While acquiring new customers is important, retaining previous customers is equally important for any business. In fact, it’s a more cost-effective way to scale. As a result, most brands today are focusing on improving their customer retention rates. Such customers know the service they receive from your business better than new customers. Furthermore, their trust and experience with you make them potential advocates for your business. As a result, your chances of acquiring new loyal customers increase rapidly!
What is the customer retention rate?
Customer retention rate helps businesses understand the percentage of existing customers that a brand can retain over a certain period of time. A good retention rate is one of the early aspects that help a business maintain long-term growth.
While there are many factors that influence a company’s customer retention rate, Research Gate highlights a few key ones: Service quality, satisfaction, trust, and commitment. These are the main aspects to check from the customer’s point of view. After getting a good score, the chances of improving the retention rates make a big difference.
Why is customer retention rate important?
Analyzing the rate at which a company retains its customers is not limited to determining its ability to consistently deliver value to them. In fact, this helps increase a company’s return on investment (ROI), improving trust and loyalty, which in turn attracts new customers. Customer retention primarily prepares a company for long-term growth by maintaining healthy relationships with buyers.
Effective cost saving
Maintenance costs are extremely lower than acquiring new buyers. Experts say that finding a new customer is at least 6 times more expensive than retaining an existing one. In general, existing customers are already deeply engaged in the channel and are already familiar with the brand’s products/services. Therefore, you don’t need to reach them through awareness campaigns and the like. So brands can look at ways to enhance the four factors that affect their customer retention.
Increase return on investment (ROI)
In general, returning customers tend to trade more with brands they know over time. And as they buy more, the company’s operating costs to maintain or service those customers go down. Thus, according to Bain’s Research, a 5% retention rate improvement should produce a profit increase of about 25%.
Improve trust and loyalty
Returning customers often pay more or upgrade their payment plans over time instead of choosing a competitor they don’t know. Once they understand the value of your product/service and your deep commitment to them, they will feel at ease. This will keep them coming back to trade for more.
Customers turn into brand advocates
If customers are satisfied, they will naturally become advocates for your brand. They will recommend your services to friends or family. New leads gather feedback on services from people they trust to take seriously. So with low maintenance costs, you welcome new customers for free
The formula for customer retention rate:
Before jumping straight into any retention strategy, first, understand where your current customer retention rates are.
First, take a time period, say quarterly or annually. And then consider the basic customer retention rate formula:
[(Number of customers at the end of the period – Number of customers acquired during the period)/Number of customers at the beginning of the period] x 100.
Example: At the beginning of the period, you had 40 customers, acquired 5 new customers during that period, and 2 customers stopped doing business with you. Using the customer retention rate formula, the retention rate would be:
[(43 – 5) / 40] x 100 = 95% retention
Now that you understand where your customer retention is, you can evaluate the reasons for the attrition rate. This will help you understand the potential scope of improvement and thus reduce the attrition rate even further.
4 ways to improve customer retention rate
By using a few strategic customer interactions, you can retain more customers within a given time frame. Here are a few ways to improve customer retention for any company. You can try and test any of the solutions below to see the results.
1. Adjust price for old customers
You might consider adjusting your fees in a way that doesn’t affect your bottom line but also shows your appreciation for your customers. For example, if you run an e-commerce business, you can make adjustments like allowing free shipping or other discount code options.
2. Design a roadmap for the future relationship
It is a solution to show customers where their relationship with the company is headed. If it was just regular transactions and nothing else, it wouldn’t be anything special. This frustrates customers as they begin to consider other, better options. Thus, a clear next step in the relationship can give them the feeling of being a valued or preferred customer. Regular roadmap review helps develop new initiatives that serve mutual goals. As a result, you can increase your customer retention with this future roadmap strategy.
3. Feedback and action
Asking for feedback doesn’t stop there. Answers from both former and current customers provide clear scope for improvement. If you don’t understand why customers leave, you’ll never take action when there’s a problem. Once you get feedback, your team can review the issues raised by the customer and take proactive measures to bring the issue under control.
If a customer sees a visible difference in regard to those issues within a short period of time, they are more likely to continue with you.
4. Create a loyalty program
Design a program that rewards your existing customers for their loyalty. You might consider adding points to a customer’s purchase record when they refer your business to their family or friends. Or you can try emailing appreciation with an 8-10% discount on their next purchase. Furthermore, it is important to keep things simple in terms of conveying the message of encouragement and action. It is imperative that customers understand the value of the program easily and immediately.