Customer Retention Measurement – Metrics to Calculate and Tips to Improve Retention
“Retaining customers is cheaper than acquiring new ones”.
Retaining your most loyal customers is the best survival skill your business needs to fight churn and defy the odds in any industry. Customer retention also has a network effect that paves the way for sustainable growth.
In fact, customer retention is 5- 25 times¹ cheaper than customer acquisition.
But do you accurately measure your customer retention? Is it enough to measure just the retention rate? What necessary steps should you be taking to improve your customer retention numbers? Let’s unpack this-
Why is customer retention measurement important?
A study has shown that 65% of a company’s business comes from existing customers.
Customer retention refers to the potential of a business to retain its customers over a specific period of time and convert them to repeat customers. Measuring the impact of the customers who continue to stay with your company over a period of time is known as customer retention measurement. It is a crucial metric for companies to track, as it helps quantify the value derived from customers.
Keeping track of your retention metrics will help you understand if your customers are satisfied with your product or service. These metrics are also beneficial for various teams, including customer support, sales, product management and marketing teams, to understand the customer journey and work towards delivering a better customer experience.
How to measure customer retention
There are specific metrics that you should pay attention to while measuring customer retention. Calculating your overall customer retention based on these metrics will provide you with a clear picture of the performance of your retention strategies.
Let’s break this down to what each of these customer retention metrics stands for, why you should measure it and how to measure it.
1. Customer retention rate
What: Customer retention rate is the right metric to start calculating the loyalty of your customer base. This metric indicates the percentage of customers that are successfully retained by your business, in a specific period of time. It reflects the quality of your product or service and also the effectiveness of your customer service efforts, marketing strategies and sales pitches.
Why: It is a key indicator of how loyal your current customer base is or is likely to be – how many of them are choosing to stay with your brand, and how many are you losing out on? A high CRR means that your product meets customer expectations and can indicate future revenue predictability through repeat purchases and word-of-mouth peer recommendations from happy customers.
How: Customer retention rate formula
Here, E refers to the number of customers measured at the end of the period, N is the number of customers during the period and S is the number of customers measured at the start of the period.
2. Customer churn rate
What: Churn rate refers to the percentage of existing customers that you lost in a given period of time. It also applies to your subscribers who cancel or do not renew their subscriptions. The acceptable churn rate varies by industry, but a healthy number would be between 5-7%.
If your CCR reaches 10% or above, it is time to look deeper and re-evaluate your strategies. A high customer rate is an indication that your customers aren’t satisfied or happy with your product or service.
Why: High churn is the enemy of recurring business regardless of the industry. It is an indicator that your customer service strategy is ineffective, or worse – perhaps even the cause of churn. Another possibility for high churn is that your marketing and sales teams are making promises that your support and product team are not able to deliver on.
Diving deeper into your churn metrics will help your customer retention efforts, and help you fight back churn. Having a business strategy specifically to fight churn can enable stickiness towards your brand, customer loyalty, and more organic growth in the long-term.
How: Customer churn rate formula
Here, S is the number of customers measured at the start of the period and E refers to the number of customers measured at the end of the period.
3. Revenue churn rate
What: Revenue churn refers to the percentage of revenue that is lost from your existing customers. Revenue churn occurs when a customer cancels or downgrades their subscription or cancels an order. There are a couple of ways you can avoid potential revenue churn – You can bring it down with a customer engagement and nurture plan – offering proactive support, educational programs or even personalized recommendations based on their previous purchases.
Why: This metric is a key indicator of customer satisfaction and your potential growth as a business. A spike in revenue churn could indicate that customers are no longer finding as much value in your product or service, that they are downgrading their financial commitment to your business, or that competitors are taking over your customer base. Either way – it means that your revenue predictability is affected.
How: Revenue churn rate formula
MRR 1 refers to MRR at the beginning of the month, MRR 2 refers to MRR at the end of the month and MRR 3 is any additional revenue or upgrades from existing customers.
4. Monthly Recurring Revenue Churn
What: If you’re a SAAS company, you must be aware that Monthly Recurring Revenue or MRR is one of the most important metrics to track. Monthly Recurring Revenue Churn is the measure of MRR lost due to cancellations and delinquencies in a given period of time.
Why: You should keep track of MRR churn to understand how much MRR is being lost. This will help you plan your budget and finances, including burn rate, profit and loss.
How: MRR churn formula
5. Customer Lifetime Value
What: Customer Lifetime Value refers to the total revenue a single customer generates for your business. It indicates how valuable a customer is to your business over the course of time they decide to stay in business with you. A drop in CLV may show two possibilities. One, you are losing out on customers faster than you are acquiring. Two, you are acquiring low-value customers.
Why: Keeping track of this metric will help you understand ways to retain your existing customers and saves you the cost of acquiring newer ones. This metric also helps you identify your most valuable customers and also helps redefine your acquisition costs strategies. But if you have loyal customers who spend more on your business, then your customer lifetime value will rise.
How: Customer lifetime value formula
Here, T indicates the average number of transactions per month, AOV stands for Average Order Value, AGM for Average Gross Margin, ALT for Average customer Lifetime and N refers to the total number of customers in a given period.
6. Repeat purchase rate
What: Repeat purchase rate is simply the percentage of the customers that return to buy from your company again. This metric indicates the quality of your product or service. This can also be extended to the success of your customer retention efforts in the form of subscriptions and renewals.
Why: Repeat purchase rate is a good indicator of customer loyalty. By understanding your customer demographics, you can shape your marketing strategies to target specific customer personas.
How: Repeat Purchase rate formula
7. Net Promoter score
What: Net Promoter Score or NPS refers to the percentage of customers who are willing to recommend your product or service to others. It is collected by sending a simple survey to the customers, asking them to rate their experience. It is measured on a 10 point scale and is a good indicator of customer satisfaction and loyalty.
Why: If your NPS score is low, you should pay attention and improve your quality of service to your customers. It will also help you understand the quality of support to your customers. Net promoter score can also be used to identify customer referrals to your business and also be used to create assets, including testimonials and case studies.
How: NPS formula
8. Product Return Rate
What: Product return rate refers to the proportion of total units sold that have been returned back to you. This metric applies to industries such as retail that traditionally have a return-friendly customer culture, rather than subscriptions or services.
Why: A company must pay close attention to why a particular product of theirs fails to meet customer expectations and work on solving the same for both customers and business.
How: Product return rate formula
9. Loyal Customer Rate
What: Loyal customer rate indicates the percentage of customers who make repeat purchases with your company within a specified time period. This metric tells you the most loyal customer base for your business. While it might sound similar to repeat purchase rate, all repeat customers aren’t necessarily your loyal customers.
Repeat customers are the ones who make repeat purchases because of convenience and competitive pricing. But your loyal customers are the ones who make repeat purchases and also stick with your company even if things wrong. These are the ones who will give you an opportunity to sort out an issue for them.
Why: It is essential to keep track of because these customers are the most valuable members of your business. Apart from driving sales, these customers are your brand advocates who will recommend your company to others.
How: Loyal customer rate formula
How to retain customers in a competitive e-commerce market
In many ways, investing in customer retention is like putting a fund aside for long-term financial success. But it can be tricky for e-commerce businesses to identify the right kind of retention strategies for them. Here is some tactical advice that you can use to improve customer retention for your e-commerce store.
1. Deliver exceptional customer service
Today’s online retail commerce is very diversified. Outstanding customer service can be the only defining touchpoint for businesses that want to position themselves superior to their rivals. 96% of the customers also say that customer service is the deciding factor for their brand loyalty. Truth be told, If you slack on the service department, you risk losing your gains.
In recent years, businesses have raised the bar on their customer service because customers now want instant response and a better customer support experience. This explains why most companies are increasingly using live chat as the primary channel to support customers instead of using phone or email, which are slow and context-deprived.
Chat support surpasses the traditional channels of customer support such as phone and email, by a huge margin because it’s instantaneous, friendly, contextual, and more feature-rich. With integrations, chat support can now be offered on customer’s preferred messaging channels such as Facebook Messenger, WhatsApp, Apple Business Chat and more.
With capabilities like rich-media support, self-service content embedded inside the chat tool, and real-time language translation, live chat enables e-commerce businesses to recreate great customer experiences.
2. Start loyalty programs
Loyalty programs are not just strategies to make your customers stay with your brand but also help you shape customer behavior. For example, you can leverage the lure of loyalty or reward points for your e-commerce store to insist customers perform specific actions, such as downloading your mobile app, creating an account with you, or referring your products to other people in their network.
You don’t need to complicate your loyalty program by overthinking it. Just start by rewarding customers for their second, or repeat purchases, and you will soon see a spike of customers who return to your store for more.
Make sure you craft engaging in-product messaging to let customers know how easy it is to earn new reward points and entice them to keep spending more. Even when the reward credits are small and not strictly monetary, customers will still feel a burst of dopamine every time they see their reward wallet getting fatter.
Here are a few ways to ensure success for your loyalty program:
- Identify the set of actions you want your customers to take
- Setup different rewards for different customer actions
- Give each of the reward programs great names (e.g., Amazon Prime, NikePlus Membership)
- Make your reward points value-driven, not necessarily monetary.
- Offer multiple enrolment opportunities based on time, customer journey, and behavior.
Loyalty programs can help your e-commerce business increase repeat purchases, average order value, customers’ purchase frequency, and eventually, your customer lifetime value (LTV).
3. Personalize customer experiences
Personalization in e-commerce plays a massive role in helping you optimize customer retention because it’s local, dynamic, and contextual.
Brands like Netflix and Spotify are doing exceptionally well at offering highly personalized services to their customers, such as showing different content to different demographics, changing their product UI based on user behavior, or tailoring a unique customer experience as individually as possible. Having personalized content ensures better context-sensitivity and higher relevance during a search.
Your e-commerce can benefit hugely by personalizing customer experience if you can:
- personalize their search results
- personalize in-product messaging
- send relevant emails or push notifications
- recommend products based on a user’s browsing behavior
- show estimated delivery date based on their location
- display complementary products they might like
- offer customized checkout options
4. Make time for social media interactions
Today’s fast-paced economy requires your business to move to places where your customers hang out. Using social media to foster relationships can be fun for both your business and customers. All the while, you also have plenty of opportunities to promote your brand and increase your bottom line.
Social media marketing for e-commerce, also known as social commerce, comes with a two-pronged advantage: you can acquire new customers while retaining your existing ones. Facebook, Instagram, Twitter, and WhatsApp Pinterest offer specific benefits for businesses to engage meaningfully with customers and make the most out of their social media spending.
But don’t limit your social commerce to marketing and sales because customers are increasingly using channels such as Twitter and Messenger to look for instant support. This makes it essential for support teams to keep track of their social media mentions. Simple integration with Freddy Social Signals will alert your agents on your mentions that need immediate attention. Thus saving your mentions from getting lost on social media.
5. Don’t be afraid to upsell and cross-sell
If you do it right, upselling and cross-selling are not just about making more money out of a customer. It’s also about guiding them on the right track and helping them get more value for their money.
Also, it is easier to sell to existing customers as opposed to newer ones. You are likely to sell 60% – 70% to your existing customers, whereas the probability is down to 5%-20% for new customers.
Customer Support agents have more opportunities for upselling and cross-selling as they are in direct contact with the customers and have a better understanding of them. If your support team understands what is the bigger problem that customers are trying to solve and offers a more packaged solution, cross-selling and upselling become value-added services for them.
In the e-commerce context, it’s about convincing them to make that upgrade. Refine your product recommendation algorithms or display similar items that other buyers have bought along with it so that customers have a fulfilling buying experience.
Churn is the enemy of business prosperity and the best way to fight it is to ensure you focus on the people you can prolong your relationship with for the longest time possible. Though prioritizing customer retention is important, it is also crucial to keep track of your retention measurement metrics to gather data-driven insights. These will help you grow and also define your success in the long run.
Customer acquisition looks great on your marketing dashboard for a while, but it also comes with too many moving parts that are hard to track and manage. On the other hand, customer retention is like taking good care of the geese that consistently give you the golden eggs.
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