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Keeping customers happy is the smartest and most effective way to grow your business. — Getty Images/Warchi

In the beginning stages of any business, most owners are hoping they can simply find customers that are willing to buy their product or service. Customer retention isn’t a high priority for most people during those early stages.

As your customer acquisition efforts begin gaining traction, your business will start to make sporadic sales. Over time, these sales will continue to grow and become more predictable.

If you make it to this stage, you’re faced with a new hurdle. It’s time to figure out how to get your previous customers to buy from you again and spend more money the next time. This is called customer retention.

Why customer retention matters

The future growth of your company depends on customer retention. Researchers like the Gartner Group found that 80% of a business’s future profits will come from 20% of its current customers.

In spite of this, businesses are twice as likely to focus on customer acquisition than they are on retention efforts. Let’s look at three reasons why customer retention is important:

Affordability: According to the Harvard Business Review, It’s 5-25 times more expensive to acquire a new customer than it is to hang on to the ones you already have. Your current customers are 60-70% more likely to buy from you again whereas the likelihood of converting a new customer is only 5-20%.

Increased revenue and profitability: Improving your customer retention rates will increase your revenue. This is because it’s easier to sell to an existing customer than it is to convince a brand-new customer to make a purchase.

By increasing your customer retention rate by just 5%, your company revenue could increase anywhere from 25-95%. So, by focusing on customer retention strategies, your company will always generate more revenue than by focusing on customer acquisition alone.

Lower customer acquisition costs: Customer acquisition costs are the amount of money a business spends on convincing a new customer to make a purchase. This includes things like marketing expenses, market research, sales outreach, and more.

It’s no secret that acquiring a new customer can cost a lot of money. But focusing on customer retention can actually lower your customer acquisition costs.

Loyal customers are more likely to recommend your business to their friends and family and bring in more word-of-mouth referrals. One study found that customers acquired by word-of-mouth referrals spend 200% more than the average customer. Another important thing to keep in mind is that, once you have a customer, you don’t want to pay to acquire that customer again as if they were brand new.

It’s no secret that acquiring a new customer can cost a lot of money. But focusing on customer retention can actually lower your customer acquisition costs.

Tracking customer retention metrics

Before you can improve your customer retention rate, you have to first understand where you are now. This involves looking at four key metrics.

Understanding how to figure out these metrics and ultimately improve them is key to maintaining and increasing your customer retention. Here are four customer retention metrics your business should be tracking:

Repeat customers:

Your repeat customer rate is the percentage of customers who have made more than one purchase from your company. Tracking this rate is the best way to see how well your retention strategy is working.

To track your repeat customer rate, you need to know two things:

  1. How many customers made more than one purchase within the past year
  2. How many unique customers you’ve had within the past year

The formula for tracking your repeat customer rate is:

The number of customers that bought from you more than once / The number of unique customers

This in not a metric that you should calculate once and forget about. The best way to use this and any business metric is to monitor your performance over time and understand how the methods you use affect this metric.

Customer churn:

The customer churn rate is the rate at which your customers stop doing business with you. This could mean a customer cancels their subscription or stops buying your products. Either way, that’s a customer your business was unsuccessful in keeping.

A certain level of customer churn is normal in any business. Depending on the type of business that you have, a churn rate of between 5 and 7% could indicate a problem.

A high churn rate could indicate that your product or service is failing to help your customers reach their goals. The frequency with which you track and calculate customer churn depends on your business volume.

All of this depends on the product or service you are providing to your customers. For example, if you sell refrigerators directly to consumers and you have a lot of repeat business, that could mean that you are selling bad refrigerators, so keep in mind the nature of your business.

The formula for tracking customer churn is:

(Number of customers at the beginning of the year - Number of customers at the end of the year) / Number of customers at the beginning of the year

Purchase frequency:

Purchase frequency looks at how often the average customer makes a purchase from your business. A higher purchase frequency results in higher revenue and overall profitability.

Calculating the purchase frequency is similar to figuring out your business’s repeat purchase rate.

The formula for tracking purchase frequency is:

The number of orders placed / The number of unique customers

Average order value:

The average order value calculates the average amount of money a customer spends on each purchase. This metric allows you to see how much each customer is worth.

The more each customer spends with you, the less money you need to spend marketing to new customers. This results in higher revenue and less money out the door.

The formula for tracking the average order value is:

Total revenue earned / The number of orders placed

4 ways to improve customer retention

Now that you understand why customer retention matters and what metrics you should be tracking, let’s look at four ways you can begin to improve customer retention:

Be accessible

Regardless of your industry, being easily accessible is an important part of building trust with customers. This is especially true if a problem arises.

A 2016 survey looked at the top customer service frustrations faced by 1,200 consumers. The survey found that the top cause of frustration with customers is if the wait time to speak to a representative over the phone is too long.

To ensure you are accessible to your customers, you should

  • Allow customers a way to get in touch with your company 24/7,
  • Provide a variety of ways for customers to contact you such as through email, live chat, a phone call, and social media,
  • Offer customers the option to receive a quote or ask a question on your website, and
  • When customers call, make it easy for them to bypass the automated phone service and speak to a representative.

Personalize the customer experience

What does it mean to personalize the customer experience? To put it simply, it means that all of your customers are different, so you should interact with each one differently. You wouldn’t talk to a long-term customer the same way you would talk to someone who just signed up last week.

You can personalize your interactions with your customers based on their location, purchase history, product variety, and more. One study found that when companies create a personalized customer experience, they generate nearly four times more revenue than companies that don’t.

You can personalize your interactions with your customers in the following areas:

  • Email marketing
  • Social media
  • Your website
  • Webinars

Ask for feedback

Requesting and acting on customer feedback is the key to customer loyalty. After all, you can’t improve your customer retention rates if you don’t know why your customers are leaving you in the first place.

Once you understand the steps that lead to customer churn, you can begin to reduce it.

It isn’t enough to act on customer complaints, you need to learn how to prevent the complaints in the first place. For every unhappy customer that reaches out, there are 10 others that simply chose to never do business with you again.

A few methods of soliciting and receiving quality customer feedback are:

  • Send email surveys to all new customers and ask them for feedback on their experience.
  • Send out an email survey every time a customer complaint ticket is closed. This will help you determine whether the customer service agent was able to provide a solution that met the customer’s expectations.
  • Always provide a customer feedback form on your website.
  • Provide live chat support on your website; 44% of customers feel like this is the most important feature e-commerce businesses can offer.

Create a loyalty program

One of the best ways to increase customer retention is by creating a loyalty program. Loyalty programs allow you to provide more value to your customers and give them an incentive to continue doing business with you.

However, your loyalty program is only as effective as the number of active participants you have. Most customers are members of 19-29 different loyalty programs but only actively participate in about 5-12.

Keep the following points in mind when considering a loyalty program:

  • Make sure that it’s easy for your customers to understand how they can earn and redeem points.
  • Make sure that you have a good onboarding strategy in place for new members.
  • As soon as a new member signs up, send them an email thanking them and letting them know how they can earn more points.
  • Give members ways to earn points and rewards beyond just making a purchase. For instance, your customers could earn additional points for referring a friend, social sharing, and more.

The bottom line

Finding and obtaining new customers will always be a priority for businesses. But once that customer makes their first purchase, there is more work to be done.

Smart businesses know that the real value lies in keeping that customer, not just earning the first sale. Current customers already know your company and enjoy your products or services, so invest most of your energy in improving the experience for them. If you do this, you’ll see more growth in revenue and profitability than you will be just by focusing on customer acquisition alone.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

Published February 25, 2019