What is Customer Retention (and Why Is It Important)?

Angela Stringfellow

3min read

The ability to secure repeat business from customers is a hallmark of any successful company. Many businesses focus on customer loyalty programs to remain competitive in today's marketplaces and explore innovative ways to keep their existing customers engaged. A survey conducted by HubSpot found that 93% of consumers are more likely to make repeat purchases from brands offering excellent customer service. Customer retention is a simple concept. Yet, it often requires effort from every department to improve the customer experience and build lasting trust. Here's what you need to know about customer retention and why it matters.

What is Customer Retention?

Customer retention refers to how well a company can keep customers engaged and prepared to purchase more products or services. When a business adds new customers, there will always be some that eventually leave. This concept is referred to as customer churn, which can describe a customer that cancels a membership, simply leaves without a repeat purchase, or closes their account with a brand. One of the best ways to understand customer retention is to explore how to calculate your customer retention rate for a given period.

How to Measure Customer Retention

The simplest way to measure a customer retention rate is to look at the number of new customers acquired, number of previous customers, and total number of customers at the end of any chosen period.

Retention rate = ((# Total Customers - # New Customers)/# Previous Customers)/100

The calculation provides a percentage that indicates how many customers have been retained over the period. It's difficult to set a broad benchmark, as customer churn rates can vary by industry and from business to business. One of the best ways to use the retention rate is as an internal benchmark with the target to maintain or increase the number over time.

Why Is Customer Retention Important?

Achieving a healthy level of customer retention can have a dramatic impact on your business results. Regardless of the industry or type of business you are in, selling to customers you already have is cheaper and more effective than finding new customers. A study from Bain & Company found that a 5% increase in customer retention can lead to an increase in profits of 25 to 95%. In addition to improvements in profitability, here are a few additional reasons why customer retention should be a priority:

  • Better Quality Feedback. Collecting feedback from a group of loyal customers produces valuable data for any business. These customers know your business better than the average consumer and have a deep understanding of what is working well and what might be lacking. They may be able to give you a level of insight that would be impossible to obtain through any other means.
  • Lower Marketing Costs. Having retained customers allows you to promote your new products or services to a group of consumers already engaged with your newsletter, website, or social media. You already have their attention. Promoting new products or services to existing, loyal customers can increase your future sales potential as you don't need to invest time and effort to prove your initial value proposition to these customers. You can simply focus on the sales process and use your existing channels to communicate your new offerings.
  • Improved Profitability. The cost of advertising and marketing to your current customers will be lower. This allows you to spend more money on high-value programs, such as improved service capabilities and customer loyalty programs. When it comes to business, it's always best to invest your time and resources on efforts that provide the best ROI. Loyal customers are an excellent resource and highly profitable group to nurture and support.
  • Efficient Referrals. Word-of-mouth advertising can often have a dramatic effect on the long-term prospects of any brand, product, or service. People value feedback from others they know and trust, such as friends and family members. Having loyal customers who are invested in your brand is an effective way to expand your influence with a broader audience. Adding referral incentives to a loyalty program can also give you a formal approach to tracking and rewarding those who contribute.

Customer retention is crucial for every business as part of your marketing, sales, and service strategies. Providing excellent customer service, offering products and services that your customers want and need, and providing a unique customer experience are all parts of the puzzle. Companies must get a lot of things right to remain competitive these days, and your customer retention rate remains a vital indicator of your customer satisfaction and your future potential for greater sales.

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