What Is Customer Retention? (And Tips To Improve It)

By Indeed Editorial Team

Published 4 November 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses use various strategies to retain their existing customers because it is more cost-effective to encourage repeat purchases than to spend on customer acquisition. Marketing and customer specialists focus on satisfying current users, who might later become loyal consumers and can help attract new clients. Learning about retention rates can help you design marketing and social media campaigns and retain customers for a brand. In this article, we define customer retention, explain its importance and how to calculate it and provide tips for increasing a brand's retention rate.

What Is Customer Retention?

Customer retention refers to the ability of a business to convert its first-time customers into recurring consumers and to prevent churn. The retention metric allows a company or a brand to measure the customer satisfaction of its users. A business's retention strategies often focus on improving the services for existing users by offering them benefits, such as promotional offers or loyalty programmes and special discounts for being a recurring customer.

Why Is Retention Important?

Retention rate is a key performance indicator for predicting business growth. Companies might highlight their retention rate to increase investments and sales revenue. Here are a few reasons why retention of loyal consumers might be essential for a business:

Lower cost in comparison to acquisition: Keeping your current users happy is cheaper than acquiring new customers. Brands can focus on retaining existing customers to build a trustworthy brand image and a reliable customer base.
Higher average order value (AOV): Recurring customers often order more than new consumers. You can increase your AOV by encouraging your existing customers to repeat their orders.
Longer list of brand ambassadors: Existing customers are your brand ambassadors. When your product offers them a satisfactory experience, they can promote your services through positive reviews and ratings on social media and bring new users through word-of-mouth marketing.
Easier to design brand campaigns: If you can successfully onboard and retain customers, you may have the data, feedback and consumer stories that might assist you in future brand campaigns. It can help you understand what might work and not work for the target audience.

How To Calculate Customer Retention Rate

You can calculate the retention rate of a business to analyse its revenue and sales and introduce measures to retain its consumers. You can follow these steps to calculate the retention rate:

1. Select a time period to analyse

Select the specific period for which you want to know the retention. You may use the previous months or quarterly customer data to know the exact number of customers. Try choosing a period when the company's customer acquisition and customer attrition numbers changed frequently.

2. Calculate the number of customers at the start and end of the period

Study customer data to understand how many customers the company had at the end of the period. Similarly, trace the data to identify how many users depended on its services at the start of the period. Such data lets you calculate the number of new customers.

3. Use the retention rate formula

You can use a formula to calculate the customer retention rate (CRR) of a business. In this formula, 'S' represents the number of customers or users you have at the beginning of a specific period. 'N' stands for the number of new customers you acquire during the period and 'E' is the number of customers you have at the end of the period. For instance, if you are calculating CRR for the last three months, then 'E' is the number of users you have at the end of three months.

CRR = ((E-N)/S) x 100

Example Of Calculating Retention Rate

Here is an example of how to calculate a company's retention rate:

If a company started the last month with 800 customers, acquired 200 new customers and lost 100 customers, they have 900 customers at the end of the month. Based on this example, the values are:

E = 900
N = 200
S = 800

CRR = ((900 - 200) / 800) x 100 = 87.5%, which indicates the business retained 87.5% of the customers last month. While a 100% CRR might not be possible, many industries consider a CRR between 80% and 90% satisfactory.

Tips For Increasing Retention Rate

You can follow these tips to increase the retention rate of a business:

Create an impactful onboarding process

When customers make their initial purchase or sign up for a subscription service for the first time, you can give them a memorable experience. Prepare a suitable customer roadmap for each step of the customer journey. For example, send a welcome email explaining how to navigate the website or send promotional offers to loyal users. An onboarding process also consists of sending follow-up emails, resolving queries, gathering feedback and sending celebratory messages during special days when you offer discounts.

Implement a customer feedback programme

Ask customers to give feedback regularly and address their problems to improve the quality of your services. You can design a customer feedback programme to collect and analyse customer reviews. Consider distributing feedback to several teams in the organisation and let the subject matter experts resolve customer problems. Businesses often prefer using Net Promoter Score (NPS) metrics to conduct surveys and gather customer reviews.

Start a newsletter to engage with customers

Connect with the customers through a weekly or biweekly newsletter, informing them about time-sensitive deals or new product launches. Email newsletters allow you to educate customers about the brand and build an effective brand image. You can talk about your products and their benefits or give some helpful tips related to your services in the newsletter. For example, if you work with a skincare brand, you can share skincare tips or if you handle a clothing brand, share fashion tips in your newsletter to add value for the consumer.

Establish brand presence across social media

You can increase brand engagement with customers through the company's social media page. Connect with the customers on social media channels, address their queries and examine their reviews on different platforms. Focus on those customers who give low ratings or are unsatisfied with your service's quality.

Surprise loyal customers with valuable upsells

Offer discounts or upsells to loyal customers who use your services often. You can categorise your regular and long-term customers and send selective incentives to them. For example, you can send congratulatory messages or give extra discounts on their birthdays or special occasions. Surprise your high-order value customers with a gift or different upsell on their 50th purchase or offer them an additional week of subscription benefits during the end of their subscription period.

Leverage personalised marketing

Personalised marketing or individual marketing uses data to connect with the target audience. Businesses use data analysis of customers and identify patterns in their purchase behaviour to offer personalised services. This allows companies to reach customers with the right product at the right moment. Personalised marketing may create a satisfying customer experience and generate more leads and higher marketing ROI (return on investment). You can leverage data to target potential customers with customised emails and product recommendations and manage customer relationships with the brand.

Inspire customers with your mission

Businesses might want to ensure women's safety or contribute to green energy through their brand. Similarly, try to define the mission of the brand. For instance, the company can donate a part of its profit share to the education or development of the underprivileged or it might focus on adopting sustainable practices for the company. A mission statement may give customers a unique reason to use your products and increase brand value. Several companies use the CSR (corporate social responsibility) business model to determine their mission, which aims to contribute to the development of society.

Reward brand advocates

Loyal customers can bring new users through word-of-mouth marketing or by talking about the brand on social media. These customers can be brand advocates who recommend your services to their friends and family because they prefer your product. Consider offering them free subscriptions or starting a referral programme and rewarding them whenever they recommend your products. Contact all brand advocates and consider making an online community to discuss new products and what new features customers might prefer in your services. Such forums can become a platform for the brand's affiliate marketing campaigns.

Understand customer's communication preferences

Understanding how often customers want to receive emails or what kind of communication they prefer with the company might be beneficial. For example, a few consumers might like educational content on the brand, some might choose emails about promotional offers or discounts and others might like to you to notify them about a new product launch before the rest. You can give your customer the right to decide what kind of company email they want in their inbox. Sending monthly newsletters may ensure regular engagement with the brand but try to allow your customers to customise their email preferences.