were acquired during that period (N)

Now that you have the above data, plug it into the customer retention formula:

[(E-N)/S] x 100 = CRR

Different industries have a wide range of retention rates.

Top Five Customer Retention Metrics that Every Business Should Track

Customer retention metrics are precise measurements that help you understand your customer retention rates. These metrics offer insights into the overall performance of your business when it comes to retaining existing customers and identifying areas that need improvement. Below are the top five customer retention metrics that your company needs to keep track of in 2023:

Repeat Customer Rate

The percentage of clients that do business with you after their first purchase is known as the repeat purchase rate. The formula for calculating this rate is given as the number of return customers divided by the total number of paying customers.

You can go further and calculate the loyal customer rate. It measures the number of consumers who made more than two purchases. However, the number of transactions that a customer needs to make to become a 'loyal customer' remains at your discretion. Although the formula stays the same, the number of customers is relatively smaller.

Purchase Frequency

The number of times customers buy your products or services within a specific period is known as the purchase rate. It helps you better understand your customer buying behavior and customer retention rate. The formula is as below:

Number of orders / Number of unique customers

Primarily, purchase frequency is calculated by averaging the number of orders per customer. If your purchase frequency is low, you can improve it by initiating a rewards program, starting remarketing campaigns, and investing in personalization.

Average Order Value

This is the average amount of money that customers spend each time they purchase something from your business. The Average Order Value (AOV) sums up all orders and revenues generated within a particular period. The formula for the calculated average order value is given below:

Total revenue / Total orders = AOV

Understanding your average order value lets you establish proper pricing policies. You will also find it easier to maintain the ideal inventory levels for your business. Finally, you can establish the quantity of product to have and the best possible price for your customers.

Customer Lifetime Value

Abbreviated as LTV or CLV, customer lifetime value measures the amount of profit the average customer brings to the company over their lifecycle. LTV formulas range from simple to complex, with most of them trying to account for the costs associated with retaining and acquiring customers.

The basic formula for calculating customer lifetime value is given as (average order value x repeat purchase rate) – customer acquisition cost.

The CLV points out whether your business needs to invest more in acquiring new customers or retaining existing ones. You can always boost your CLV by investing more in customer loyalty programs, encouraging existing clients to buy more, and improving customer satisfaction.

Note that you can decide to spend more on customer acquisition if you have a high CLV.

Churn Rate

This is the rate at which customers stop purchasing your products or services. Whether a consumer has decided to opt-out or end a subscription, a churned customer is one you failed to retain. The formula for calculating the churn rate is given as:

[(Number of customers at the beginning of the period (e.g., year) – Number of customers at the end of that period (e.g., year) / Number of customers at the beginning of the period (e.g., year)] x 100

However, losing a customer is natural to some degree. After all, consumers tend to undergo major changes like bankruptcy. But you should be concerned if you have a churn rate of more than 7% because it likely means your customers are unhappy.

9 Effective Strategies for Customer Retention in 2023

Your business needs to implement the right strategies to improve customer retention, reduce customer acquisition costs, and slow customer churn. Therefore, you can strengthen your customer relationships by ensuring every customer feels like an integral part of your business, and not numbers on a page. Below are the top nine customer retention strategies every business needs to implement in 2023.

Create a Strong Onboarding Process

A good consumer experience starts with a seamless onboarding process. For instance, an auto-login right after a purchase can do wonders for your company. Rather than having to sort through hundreds of emails to manually enter login details, your consumers get redirected to the member page instantly.

It will also help to create a solid welcome or onboarding email. Let your customers know that they are an integral part of your business. However, ensure it is individualized and hands-on to help remove as much friction as possible.

Offer Personalized Customer Experience

An excellent way to boost customer retention is through personalized customer experience. However, you need lots of data to do this. Start with collecting customer insights through reviews, surveys, and purchase patterns.

Next, create consumer profiles and execute personalized customer experiences through messaging and deals. You are in the best position to give your customers what they need when you know their pain points. Doing this ensures they return for more transactions which also gets you their loyalty.

Build Customer Trust

Unlike what most people think, customers that buy from you do not necessarily trust your business. For starters, trust takes time to build. Therefore, you need to constantly focus on building trust between your customers and your company.

The first step to earning and keeping trust is delivering on your promise. It will also help to maintain transparency with customers at every given time. Over time, your customers will learn to trust you and perceive your business as honest.

Ask for Customer Feedback

You must find out why customers may be cutting ties with your business. Knowing the real reasons behind this will help you correct them quickly. However, how do you get the answers you need? Well, you need to implement a customer feedback loop.

Having the right customer feedback tools lets you identify consumer happiness trends. Consider asking your customers for qualitative feedback to help you better tailor your product or service to suit them. For example, Uber lets customers rate their drivers and add specific comments.

Keep a Comprehensive Record of Communication

Your company culture and business practices help with retention. However, another great way of achieving this is by adopting a CRM that prevents disruption in personnel changes. You get to store all your phone calls, notes, meetings, and personal customer preferences.

Keeping a record of communication makes it easy to relate better with customers. Employee change will not affect your relationship with existing customers because you have their complete history. Doing this also helps you build brand loyalty and trust.

Send Company Newsletters

The simplest way of retaining customers is through a company newsletter. It is a cost-effective method that lets you enhance your notability and reputation. You can leverage email automation to keep customers informed on offers and updates.

Newsletters have the power to remind your customers that your company exists. It also lets you showcase your company goals and values.

Invest in a Customer Education Program

You must send informative or educational content to consumers immediately after they make a purchase or sign up for your service. Doing this educates them on your products and ensures they understand how to use them properly. Therefore, they can derive true value from your products or services.

Consider an educational email that contains basic instructions on how to use the product or service. You could let your consumers discover all the problems your product or service can fix for them. Doing this ensures your consumers keep on purchasing your products and services.

Provide Unique Services

Offering a superior product will keep customers coming back. Therefore, you need to ensure your consumers get value from their money whenever they make a purchase. Doing this will ensure they see your product or service as being superior to those from competitors.

Start by thinking of unique customer pain points that your product or service is in a unique position to solve. For instance, can you automate a process that every other company is struggling with? Doing this will ensure your current customers commit to your brand and perceive you as an industry leader.

Implement a Customer Retention Program

Every business needs to create a customer retention program that best suits them. There are numerous types of tactics to choose from depending on your unique business and customer needs. Some of these strategies include the following:

  • Get to know your  customers through customer research

  • Capitalize on social proof

  • Use surprises

  • Use referral programs

  • Leverage gamification

  • Apologize for any mistakes

  • Using subscriptions

  • Offer customer support

Retaining customers ensure they act as brand ambassadors for your product or service. Equally, it ensures your consumers derive the most value from what you have to offer. Soon enough, you will build a community of customers that connect positively with your brand.

The Bottom Line

Customer retention is a critical component to the success of your business. Whether you invest in building customer trust, offering unique service, or sending company newsletters; these steps help you improve customer experience.

However, you need consumer data to implement the right customer retention strategies for your business. Luckily, Dovetail can help you unlock the potential of research at scale. Ensure you reach out to us today to learn more.


Who manages customer retention?

Typically, customer success manages customer retention. It is a team tasked with delighting existing customers throughout the duration they are in business with your company.

What is the best way to retain customers?

Some of the best ways to retain customers include delivering outstanding customer service and providing gifts or discounts. It will also help to provide unique services, ask for customer feedback, and build customer trust.

What is a good customer retention rate?

Although businesses need to aim for a customer retention rate of 100%, this number is not realistic because it means you don't lose a single customer. The ideal number in today's business world would be somewhere around 35%. That being said, this varies widely by industry, so what is effective for your particular niche could differ from what is effective for someone else in a completely different category.

At the end of the day, it’s important to do your best in your own niche and only compare yourself to reasonable retention rates in your industry. However, it’s arguably essential to compete with yourself so that you can continue to improve each and every day. 

Why should I focus on customer retention?

Customer retention helps protect your bottom line. It is easier and cheaper to retain an existing customer than to acquire a new one. Customer retention also helps you measure brand loyalty and customer satisfaction.

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