Wouldn't it be nice if you could win a new customer and then have them pay you for services and products not once, but many times?
Wouldn't that be just beautiful?
Well, that's called customer retention and if it's something you're into achieving in your company (and why wouldn't you be), then get ready for a whirlwind trip through the topic.
We'll show you how to measure, manage and improve customer retention.
You'll learn why the classic calculation of customer retention – the one most blogs seem to think is right – is, quite frankly, about as useful as a building made from KY Jelly.
You'll find out why customer retention begins before customer acquisition.
And obviously, because we're a company that sells a survey tool, I hope I can convince you that using surveys will help you improve your customer retention and ultimately make you feel like you're diving into Scrooge McDuck's money pool.
Ready? Let's go!
Oh wait. Here's the contents:
What is customer retention?
Customer retention is a metric that helps you understand whether an existing customer will continue to buy from you or whether they will churn.
Ultimately, if you want your business to grow focus on how you can improve customer retention: Not only will engaged customers repeat purchase (increasing the customer lifetime value when they do), but every time they tell their friends or colleagues how satisfied they are, you'll increase the odds of getting a new customer.
What’s the importance of customer retention?
- Increase customer lifetime value
- Decrease customer acquisition cost
- Generate referrals, further decreasing customer acquisition cost
Customer retention is a really important metric for any business. It helps you manage a couple of vital things that you'll need to stay on top of if you want to grow as a company.
Firstly, it helps you to increase customer lifetime value. Customer lifetime value (LTV or CLTV depending on your industry) is the amount of money that each customer pays your business across the period they buy from you.
Brand loyalty is one of the best ways to grow a business. Imagine you've drunk Coca-cola your whole life and then Pepsi releases a new soft drink – how likely is it that you'll stop buying Coke and start buying NewPepsi?
If you have a high customer retention rate, your satisfied customer will greatly increase their value to your business.
And if you increase the value of each customer in your business by making sure they buy from you frequently, then you also increase the amount of money that you can spend to acquire a new customer.
That leads us on to decreasing the customer acquisition cost, which is really a two fold reason to carefully manage customer retention strategy in your business.
How much your sales and marketing team effectively pay for a new customer really matters in business. For example, if they need to spend $100 dollars on advertising to get a new customer, they're going to want to make sure they become a loyal customer so that they can see a return on their ad spend.
If I have high customer loyalty, I know that I can outspend my competitors to acquire market share. That means I can grow my business.
The other way that the work you put in to improve customer retention decreases acquisition costs is that satisfied customers generate referrals.
Actually, loyal customers will tell their friends and colleagues about your business when they've had a good experience (87% according to research done by Zendesk) but, if you don't do so well, not only will you lose one loyal customer, they'll actually become detractors from your brand and 95% of detractors will tell their friends about their bad experience.
By the way, for more on how to find the promoters and detractors in your business, check out our guide to what metrics measure customer satisfaction – which is closely linked to customer retention.
Hopefully you're starting to see how closely customer retention and business goals are linked. So now let's talk a little about some different ways you could calculate customer retention rate.
How do you calculate customer retention rate?
Look, I'm going to be honest, most articles on this topic are overly simplified. If you Google 'customer retention rate' this is the top answer:
Simply put, customer retention rate is the percentage of customers you keep relative to the number you had at the start of your period. This does not count new customers. It is the reverse of customer churn.
And yeh, to a certain extent that's true. If you measure the number of customer you keep relative to the start of any (say) year, then you'll get an idea of your customer retention rate.
But are all customers equal?
Let me give you a genuine example from my own business. At doopoll, we've got customers who pay us £9 a month. And I love them. Those people are generally single person businesses who are saying they value doopoll enough to pay with their, often, scant resources – they're growing their business but they also want to help grow mine and I love that.
On the other hand, we have customers who pay us £2000 a month. Now, those businesses also generate huge amounts for us in referrals. One recent customer brought in hundreds of new users for doopoll just by sharing their survey on their website.
I would need to churn 222 customers on our £9 package to make up for losing a single £2000 month user.
The pain of losing 222 customers at once would be immense and long lasting, but the pain of losing £24,000 a year in repeat business would be devastating to the business.
And that's why I'm telling you that retaining customers isn't just about some absolute percentage. You should be considering your customer segments a little more closely when you're measuring customer retention rate.
I'm going to give an overview of a couple of ways to measure customer retention rate that are more accurate than the dudes who all copied eachothers answers on Google without thinking about it.
The first one is measuring the percentage of gross retention rate in terms of revenue rather than absolute number of customers. This is also sometimes called gross churn (but I'm an optimist). To calculate gross retention, you would do this sum:
($) Total revenue churn this period / ($) Total revenue at the start of this period X 100 = (%) Gross retention churn rate
In practice, that might look like this if I had a turnover of $100,000 and then lost $50,000 in the past 365 days:
50,000 / 100,000 x 100 = 50% retention rate
And my gosh if I ever saw a 50% retention rate the scene would look like this:
This is good as a metric because it allows you to get a brutal reality check if you're doing badly (so you can pull the team together and make changes fast) but it also has a real downside.
And that downside is why most people prefer net retention rate or net churn rate which can be calculated as follows:
(Revenue churn - New Revenue) / Total revenue at the start of the period X 100 = (%) Net revenue retention rate
Why is net retention a better metric?
Net retention can be a negative figure because you're factoring in new revenue. This metric has all the benefits of the gross revenue retention metric (i.e. it can be a reality check) but it also allows you to track the health of the business.
How do you add new revenue?
Increase the value of customer by having them by more (repeat customer) or more expensive stuff from you (more valuable customer), or by acquiring new customers either through sales or by generating referrals from a loyal customer (which will make your marketing department insanely happy).
The reality of all of the above, as you saw in the doopoll example, is that your customer retention metrics should always by looked at on a cohort and/or customer segment basis.
A cohort would be a group of customers who originally bought from you in a particular time frame – measuring like this would allow you to understand how to better talk to a potential customer by aligning your value proposition to a similar value prop that a high performing cohort saw.
A customer segment measurement allows you to see whether you have a particularly high repeat purchase rate among a specific segment of your customer base and potentially to discourage a sales rep or your marketing team from trying to acquire customers in a low value segment.
But whatever you do, unless you have only one type of customer buying only one tier of product, don't leave your customer retention rate to the top articles on Google's recommendations. You'll quickly see that there's a lot you're probably missing out on that could increase customer lifetime value for you drastically.
How do you create customer loyalty?
A lot of people think they know how to create customer loyalty. After all, it's simple right? You offer a loyalty program and bangarang! LOYAL CUSTOMER made! After all, who could refuse to buy from you eternally when they get a free coffee for every ten they buy?
This is the wrong approach to turning an existing customer into a lifetime customer.
The path to creating high value customers is dependent on the following factors:
- How likeable your brand is
- Your cult level
- Whether you have engaged customers well
- How satisfied your customers are
Let's talk about each of those in turn, starting with likeability.
How likeable is your brand?
No matter what anyone tells you, the quality of your product matters more than anything. That extends to the brand itself. Factors like price, ease of access and look might matter in the short term — but if a customer is going to buy from you again and again, they're going to want a quality product and a likeable brand.
To illustrate this, let me give you a concrete example of when quality matters.
While I'm not a hairy man, I do, once in a while need to shave my approximately 3-4 facial hairs off. Up until a few years ago, I had been using Gilette or some other brand of shaving foam. After all, it was available in the supermarket I live 5 minutes from. Why would I buy anything else when it was so available and so cheap.
But here's the literal rub: using shaving foams and gels like that was giving me shaving burn and dry skin.
And then a guy I did some work for told me that I should switch to the shaving oil he was making in his kitchen. It was more expensive and less convenient to buy because it was artisanal and sold by mail order only. And yet, I haven't shaved with anything other than Old Faithful (the brand he built himself) in more than 5 years now.
His quick pitch to me in a car park after a workshop we ran together turned into a lifetime value of hundreds of pounds.
That's the power of a likeable brand. And it doesn't just need to be artisanal shave oil.
Let me join your cult please?
This is closely related to the concept of cult brands.
A cult brand is a brand that has generated so much loyalty among a group of people that the customer retention strategy now relies only on continuing to be yourself as a brand.
A good example of this is Hiut Denim. A small jeans brand which is punching far above its weight. They've built their brand around the cult of Hiut: know where the jeans are made and who made them; pay for quality; be proud of your jeans.
If you go to a creative conference of any kind or if you ever get to visit a startup's office, you can place a good bet on circa 50% of the denim in the room being Hiut Denim. And that's what cult like status looks like.
It's hard to generate cult like loyalty from your customers. But by focusing on what makes your brand truly unique and doubling down on that in every bit of marketing and communication, you can make it work!
Let's get engaged
So maybe you're working on building cult-status for your brand, and you want to do something today to improve customer loyalty. Why not just... talk to your customers?
According to Accenture, 33% of customers abandoned a business relationship because personalisation was lacking. Which is wild. Because even when you've got 1000 customers, it only takes a 2 minute personal email to 3 of them a day to get through your entire customer base in a year.
And what would a quick acknowledgement of some of your finest customers on social media do for your brand?
In fact, if you look at the social media accounts of the biggest and best brands, you'll notice how well they do this.
Social media expert Owen Williams recently shared his insights into viral social media with us. One of the examples he shared on Twitter was this beauty of a social media campaign by Lemonade Inc. (an insurance firm) who generated huge customer engagement by asking what customers wanted 'covered' and then proceeded to use their brand color to dip those things in paint, posting a picture to Instagram.
It's dumb but it works. The engagement is huge.
Once a brand has engaged with you, it becomes less a brand and more a set of people who have acknowledged your humanity. And while that might seem overly philosophical, in a world of impersonality and anonymity, being counted as an individual by other individuals is one of the most powerful ways to engage customers.
So forget that customer loyalty program and focus on increasing client retention through better engagement of your customers.
I can get satisfaction
Customer service and customer experience also play a huge part in building a business of retained customers. Addressing customer complaints early and often, as well as helping them resolve their issues will generate customer satisfaction.
And high levels of customer satisfaction help brands to retain their current customers and existing client base. 67% of consumers cited bad experiences (read: low customer satisfaction) as a reason for churn. Big takeaway: deal with each customer complaint!
One way to ensure that you don't find out about a bad experience when it's already too late (i.e. doing the exact opposite of improving customer retention) is to regularly use surveys with your customer base.
There are many popular existing metrics to measure and systems you can use to ensure that you're getting the right feedback. Here's a good summary of NPS, CSAT and CES which are some of the most popular as well as a couple of less rigorous but equally popular systems.
But just for reference, around 65% of companies measure NPS compared with 44% that measure CSAT and 14% that measure CES.
We actually have templates set up for all the major customer satisfaction surveys. It's free to get started with doopoll and you'll see much higher response rates versus tools like SurveyMonkey. Here's links to each of them:
- Net Promoter Score (NPS) survey template
- Customer Satisfaction (CSAT) survey template
- Customer Effort Score (CES) survey template
Pro tip: Use your marketing automation platform to send out these surveys based on events that happen in the customer journey.
How can you tell when someone will churn?
Knowing when a customer will churn is difficult without a good level of forethought. But with a bit of careful consideration of your data and a bunch of customer engagement through surveys and good customer relationship, you'll be able to have a good idea of when a customer will churn.
The key thing to focus on is developing a customer satisfaction lifecycle. One way that you can do this is by instituting a simple customer satisfaction strategy.
The idea of this is to consistently survey customers to understand their needs, frustrations and joy at using your product. The outline of your strategy is a quick answer to each of the following questions:
- What would you consider to be high levels of customer satisfaction?
- How will you track customer satisfaction levels?
- How will you improve customer satisfaction?
There are ways to predict customer satisfaction without surveys, but there are also some downsides to these approaches. For much more detail, here's an article we wrote on that topic.
The most important thing to remember is that maintaining high levels of customer satisfaction is the best way to ensure that the risk of churn is minimised.
How can customer loyalty be improved?
And so all of this leads us neatly on to how you can retain more customers. Remember how dumb it is to think that a customer retention program can be driven by some kind of loyalty program (put that loyalty card down, friend). And now let's think of some of the ways that you can ensure high quality customers stay and purchase from you time after time.
Make sure your value proposition is clearly displayed pre-purchase
Weirdly, customer retention and brand loyalty actually starts pre-purchase. When a customer is thinking about whether to use the product you provide, your marketing or some word of mouth referral has communicated a message to them about how you can change their life (in whatever way).
Whether the customer's perception of your product's value and the real value proposition of your company line up is actually vital.
80% of customers churn within the first 3 months of signing up for an app. And as this pretty great post outlines, poor communication of the value proposition is often to blame.
Lesson: make sure that your value proposition is clearly displayed before a customer purchases. That way, they won't have to cancel when they realise their idea of what your company could do for them wasn't realistic.
Run retention campaigns when customer activity decreases
Marketing automation is beautiful. We probably automate 60% of our processes at doopoll. But running a retention campaign can be a high impact, low effort way of positively moving the metrics in your customer retention strategy.
The way to do this is to work out what the indicators that a customer might churn are for your business.
Because each company is different, I can't give you an exhaustive list of these but here's a few standard ones:
- A customer stops responding to messages
- A customer complains a lot
- A customer stops logging in to your digital product
- A customer leaves a low NPS score on a survey
I know, for example, that a doopoll customer is likely to churn if they don't hit the share menu on their survey once they've built something.
I can use that data to feed them a series of automated messages while I work out how to better help them in a more personal way.
That message thread might include things like:
- An email outlining how to share their survey
- Sending an in-app message asking if they need a hand
- Adding them into a drip fed course on how people are getting more responses to surveys
What works for me, won't necessarily work for you in your company. But this should give you some idea of how we have handled automated retention campaigns in the past.
Customer feedback is vital
Did you know that 67% of customers mention bad experiences as a reason for churn, but only 1 out of 26 unhappy customers complain. Ensuring you stay on top of customer retention metrics and live up to customer expectation will also improve the likelihood that you'll retain customers.
As we outlined above, you need to be feeding customer feedback into your strategy at all times. And no-where is that more obviously useful than predicting whether a customer is going to churn.
Use customer feedback to make changes to your product and your processes to ensure that customer satisfaction increases throughout the customer lifecycle.
And now, I want to make a quick pitch for why you should use doopoll to do that. Here's three short reasons:
- doopoll is easy to use and your team will love being able to break down the live results by segments of customers – it's genuinely a joy to use the reporting
- We see 3-4x the response rate of other survey tools like SurveyMonkey. But because we're so confident that we'll outperform any product out there, here's an article where we compare alternatives.
- doopoll is free to get started and our pricing is aligned to your success. When you get more responses, you'll see the value of those responses and upgrade to a plan that suits your business. You can create your first survey in under 5 minutes by clicking here to get started.