Digital Marketing, Email Marketing

What is Customer Retention?

Customer Retention

Your Business and Customer Retention

It does not matter if you have been in business for years or have just started; attracting customers is not free. Based on your offering and your industry, getting new customers can cost you between a single dollar and thousands. That is why customer retention strategies are essential to boost customer loyalty.

Customer retention is one way to generate revenue while simultaneously reducing your expenses. According to Harvard Business Review, many companies will spend between 5 times to 25 times more to get a new customer than to keep an existing customer. That means prioritizing and planning strategies that can accelerate progress for your revenue goals while letting your business grow.

What is Customer Retention?

Customer retention is when you focus on maintaining the existing customers of your business that have already been converted while reducing the number of customers lost. That process complements customer acquisition and lead generation, which have you attracting new customers.

Many customer retention strategies are about increasing each customer is revenue, often by getting them to make repeat purchases and referring other customers. You must build long-lasting customer relationships to have an effective customer retention program.

What is Customer Lifetime Loyalty and Value?

Customer lifetime value, or CLTV, is a metric that will show the total revenue that your business can get from an average client. If you want to calculate your CLTV, you must know the average amount a customer will spend, your customer’s life span, and the purchase frequency.

When you start developing a retention strategy, you will notice that businesses want to increase the CLTV so that they have a better ROI or return on investment from every customer. Higher CLTV can show improved loyalty or the likelihood of a repeat purchase.

Customer Loyalty

What is Customer Retention Management?

Customer retention management involves making the customer experience better while improving satisfaction simultaneously. The whole process works on attracting and engaging your customers after the initial purchase to make additional purchases and keep existing customers for as long as possible.

When You Should Focus on Customer Retention

For many established businesses, customer retention plans start at the first point of contact and run through the relationship’s entire life cycle. However, reservations are not always a priority. If you are the founder of a startup or your business is relatively new, your energy may attract customers. Depending on the age and focus of your business, you should now focus on customer retention:

  • Automatic retention: After the company is established, most sales, marketing, and support processes should be simplified and improved. At this point, you can get the most value by investing in automatic customer retention. By automating these essential processes, you can achieve better returns and set more ambitious goals for your business. (Marketing Automation)
  • Seek growth opportunities: When your business is relatively established, you may have entered a large part of the potential market. At this time, it is essential to focus on customer retention, as this may be one of the most significant opportunities to increase CLTV and grow business.
  • Maintain stable sales: When you attract a steady stream of customers, your business can achieve more value by increasing retention. You can add steps to your sales and onboarding workflow rather than focus on updating or promoting existing customers. Using this approach, you can connect with your customers earlier and build a much stronger relationship from the start.
  • Start attracting people: After you start selling and have a few customers, you can study retention rates. Most of your early work should focus on more straightforward and higher-value tasks, such as encouraging existing customers to update their current purchases or consider upgrading.
  • Just launching: If your company has just opened, it is essential to focus almost all resources on attracting new customers, successfully delivering products and services, and operating the company. At this early stage, you can postpone customer retention activities.


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Benefits of Customer Retention

If you run an online business or e-commerce store, you can easily calculate the benefits of retaining customers. Some of the most valuable benefits include the following:

  1. Generate recommendations: The benefits of having loyal followers go far beyond the initial customers. Loyal customers are five times more likely to recommend your business to friends and family, which can increase sales opportunities exponentially. This means that when you have a strong customer retention program, your business can thrive, and you will have a balance between existing and new customers.
  2. Leverage customer loyalty: You can assume that your returning customers may buy the same services and products or they have much higher expectations. Yet, loyal customers are experimental regarding what they buy and have fewer expectations. A repeat customer is less likely to report things like support issues or delays in delivery. According to Outbound Engine, they are also seven times more likely to try your new product line.
  3. Increased order value: First-time customers tend to reduce order costs, while existing customers use larger shopping carts. Returning customers spend 30% more than new customers.
  4. Improve your return on investment: Since it is easy to convert existing customers again, a good customer retention plan can increase your return on investment. In fact, according to the Harvard Business Review, increasing the retention rate by only 5% can increase your profit from 25% to 95%.
  5. Reduce expenses: Depending on your strategy and the company’s products, the cost of attracting new customers may be too high. The cost of attracting new customers is 25 times higher than retaining customers who have won it once. If you do not want to waste your money on lead generation, try focusing on customer retention, as it helps control sales and marketing budgets.
  6. Rates of improved sale success: When you convert new customers, it can be challenging, but when you sell to one of your existing customers, it tends to go through much easier. According to Outbound Engine data, the average success rate of converting new customers in various industries is about 5% to 20%. In contrast, the success rate of reselling to existing customers is about 60% to 70%.

Calculating Your Customer Retention Rate

Suppose you want to understand how well your business is doing and you can benefit from customer retention. Then, you can take time to calculate what your customer retention rate is. To calculate your company’s customer retention rate, collect the following data:

  • New customers: How many new customers have you acquired during this time?
  • Time period: Determine the time range, such as one month, quarter, or year. This formula applies to any time period. However, you will gain more insights when the sample size is more extensive. If you only attract a couple of customers each month, you should use a longer time period, like every quarter or once a year, as your time frame.
  • End customers: How many customers do you have at the end of the timeline?
  • Existing customers: How many current customers do you have at the beginning of this period?

Once you have the information from above, you can use this formula to calculate your customer retention rate:

100 x (# end customers - # new customers) / (# beginning customers) = Customer Retention Rate

For instance, if your business started with 200 customers, you gained 100 new customers and ended the quarter with 250 customers. You would have a retention rate of 75%.

After calculating the company’s customer retention rate, you can compare it to industry standards. With a quick comparison, you can see if your company’s performance has exceeded the average or if you can benefit from significant improvements.

Overall, according to HubSpot data, the average customer retention rate in most industries is less than 20%. However, the target tax rate for specific industries is much higher. For example, according to Profit Well, the retention rate of IT services is 81%, while the insurance industry only has a retention rate of 83% of its customers. The average retention rate for professional services companies is 84%, while the retention rate for retail businesses is 63%.

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