Customer Retention Explained
Welcome to your official crash course in customer retention. After reading this blog, you’ll have a thorough understanding of what exactly customer retention is, how it impacts a brand's success, the key challenges associated with customer retention and how to go about solving them. You’ll learn some useful metrics when it comes to measuring customer retention and understand how to leverage software to make the most of customer feedback.
What is customer retention?
Customer retention refers to the rate at which a company is able to keep customers coming back for more. It considers strategies to turn customers into repeat customers, and decrease the number of people who churn (drop off or look for alternatives). High customer retention rates signify a business is providing an experience that resonates with customers, and means they are able to maintain their position as a preference over their competitors.
Focussing on customer retention is arguably a more efficient way to grow than focussing on acquisition. In fact, the cost of acquiring a customer is 5x more than retaining one. When companies get caught up trying to attract as many new customers, losing focus on the customers they already have, it can cost them big time.
How does customer retention impact brand success?
There are a few reasons why customer retention is vital to company growth and success:
Boosts revenue
Returning customers results in greater ROI over time than acquiring new ones. A 5% increase in retention leads to 25% - 95% increase in profit.
Reduces customer acquisition costs
A focus on customer retention saves costs. It decreases customer churn, creates brand advocates, drives word of mouth marketing and optimizes marketing expenditure.
Builds brand loyalty
In markets with an unprecedented number of competitive options, building brand loyalty is the key to creating a sustainable business. One of the most effective methods to cultivate brand preference (that is when a customer chooses your brand over another time and time again) is through focussing on customer retention strategies, such as customer experience. 87% of customers who say they had a great experience will make another purchase from the company, compared to 18% of customers who had a very poor experience.
Increases Customer Lifetime Value
Customer lifetime value (CLV) is the measure of total income a brand can expect from a customer for as long as that person continues to purchase the brand's products or uses their services. Retained customers buy more often and spend more than newer customers, meaning their CLV is higher.
What are the challenges of retaining customers?
Since 2016, customer retention loss has risen by 37% due to poor customer service. With the power in the hands of the customer and increasing competition, customer retention is becoming more challenging for service businesses around the globe. Some of the key challenges include:
Gaining customer trust
The erosion of consumer trust makes customer retention more elusive than ever. 55% of customers now trust companies less than they used to. When customers lose trust in a brand, the brand loses customer loyalty, referrals and growth.
Understanding customer needs
Knowing and understanding customer needs is at the center of every successful experience brand. However, customer needs and expectations are constantly evolving. Their preference one day, may be completely different to another. Staying on top of customer needs in a cost-effective and efficient way proves to be a difficult task for many service brands.
Meeting rising customer expectations
Customers are getting picky, and so they should! A 2020 study by Microsoft found that 54% of customers have higher expectations for customer service today compared to one year ago. Just one bad experience, and we lose customers in a heartbeat.
Maintaining customer satisfaction
Once we nail the first dates and honeymoon phase, how can we keep the spark alive? How can we continue to add value to the customer’s experience and encourage repeat business and referrals? It’s a challenge faced by almost every experience brand.
Building a customer-centric culture
Building a company culture where employees are highly motivated and inspired to deliver awesome customer experiences is no easy feat. One-off training and workshops no longer work. Customer centricity has to be systematically baked into a company’s DNA through customer feedback and frontline coaching.
Brand differentiation
In order to be a successful service company, you need to have a key point of difference. Why would someone choose you, over a competitor? In today’s saturated market with increasing competition, differentiating your brand from the rest is a struggle for many businesses.
Why do customers leave a company?
Before we look into how to increase customer retention and overcome the challenges above, let’s first take a look at the possible reasons why customers switch to a competitor.
Lack of perceived value:
When customers see a loss of value, they stop using the service. Period. There are simply too many alternatives for customers to persist using a brand they don’t feel like they’re getting the most value out of. Your job as a brand? Maximize value at every touchpoint in the customer journey.
Poor customer experience:
Customer retention is highly reliant on a brand’s ability to deliver an awesome customer experience. 1 in 3 customers will leave a brand they love after just one bad experience, while 92% would completely abandon a company after two or three negative interactions. It’s a tough reality: one bad date and you’re dumped.
Too much friction in the onboarding process
Customers expect streamlined, easy, personalized and enjoyable experiences. As soon as they run into friction on their customer journey, for example, long wait times, confusion around a product or service or an unfriendly frontline staff member, you decrease your level of customer retention instantly.
Tips for improving customer retention
We’ve talked a lot about the struggles of customer retention, and while it is one of the key challenges businesses today face, the good news is - there are proven strategies to improve it. It’s important to note that these retention management strategies only succeed when businesses can take a long-term approach, rather than a transactional one. Meaning, you can’t slap a plaster over the customer churn wound and carry on, you must make systemic changes that address the way a brand approaches business with their customers.
Understand customer needs and expectations
We’ve said it before and we’ll say it again, you can not have high levels of customer retention without having a deep understanding of who your customers are and what their needs and expectations are.
You can formulate customer personas which include demographic and psychographic information about your various customer segments. These paint a detailed picture of who your customers are, and act as a roadmap for delivering world class customer experience.
The most effective way to understand what your customers want and need is by getting direct feedback from them. What do your customers love the most about your business? What do they like the least? Would they recommend your business to a friend? Why? Why not? You can use a feedback tool to get these answers and get valuable insights into your customers and their perceptions of your brand in their own words.
Set clear expectations
A great customer experience is one that meets customer expectations. Too often, the expectations of the customer, doesn’t match up to the brand offering, which leads to customer churn. Setting clear expectations early in the customer relationship helps to avoid this disconnect, and increase levels of customer retention.
Setting a service promise is one of the most effective ways to set things straight between your brand, employees and customers. Your service promise tells customers what they can expect but, more importantly, it tells your frontline workers precisely what an awesome experience should look like. An experience so good that people will come back for more, and tell others about it.
Personalize the customer experience as much as possible
When customers receive personalized levels of service, they’re more likely to do business with you again. 80% of customers are more likely to purchase a product or service from a brand who provides personalized experience.
Personalized services provide a more relevant experience, enhance customer engagement and meet the rising customer expectations of tailored experiences. You can read about one awesome case of customer personalization in Charles Ryan Minton’s presentation at the Global Frontline Experience Summit. It involves fried pickles. Need we say more?
A data-driven personalized approach is imperative in boosting customer engagement, and engaged customers are less likely to defect.
Reward loyalty
Loyal customers are your biggest brand asset, so show them some love! Loyalty programs work by incentivizing and rewarding customers for returning to your brand. They can be as simple as a coffee stamp card, or a compounding discount system, e.g get a $10 voucher for every $200 you spend. This motivates customers to continue to support your brand instead of competitors.
Loyalty programs in action
Starbucks
The Starbucks rewards program is a great example of a successful loyalty program in action. While it’s common for service businesses to manage loyalty programs on an app, Starbucks was one of the first. The app streamlines the customer journey (no punch cards to forget or lose) and allows customers to earn points, or stars, in Starbucks’s case. To gain points, customers must pay with the app, which centralizes customer transactions and creates a goldmine of customer data.
Sephora
Sephora’s Beauty Insider rewards program is a hit among make-up and beauty lovers around the world. It boasts more than 25 million loyal members, and members make up as much as 80% of Sephora’s annual sales. Customers earn rewards for each purchase based on a traditional point system, but the fun part is that members can choose how to use their reward points. Giving loyalty members the flexibility to choose enables Sephora to put more choice and personalization in the hands of their customers.
Foster employee empowerment
There is a clear, undeniable correlation between customer experience and customer retention. Customers that have great experiences stay and continue to purchase from the brand. There is also a clear and undeniable correlation between customer experience and frontline employee experience. Employees that feel empowered, motivated and supported to deliver on your service promise are more likely to create experiences that make customers want to return and refer to their friends and family.
It’s a simple equation — Employee Experience → Customer Experience → Loyalty & Retention = Growth
You can use a frontline coaching tool, to help your organization align to a customer-centric company mission and improve customer service.
Follow up on customer feedback
Data collection and analytics that monitor and evaluate customer experience feedback can help support an increase in customer retention. Through collecting real-time customer feedback, you’re able to enhance the customer experience through the diagnosis of potential dissatisfaction and paint points.
Gathering customer feedback doesn’t have to be an overwhelming task. When you leverage technology and use a feedback tool, you’re able to receive customer feedback in real time, and connect it to the teams in your organization that need to hear it the most.
AskNicely customer NZHL, is an awesome example of how customer feedback can lead to customer retention and brand loyalty. The company was able to gain a 13 Point improvement in NPS from their bottom tier locations, an operation fuelled by customer feedback. The combination of happier customers, and an automated referral pipeline has seen a massive 7x increase in referrals for the entire year, which counts for $530k in revenue.
Useful metrics for tracking customer retention
How do you know if you’re getting it right? Here are the key metrics for measuring customer retention.
Note that dedicated customer retention software will automate calculations and reports for efficiency and convenience.
Customer retention rate
Customer retention rate measures the number of customers a company retains over a given period of time. Calculate retention rate with this formula: [(E-N)/S] x 100 = CRR.
Bear with - it’s less confusing than it looks.
Start off by gaining 3 simple bits of information:
- The number of existing customers at the start of the time period (S)
- The number of total customers at the end of the time period (E)
- The number of new customers added within the time period (N)
For example, if a company had 100 customers at the start of the period (S), ended the period with 100 customers (E), and added 10 customers over the period (N). They would have a customer retention rate of 90 percent: [(100-10)/100] x 100 = 90 percent.
Repeat customer rate
Repeat Customer Rate is the percentage of customers who have made at least two purchases during a certain time period.
To calculate the Repeat Customer Rate, simply divide the number of return customers by the total number of customers, and multiply by 100 to convert to a percentage. This can be calculated based on a variety of time frames such as daily, weekly, or monthly.
For example:
- Say you have 150 returning customers in a month
- Total customers in a month is 300
(150/300) x 100 = 50%
RCR = 50%
Purchase frequency
Purchase Frequency is the number of times that a customer makes a purchase in a given period of time.
To calculate Purchase Frequency, divide your total number of orders by the number of unique customers for the same time frame. Purchase Frequency is effectively the average number of orders per customer.
Using NPS
Net Promoter Score (NPS) is a method for measuring customer experience by asking one question, usually phrased like this: “On a scale of zero to ten, how likely are you to recommend us to a friend or colleague?” Based on your customers’ responses, you can place them into three categories: promoters, passives, and detractors (more on that in a moment).
Regular NPS surveys will boost your retention rates long-term, as when you understand how customers feel about you, you can determine if your current strategies are effective or not and adjust them accordingly.
You can get a full run down on NPS here, and use our NPS calculator here.
How can customer retention software help?
Quality customer experience software is designed to give you robust capabilities to make the most of your feedback (aka - make your life easier!) You can integrate your customer feedback tool with your CEM software tools to ensure a streamlined delivery of customer feedback for your team.
Better data leads to better customer retention
Companies with the best data, have the best retention rates. It’s simple: the more you can leverage customer feedback, the better experiences you can deliver.
Looking for a platform that can help you leverage data to deliver an awesome experience every time? Learn more about the AskNicely Frontline Success platform here.
In summary:
Focussing on customer retention is a highly profitable way to grow. Despite the key challenges of meeting rising customer expectations, building a customer-centric culture and consistently delivering awesome experiences, there are technological solutions to help you face these challenges head on and build a customer base who are loyal, and keep coming back for more.
