In today’s fast-paced business world, customer retention is critical for companies to track. Retention rate is a percentage-based metric that measures how well a company is doing to keep its customers.
Maintaining a high customer retention rate is essential for businesses to boost sales, revenue, and customer loyalty.
This article will dive deeper into customer retention, why it’s important, and how it can be measured.
What is customer retention?
Customer retention is the company’s ability to retain its customers to remain loyal to the business. This percentage-based metric measures how well a business is doing in terms of keeping customers.
Customer retention is affected by how many new customers a business acquires and how many customers decide to stop or cancel subscriptions, not repeat orders, or even close contracts.
As a result, maintaining a high customer retention rate is critical for businesses to boost sales, revenue, and customer loyalty.
Why is customer retention important?
According to one study, 68% of sales come from existing customers. Loyal customers will be more likely to share their experiences with the company and make repeat purchases. So, businesses must increase customer retention.
In addition, customer retention is important for businesses for the following reasons:
- Revenue growth: Retained customers will continue to purchase products and services, providing a consistent revenue stream for the business.
- Improve company’s understanding: customer feedback is important. The longer the customer is with a company, the more feedback the company gets, thus giving a better understanding of customer needs.
- Cost-effective: Retaining existing customers is typically less expensive than acquiring new ones. It can cost a business five times more to receive a new customer than to keep an existing one.
- Positive word-of-mouth: Satisfied customers are more likely to recommend a business to others, which can lead to new customer acquisition and further revenue growth.
- Higher Return on Investment (ROI): Loyal customers will continue to support the brand and increase sales, and ultimately the business can get a greater Return on Investment (ROI).
- Long-term relationship: Building and maintaining relationships with customers is crucial to the long-term success of a business.
- Brand royalty: By consistently meeting or exceeding customer expectations, a business can build brand loyalty and create a competitive advantage over other businesses.
How to measure customer retention?
Customer retention is vital for the success of your company. Therefore, it is also essential to measure the level of customer retention.
Meanwhile, to measure it, you need to pay attention to some customer retention metrics below:
1. Customer Retention Rate
The first metric is measuring customer retention rates. As you know, it takes time to see how effectively your retention strategy works.
Previously, you need to understand how many customers are loyal to you over a specific time (e.g., monthly, per semester, or yearly).
But you can measure it using the following formula:
Customer Retention Rate = ((NCE – NEW) / NCS)) X 100
This formula is expressed as a percentage and is calculated for a specific period, such as by week, month, or year.
NCE = Number of Customers by the End of the period
NEW = New Customers acquired during the period
NCS = Number of Customers at the Start of the period
2. Customer Churn
Customer churn is a metric that measures which customers are leaving a business and is typically expressed as a percentage.
It can be calculated by taking the number of customers lost during a given period and dividing it by the total number of customers at the beginning of that period.
Customer Churn Rate = (Customers Lost) / (Total Customers)
3. Revenue Churn Rate
Revenue Churn Rate is the percentage of lost revenue from existing customers within a specific time. For example, revenue turnover could result from order cancellations, downgrades to plans, or the end of a business relationship.
Revenue Churn Rate = (Lost Revenue) / (Total Revenue)
4. Existing Customer Revenue Growth Rate
This is the rate at which revenue from existing customers is growing.
It can be calculated by taking the total revenue from existing customers during a given period and subtracting the total revenue from existing customers during the previous period.
It also means that your customers quickly realize the value of your engagement.
Existing Customer Revenue Growth Rate = (New Revenue from Existing Customers) / (Old Revenue from Existing Customers)
5. Repeat Purchase Ratio
The repeat Purchase Ratio (RPR) is the percentage of customers who have returned to buy products from your company again.
This metric is an indicator often used by marketing and sales teams to assess the performance and impact of a company’s customer retention strategy.
While this metric typically applies to products, you can use the same formula for recurring subscriptions or contract renewals.
Repeat Purchase Ratio = (Repeat Customers) / (Total Customers)
6. Product Return Rate
Product Return Rate is a particular matrix to calculate the return rate of your product. While products can be returned for many reasons, product returns are never good.
Therefore, companies need to keep the sum of this matrix as close to zero as possible.
Product Return Rate = (Returned Products) / (Total Products Sold)
7. Days Sales Outstanding
Days Sales Outstanding (DSO) is the average number of days receivables (customer fees, invoices, payments) remain outstanding before being billed.
DSO shows how well your company’s receivables are managed and how committed customers are to maintaining a healthy working relationship with your business.
The longer it takes customers to pay their bills, this may bode poorly for your customer retention strategy.
Therefore, it is essential to look at DSO as a whole to identify trending behavior and what you can do to combat rising DSO numbers.
DSO = (Accounts Receivable) / (Average Daily Sales)
8. Net Promoter Score (NPS)
Net Promoter Score quantitatively measures customer satisfaction and loyalty to your brand. Once you calculate the NPS, you will know if your customers are satisfied and willing to refer your product or service to others.
Usually, this metric will be measured on a scale of 1 – 10. Respondents can be divided into detractors, neutrals, and promoters. Those who answer 1-6 are detractors, 7-8 are neutral, and 9-10 are promoters.
NPS= % Promoters – % Detractors
9. Loyal Customer Rates
The loyal Customer Rate refers to the number of customers who have made repeated purchases within a certain period. This metric identifies the percentage of your customer base demonstrating loyalty to your business.
Loyal Customer Rate = Number of Repeat Customers / Total Customers
10. Customer Lifetime Value
Customer Lifetime Value (CLV) is a metric that measures how much revenue a single customer generates.
Ideally, you should see your CLV increase or remain constant, as a shrinking CLV indicates that you either have low-value customers or are losing customers more quickly than before.
Customer Lifetime Value = (Average Value Per Customer) X (Customer Lifespan)
Note: Although all of these metrics can be useful, they should be viewed in the context of the company and industry and the kind of customers you deal with. A business should use multiple measurements to keep track of its customer retention.
However, customer retention is a crucial metric for businesses to track. A high customer retention rate indicates that a business is thriving in keeping its customers and that they are satisfied with the products or services offered.
These tools allow businesses to better understand and engage with their customers, resulting in increased customer satisfaction and loyalty.