Keeping customers is as important as getting them because getting customers is the most expensive thing you can do as a business and existing customers are more likely to buy more and more often.
Chances are you’ve heard a manager say these words to you more than once. They’ll deliver it to you like a divine proverb, “The customer is always right.”
I can almost hear my former floor manager John’s assertive voice saying those exact words to me at my first job at a major department store. These words were meant to brand me as an agent of great customer service because with great service comes high satisfaction and that was our highest goal: satisfied customers.
So why did that big department store file for bankruptcy just a few years after John had given me the cosmic truth?
My performance as a shopping cart wrangler aside, it might have been because the focus was on customer service when it should have been on customer retention.
Increasing customer retention rates by 5% increases profits anywhere from 25% to 95%.Bain & Company
Great customer service is expected. It’s the floor. Retention is all the things you do above and beyond the call of duty that keep people around for a lifetime. Just because customers are satisfied with your service does not mean they always come back.
Making sure customers come back is the science of customer retention.
Customer retention is one of the most critical considerations on the path towards sustainable growth yet many companies overlook retention and focus solely on the acquisition of customers. This might be because customer retention can be difficult to define and keeping customers can seem less important than getting new customers.
This guide was written to make customer retention more clear, clear up some misconceptions, and provide some tactical steps towards implementing your own customer retention strategy.
What is customer retention?
The definition of customer retention is relatively simple. Customer retention is a metric that measures the process by which customers continue to buy products and services from the business within a given time period.
To know what your company’s customer retention rate is there are a handful of variables to consider. To get a good understanding you may have to consider what factors are unique to your industry, your revenue model, and what market incentives are in play that shape perceptions about what your customers expect from your business.
To illustrate this just imagine the differences between how a free online magazine that makes money from advertising might measure retention vs how a food delivery service might. There are different factors to consider but the overall definition is the same, how many customers kept coming back for more?
Key terms in customer retention:
- Retention – when customers continue to buy products and services within a determined time period
- Attrition – the process when customers no longer want to use product and services provided by the supplier and break the relationship bond by informing the supplier that he will be no more a customer resulting in a customer churn
- Silent Attrition – when the customer stops purchasing the product and services and diverts to other suppliers without even informing the previous supplier
- Churn rate – the opposite of a retention rate calculated in the number of individuals that decide not to make a renewal purchase over a specific period.
- Dollar Attrition – lost revenue attributed to the loss of a customer
- Purchase frequency – how often a customer will make a purchase. In a subscription service, this might be once per month.
- Revenue attribution – the behaviors or transactions contribute in revenue for the business and designate a customer relationship with the purchaser
How to calculate customer retention
Your revenue model should be determinative of your company’s definition of customer retention. How you make money from consumers should determine who is a customer and therefore how many customers your business is able to retain.
Calculating customer retention is simple once everyone can agree on who a customer is and what actions they can take to maintain that relationship with your business.
With customer retention, you’re essentially keeping a finger on the pulse of your company’s market share. It’s powerful to know this information but you have to decide how often your going to measure this and that is largely determined on consumer behavior and the relationship you have to your customers. Make sure to define those before calculating your customer retention rate.
What to define before calculating customer retention:
- What period of time is relevant to your business
- What consumer actions define a customer
- What actions define someone who is no longer a customer
- What is the financial impact of the above
Customer retention formula:
The customer retention formula isn’t difficult, but it’s powerful. To calculate your customer retention metric you should first decide on your time frame; monthly, quarterly, yearly, etc. Then subtract the number of customers acquired during this time from your total customer base at the end of the period. Then, divide that number by the number of customers you had at the start of the period and divide by 100.
|Number of customers at end of period||–||Number of customers acquired during period||/||Number of customers at start of period||X||100|
You might be surprised to know what your number is and you can always attribute that number its value in dollars and lost revenue. Making the case for a customer retention strategy is a lot easier to understand when you attribute your retention rate to dollars and even lost revenue.
Your retention rate should actually describe your churn rate. That is how many customers you didn’t keep. You want to keep that number as low as possible.
Again, if you attribute to the revenue expected from that customer if they renewed with your business and present it as lost revenue you have a persuasive number to present to leadership for more resources and investment into a customer retention strategy.
Why is customer retention important?
Revenues make businesses.
You’ve already worked hard to convince someone to do business with you. Doesn’t it make sense for your business to keep the customers it has vs going out and getting more?
With a great retention strategy in place, your company can continue to make revenue from existing relationships and reduce costs associated with finding new relationships.
Often businesses leave a lot of revenue on the table. They continue to increase expenses attributed to customer acquisition and accept more and more customers who may or may not be a good fit simply because that is what feels natural. It’s a missed opportunity because as you’ve seen with the customer retention formula, they stand to benefit greatly by treating their current customers with equal importance as those yet undefined new customers.
How you can get started with a customer retention strategy
- Get the right people in the right seats
The most important question when it comes to customer retention is the question of management. Your business must answer: who owns customer retention?
If your business has hired people to get customers wouldn’t you like to hire people to keep customers as well? Again, this goes beyond just providing great customer service—customer retention hires will be focused on reducing churn and finding new and creative ways to go above and beyond customer expectations. 4
Your customer retention strategy will likely be cross-functional as you will need to get everyone from success and service teams, marketing, and sales on the same page as they all interact with customers at critical times during the buying process.
So, some organizations like to say that customer retention is a metric that everyone is accountable for but general management best practices imply that you should establish a manager or a team as the lead for accountability reasons. Some organizations take customer retention accountability to the top. Many use customer retention as an indicator of even the CEO’s performance.
Your sales team should have retention incentives
Start by setting goals.
In many companies, your sales team sets the pace. It’s important to start here. If you want to ensure you have continued success. Think about it, who’s most likely the first person to really demonstrate what it’s like to work with your company? The first person on the “inside” is probably a sales rep. That first impression is pretty important to nail.
Likewise, if your customers don’t come back it probably has to do with an expectation set during the sales process.
So, make sure to set the right retention incentives with your sales team. Making sure that your sales team is financially aligned with the success of your customers is a great way to avoid a lot of problems down the road, including a high churn rate.
Bring alignment on retention to all customer-facing teams
Map out your buyer’s journey. What are all the steps before someone does business with you?
At SalesReach we work with four stages. Each stage is characterized by distinct buyer behaviors and characteristics and the appropriate messaging and content from your company. Each general area of the buyer’s journey is typically associated with a core business team.
Awareness and Marketing
The stage when the buyer realizes they have a problem that they need to solve. Marketing teams usually own the education of the customer, getting them aware of the problem, or bringing attention to the problem.
Consideration and Sales Enablement
In this stage the buyer is researching potential solutions. Many companies would love it if sales reps were playing an active role in helping the buyer become more aware of their options, upsides, and tradeoffs.
Decision and Sales
The buyer is ready to make a purchase decision. This is all sales but more recently organizations have been introducing customer success and services teams earlier into the sales process to provide more prescriptive advice and simulation.
Delight and Customer Success
The buyer has a solution to the problem and it was hopefully with your company. This is your opportunity to really follow through with promises you’ve made and add go above and beyond like we’ve talked about. At this stage all teams are working together to bring maximum value to the customer.
Your business will probably have many touchpoints in these general areas. Make sure to get a detailed picture of all the things your buyer will do before making a purchase.
By mapping out the customer journey you can get a better sense for what your messaging needs to be every step of the way. Making sure your teams are all on the same page with messaging is key to gathering trust from your buyer.
Create a roadmap for the continued partnership
You can set your company apart from the competition if you share the vision for the future. Sell on the vision. Make sure your buyer’s journey extends into the future. Take a deep dive into mapping out the Delight stage of the buyer’s journey as much as you consider at other stages on the map.
Recurring revenue gets more powerful as you retain customers. The delight stage should have all the upsell opportunities and touchpoints designed to keep the customer engaged. Share this vision with your customer and make sure they’re looking forward to the continuing partnership as much as you are.
If your sales team can sell on the vision of working together with your business and your service team can deliver on that roadmap your customers will reward you.
Many companies, for whatever reason, keep the upsell conversation off the table. Your customers want to know what’s coming next and they actually want to hear from you.
Keep the conversation going
It’s critically important to maintain a relationship with your customers.
There are a number of ways to keep your customers engaged. The funny thing about this is that marketing is involved again.
You might be saying, “Wait, marketing? I thought they were getting me new customers, not talking to my current customers. What does marketing have to do with retention?”
Marketing is your messaging and positioning powerhouse. Therefore, they too have a role to play in customer retention. Who else is going to help keep customers interested in your business and not competitors who approach your customers?
Consider what the communication from your company looks like once a customer signs on. At SalesReach our customers are with their client success manager but they also get a newsletter right from our CEO who sends out new training and product examples he’s seen work for reps in the field.
This is a quick example of customer relationship marketing, which exists to create emotionally invested brand advocates from repeat customers. These positive long-term customer relationships result not only in increased returns from loyal customers themselves but also lead to new client contacts.
Customer relationship marketing plans usually have the same triggers in place for qualifying new leads as they do for qualifying customers for another sale. It should come at no surprise to your customer that their salesperson approaches them with an irresistible offer. They’d already heard about it when they were sold on the vision.
Reward your loyal customers
No matter what your business does, over time your customers will form an emotional relationship with your brand. Capture these moments, the good and the bad. How you choose to respond to these moments will accelerate your relationship.
Great brands know how to call attention to customers who are having success. That’s because people tend to remember negative experiences more than positive ones. Your happy customers will love to see themselves represented in your company.
It goes back to the psychological principle of reciprocity. Acts of kindness create a feeling of obligation in the person who instinctively wants to repay the kindness. This is the basis for one of the most popular retention tactics, a customer loyalty program.
There are hundreds of ways you can reward customers. What is more important to your business is that you’re able to provide rewards to customers to deserve it. That’s hard to do if you’re not spending time with them.
At this point, it should have become clear your three core teams are working with the customer on their success and their retention. Marketing, sales, and service are all interacting with the customer to make sure they’re getting the most value.
We should call special attention to the team that’s most important to the success of the customer.
Get feedback and act on it
Your customer success team is the backbone of your customer retention strategy.
Make sure your customer success team keeps accurate records of direct communication and any past problems. You should be keeping track of all customer interactions but make sure to pay attention to how your success team resolves customer problems.
Consider when it’s the best time to ask for customer feedback. Know that when you ask for feedback, your customers will expect that you act on it. The most important key to customer success is consistency and ease of experience across all channels of communication.
Give your team the tools they need to improve customer retention to grow your business
Your company’s mission statement says it’s a customer-centered company. Your managers say great service your company provides is its most important differentiator. You may care about your customers so much that you send them surveys asking how satisfied they were with your service.
However, what do your customers actually do? Are they coming back? Are they buying more? Are they telling their friends about your company?
Ensuring your customer-facing teams are given the most value to the customer is not easy to do. Remember that you’re business is constantly being compared to the frictionless experiences offered by your customer’s favorite brands.
You may not be Amazon, but you can make the right technology decision to provide amazing speed, consistency, and personalization to your customers. They will reward you with repeat purchases and deeper relationships.
Remember: great service is table stakes.
Make doing business with you as easy as possible and give your teams a seamless and collaborative way to provide maximum value to customers.
At the end of the day, you will be glad that your company chose to focus on getting new customers just as much as keeping them!