Customer retention is the business’s potential to retain its customers over a period of time. It is a percentage of how many customers kept purchasing from the business or were retained in a certain time period. Retaining customers is more profitable for any business rather than acquiring new ones. It shows that a business is capable of satisfying the customers who convert. When the customers are satisfied with the quality of service and products they receive, they are more likely to keep purchasing from a brand.
Retaining customers is especially important for B2B businesses. B2B businesses have a longer sales process, they spend more time and resources to convert a customer. Hence, maintaining and growing a current customer base is useful. Having a loyal customer base is not only good for revenue, but also to build a good reputation in the industry. To track your customer retention success, you need to monitor and measure it. Measurement will also help you see where you can improve. Customer retention metrics can show you how well your business is retaining its customers. Companies track these metrics to understand if they are successfully meeting a customer’s needs to gain their business.
This data is useful for different teams like marketing, sales and customer service. These insights can help each team create a valuable experience for their customers.
Here are some key customer retention metrics you should be tracking.
Customer Churn
Customer churn is the percentage of customers who stopped using your company’s products or services in a certain time period. Churn rate can be calculated by dividing the number of customers you lost during a time period by the number of customers you had at the beginning of that time period. The lower the churn rate the better. Customer retention helps you increase profits as existing customers are willing to spend more.
Acquiring new customers is more costly than retaining existing ones. Of course, there are going to be some customers who stop investing in your products or services. But if the churn rate is more than 5% to 7% annually, it is important to evaluate and improve the customer’s experience with your business. Reducing churn rate can help increase your revenue and lower your cost of acquiring new customers.
Churn rate is different from retention rate. Retention rate is the percentage of customers who return to do business with your company. Whereas churn rate is the number of customers a business has lost.
Revenue Churn Rate
It is the percentage of revenue your business has lost from its existing customers. Revenue churn rate can occur due to various reasons like returns, plan downgrades or when customers end a business relationship. This metric provides a view on overall customer satisfaction. Revenue churn rate should be calculated on a monthly basis.
To calculate this first start by subtracting the monthly recurring revenue (MRR) at the end of the month from the MRR at the beginning of the month. Then subtract any revenue gained from upselling or cross-selling to existing customers. Lastly, divide this number by the MRR at the beginning of the month. A negative revenue churn rate means that the businesses gained revenue. Ensure that you do not include revenue gained from new customers in this calculation. This metric is useful in measuring a business’s financial performance.
Time Between Purchases
This metric measures how much time it takes for a customer to purchase from you again. It is an important metric because it shows if your customers are satisfied with your products or services. To derive the best results from this metric you can compare it with other metrics like NPS or net promoter score. If customers are taking long to repurchase from you it could mean that they are purchasing from your competitor. Or it can also mean that they are satisfied with their current purchase of a product or service and do not want to buy again. To understand why customers are taking longer to purchase you can compare it with other customer satisfaction metrics.
To calculate the average time between purchases, you need to keep track of all the purchases made by every customer. A CRM system can help you keep a track of all these purchases. Once you have all the information on each customer and their purchases, add together every customer’s average purchase rate. After calculating the individual purchase rates divide that number with total repeat customers. Ensure that you exclude all new customers from this calculation.
Net Promoter Score (NPS)
Net promoter score measures a customer’s loyalty toward a brand and its products or services. A net promoter score will tell you if your customers are satisfied enough with your products or services to refer them to others. A net promoter score can be simply calculated by asking your customers how likely they are to recommend your brand. The score is between 0-10. The 9-10 score range is for promoters, who are very likely to promote your brand. Passives are the ones giving a rating between 7-8, these customers are indifferent and may switch to your competitors. Customers giving a rating of 6 or lower are detractors, who are unhappy customers less likely to promote your brand. Once you have these scores subtract the percentage of detractors from promoters.
Always ask your customers for NPS when they have purchased your products and have their issues resolved. When customers experience great customer service they are more likely to give higher scores. This metric can show you the satisfaction of your customers with your products or services. Although a high NPS does not guarantee retention, this can be used for referrals like case studies, website testimonials and other types of social proof.
Customer Lifetime Value (CLV)
Customer lifetime value measures how much revenue you gain from a single customer account. This is a metric that helps measure how long a company takes to make the money back that was spent to gain a customer. Businesses track this metric to identify which customer segments are most valuable to them. CLV helps businesses estimate how much revenue they can aim to generate from a customer through the course of their relationship.
To calculate CLV first determine the average revenue amount you expect to earn from a customer during a year. You can calculate this by dividing gross annual sales by the total number of new customers in that year. Next, determine the length of the business relationship in terms of years. Finally multiply the average revenue per customer by the average lifetime of the customer to calculate CLV.
This metric shows you where you need to improve when it comes to customer satisfaction. A happy customer can increase the CLV for your business. Acquiring new customers is costly for any type of business. According to Harvard Business Review gaining a new customer can cost between 5 and 25 times more than retaining an existing customer.
Not sure how to retain customers? Here are some strategies that can help you improve customer retention rate.
With the help of these metrics, you can track your customer satisfaction. Understanding what is causing the customers to leave can make improvements to retain customers. Without measurement there is no way to analyze what will help your customers stay loyal to your business.
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