Customer Retention: Importance, Calculation and Stages

One of the key factors that determines the success of a business is the customer retention rate. It refers to the rate at which customers stay with a business for a given period. All businesses within the B2B and B2C sectors aim to maximize customer retention and boost business profitability.

What is Customer Retention?

Companies launch a set of customer retention programs encompassing brand loyalty initiatives and customer loyalty programs aimed at building a good relationship with the customer. Working in the direction of customer retention must start as soon as the customer has their primary contact with the company and goes on throughout their relationship together.

While strategizing for customer acquisition is important, customer retention is what helps sail the boat in the long run. This article will delve into the intricacies of customer retention, its stages, steps, and importance to help your business take strides toward success.

Geeky Takeaways

• Successful companies use loyalty programmes for brands and customer loyalty programmes to retain customers.
• Effective client retention begins with the first interaction and continues throughout the company’s lifecycle.
• Customer retention requires understanding client needs, providing excellent service, and immediately addressing issues.

Importance of Customer Retention

The importance of customer retention can be highlighted by considering the following points:

1. Lower Cost and Effort: The cost and effort needed for customer retention are far less than those necessitated by customer acquisition. Customer retention strategies are targeted towards customers who have already shown an interest in the brand and its services. All that is needed for businesses is to capitalize on their interests and engagement.

2. Increased Profitability: The lower cost of customer retention also leads to increased profitability. A survey recently performed by Bain & Company listed that increasing customer retention by 5% can lead to an increase in profits by 25-95%. Not only this, but their reports also show that while the likelihood of tapping a new customer is 5-20%, that of converting an existing customer into a repeat customer is 60%-70%. It means that the overall profitability derived from customer retention efforts exceeds all else.

3. Increased Publicity and Sales: Another direct benefit of focusing on customer retention is referrals. Satisfied customers will loop in more traffic that comes at little cost for the business. As against this, a negative experience would drive traffic away by negative word-of-mouth publicity from unsatisfied customers.

4. Increased Scope for Innovation: With a guaranteed loyal customer base, businesses can take the plunge towards innovation and experimentation. They always have loyal customers to keep up the business revenue and also a ready customer base to try innovations.

5. Continuous Enhancement: By continually taking feedback from your customers, the scope for improvement increases. The business can also move towards enhancing brand engagement and capturing a wider audience.

How to Calculate Customer Retention Rate?

To calculate the customer retention rate:

• Identify the period for which you want to study customer retention
• Collect data on the number of existing customers at the beginning of this period – S
• Collect data on the total number of customers at the end of this period – E
• Lastly, determine the number of new customers added during this period – N
• Put these values in the retention rate formula and get your retention rate.

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

CRR = ((Customers at end of the period – New customers during this period) / Total customers at the start of the period) x 100

This rate can be calculated on a weekly, monthly, quarterly, or annual basis depending on your business requirements and how frequently your user base is expected to fluctuate.

Stages of Customer Retention

There are essentially 3 stages in the customer retention process. These include:

1. Onboarding: The first stage of onboarding starts when the customer interacts with the brand and makes a purchase till they start using the product and see value in it. It is the most crucial stage of customer retention as they must see the value and find your product useful to renew their purchases with you.

2. Adoption: Once the customer sees value in your products and services, the adoption phase commences. Adaptations refer to the purchase of other product features and other purchases that complement the initial purchase. If they are attracted at this stage and continue to see the value, there is a high chance of them being converted into loyal customers. On the contrary, when unsatisfied, they might become disinterested or complacent towards making further purchases with your brand.

3. Renewal and Upsell: This stage unfolds at the end of the designated services period when the customer decides if they wish to continue their purchases or re-subscribe. The customer’s overall experience with the above two steps influences this decision. The customers will either close an upselling or renewal deal or simply end the contract at this stage.

Steps for Customer Retention

There are four key steps for succeeding in customer retention, including segmentation, service, system, and selling that can together deliver customer stability followed by profitability.

1. Segmentation: It is of prime importance for companies to study the nature of their customers and segment them accordingly. Different customers demand a different approach to be persuaded into becoming a recurring customer. For instance, while a price-driven customer would see nothing besides the offers, a loyal and relationship-centred customer would focus more on the value that the company provides and go for a less price-centered approach.

2. Service: Nothing beats maintaining top-notch services for the customers. Price can also sometimes take a back seat when compared with the kind of services provided. If the customers are happy with your services, they won’t be swayed by lucrative offers extended by alternate sellers. Feedback and surveys are an excellent way to gauge if your services are satisfactory for the clients and identify areas where you can do better. Excellent service inevitably leads to excellent retention rates.

3. System: A well-functioning system must be in place to keep customer engagement smooth and assist them with their needs and requirements. The brand must have a strategic system to follow up with the existing customers, send them updates about renewals, and assist them in the process. Brands with a more systematized approach are guaranteed to keep their customers satisfied and loyal.

4. Selling: Lastly, another important step in customer retention is to focus on selling products and services to the existing customer base. Companies often forget to market their products to existing customers and bring them new offers and ideas to keep them engaged and looped in the brand’s new marketing efforts. They should be the first customer base to reach whenever new products/services/offers turn up.

Strategies for Customer Retention

After studying the importance, stages, and steps of customer retention, let us finally look at a few strategies that can assist you in enhancing your customer retention rate. Some of the proven strategies include:

1. Stand for Something: For customer retention, it is essential to build a relationship with the customers. Often enough customers stick to a brand because their values resonate with them, be it the environment-friendly products or a goal to provide herbal products. If your brand functions on an ideology and stays true to it, your brand can find a loyal customer base and retain it.

2. Customer Feedback and Implementation: Identifying the gaps in your customer delivery is of prime importance. Collect customer feedback and bridge the gap that is causing customer dissatisfaction. When your customers feel they are heard, they convert into a retainer client.

3. Educate your Customers: Instead of leaving your customers to fend for themselves, educate them about your product by providing training sessions, guides, or follow-up emails. This is an excellent technique to help customers optimally utilize your product and find value in it.

4. Extend Personalized Solutions: Personalization is stealing away customers like nothing else. With technological advancements and customer engagement studies, it has become increasingly possible to deliver personalized services to customers. Customer retention rates significantly enhance when customers get exactly what they want delivered to their inboxes.

5. Focus on Fast Delivery and Returns: Another effective strategy to retain customers is offering easy and fast delivery and return. This factor is of prime importance in the e-commerce market and might help your brand retain customers in comparison with others.

Examples of Customer Retention

Let us now look at a few real-life instances where brands have come up with effective strategies to retain their customers.

• Amazon: While shopping on Amazon, you would frequently receive messages about some items pending in your cart. This is a strategy to push customers for follow-up action. They also keep sending the hot deals to their existing customers’ inboxes to keep them in the loop and encourage them to place a repeat order.
• H&M: H&M alerts its members with a special members news alert about the brand. They provide their registered members with an added incentive (often a special discount and point-based incentive) compared with other people that makes them feel celebrated.
• Myntra and Flipkart: Further, eCommerce websites such as Amazon, Myntra, and Flipkart also ask customers for a rating and review that makes the customer feel heard and makes them a recurring customer.
• Shopify: It sends a direct invitation to the customers to create an account after they have made their primary purchase. This allows them to make their first purchase as a guest by storing their personal information to deliver personalized results later.

Conclusion

With an understanding of the stages and steps of customer retention, brands can work on curating effective strategies to boost their customer retention rates. It is among the core metrics to measure a business’s success and a workable factor to soar sales and profitability.

The basic motto behind being successful in customer retention is to satisfy the already existing customer base before or while focusing on acquiring new customers. When people feel they are heard, their feedback is incorporated and their values resonate with the brand, they often stay loyal. Keeping each customer as a valuable contributor to the overall sale is the way to go!

Frequently Asked Questions (FAQs)

1. What is the key to customer retention?

Answer:

Communicating regularly with your customers, gathering feedback, and implementing it is the key to customer retention.

2. What do the 3Rs in customer retention stand for?

Answer:

The 3Rs stand for Retention, Related Sales, and Referrals.

3. When does the customer retention process start?

Answer:

The customer retention process must start as soon as the customer engages with the brand and should continue till the end of their interaction period with the brand.

4. Is customer acquisition more important than customer retention?

Answer:

Customer retention is equally, if not more important than customer acquisition. It often involves lower costs and higher profits.

5. What is customer churn?

Answer:

Customer churn refers to the people who have stopped purchasing from a brand during a specific period.