What Is Customer Retention?

Definition & Examples of Customer Retention

A business owner laughs with a loyal customer.

Luis Alvarez / Getty Images

Customer retention is a business’s ability to turn customers into repeat buyers, and it’s an important aspect to consider, as product and pricing alone are not enough to keep your customers happy. The question to ask is, how do you keep people coming back after that first initial exposure? The answer lies in implementing strategies focused on customer retention. If you make customer retention a priority, your business may discover increased business profits.

What Is Customer Retention?

Customer retention is, simply put, making your customers happy enough to stick with your company and not jump ship to your competitors. Your business may excel at attracting new customers, but if they’re ready to leave shortly after being introduced, that’s a significant problem. 

Maintaining loyal customers involves more than offering impeccable buying journeys and a quality product or service. You have to build a relationship with your customers in the same way you would a relationship in your personal life—through trust building, active listening, and consistent communication.

The ultimate goal of retention is to foster a vibrant, long-term relationship, which requires that you actively ensure your customers’ needs are fulfilled. 

How Customer Retention Benefits Small Businesses

Many businesses may not realize that increasing their customer retention rate (CRR) by even 5% can significantly boost profits. In financial services, for example, a 5% increase in customer retention produces more than a 25% increase in profit, according to research conducted by Bain & Company.

Depending on the industry you’re in, it could cost your business five to 25 times as much to attract new customers as it does to turn current customers into loyal ones.

Developing a customer-retention game plan is one of the most often-overlooked business strategies, despite how big of a payoff it returns. Only 18% of businesses focus on retention, while 44% of businesses admit to spending more time, energy, and money on customer acquisition efforts, according to the most recent data from consulting firm Invesp.

How Do You Calculate Customer Retention

Calculating your business’s CRR is relatively simple.The customer retention rate formula is ([E-N]/S) x 100 = CRR. Record and collect these metrics to run the calculation:

  • The number of customers at the end of the period (E)
  • The number of customers acquired during the period (N)
  • The number of customers at the start of the period (S)

Subtract the number of new customers acquired (N) in a certain time period from the total number of customers at the end of the period (E). Divide that total by the number of customers at the start of the period (S). Multiply by 100, and that is your current CRR.

While the goal is 100% customer retention, measuring a good CRR depends on your industry. No matter which industry you’re in, if your CRR hovers around the 15% range, it’s time to start implementing customer retention strategies, according to software company ProfitWell.

How Do Businesses Improve Customer Retention?

Improving your business’s CRR is closely tied to customer relationship management (CRM)—the combination of technology and techniques a company uses to further nurture its relationship with customers. To build and maintain that connection with your customers, use these six customer retention strategies.

Streamline the Buying Journey

It’s important to consider what emotions you want customers to experience during that initial visit to your brand, and while considering purchases with you. If it’s mainly confusion or frustration, you’re probably not going to retain customers. If it’s relief or satisfaction, you’re on the right track. One out of three consumers (32%) admitted they do walk away from a brand they love after just one poor experience, according to a 2018 report by PWC.

Focusing on customer experiences (CX) and user design (UX) from the beginning to end of your customers’ buying journeys is imperative for boosting customer retention. 

Ensure customers are getting what they want quickly and without headaches, and they’ll keep coming back. Customers are willing to spend more with a business in return for a “friendly, welcoming experience,” the PWC report noted.

Focus on Employee Job Satisfaction First

The best advocates and marketers for your business are the ones already working for you: your employees. Unfortunately, according to 18 years of research by Gallup, only 34% of U.S. employees are actively engaged in their work. Not building employee loyalty, according to estimates from Gallup, is a lost growth opportunity for many businesses, and costs the U.S. economy roughly $450 to $550 billion per year.

By focusing on your employees’ satisfaction through non-monetary or low-cost incentives and perks, as well as working on communication, you can improve customer satisfaction and, in turn, your business’s CRR.

Cultivate Flawless Customer Service Experiences

You can earn customer trust by showing dedication and initiative, and doing things like  following up and listening to their opinions. Don’t wait for them to make the next move—express gratitude for loyalty, whether that be through social media, campaigns, or when they visit your in-person shop. Most importantly, resolve issues with your services or products quickly and thoroughly, as speed and efficiency are key aspects of getting customers to come back. By going above and beyond for your customers, you may be rewarded with a higher CRR.

Providing exceptional service for your customers increases the chances they’ll publish a positive review or recommendation of your company. Those recommendations will have more value and come to your business with more inherent trust and personal investment than leads from advertising. 

The Power of Customer- and Influencer-Driven Marketing

Word-of-mouth marketing (WOMM) from employees and customers can boost customer acquisition and retention numbers. 

Influencer marketing has become an integral part of WOMM over the past few years, according to a 2021 benchmark report from Influencer Marketing Hub. Just take a look at the numbers:

  • The influencer marketing industry is predicted to grow to $13.8 billion in 2021
  • Nearly half of businesses have a dedicated budget for influencer marketing
  • 90% of survey respondents said they believe influencer marketing is an effective form of marketing
  • Instagram is the most popular social media channel for influencer marketing

Email marketing, social media, and referral marketing are some other effective methods for boosting customer retention. They can be useful tools for keeping your customers engaged and informed on what’s happening with your business, and also help you receive direct feedback on how to improve your business. 

Reward Customer Loyalty

Incentivize the brand loyalty of new and existing customers by rewarding them for continually choosing your business.  According to a 2017 report by Segment, 54% of consumers expect to receive a personalized discount from businesses within 24 hours of identifying themselves to a brand.

Consider offering an email coupon after a purchase or site visit to thank them for choosing your business, and encourage future interactions by offering discounts, rewards for referrals, freebies, giveaways, or beta testing after sign-ups. 

Key Takeaways

  • Customer retention is a business’s ability to turn new customers into repeat, loyal buyers.
  • Employee happiness comes first: Happy employees boost CRR and unhappy ones can lead to significant customer losses.
  • Make sure your customer service is responsive, compassionate, and accessible, as customers who feel frustrated by the experience tend to leave and not come back. 
  • Think like your customer by engaging consistently and prioritizing feedback, and also reward them for continued loyalty.