What is customer retention?
These days, it takes a lot of hard work to earn the attention of a customer. Retaining that customer can be even more difficult.
Low customer retention is one of the leading causes of business failure, especially within the SaaS industry. Having an effective customer retention strategy, therefore, is a critical component of long-term success. We’ll go over customer retention, why it’s important, and strategies you can implement to increase your business’s customer retention rate.
The definition of customer retention
Customer retention is a company’s ability to keep its existing customer base over a defined period of time.
The process of customer retention begins with customer acquisition. To increase retention, first focus on acquiring high-quality customers who are likely to stay with your company for the long haul. This means, in part, identifying potential prospects who fit your ideal customer profile (ICP), which assesses a customer’s readiness to buy, capabilities, expansion potential, acquisition efficiency, and more.
Once you’ve acquired these customers, you need to nurture and cultivate them into lifelong promoters of your product. You can accomplish this by delivering an excellent, consistent customer experience, driving value attainment, and offering exclusive deals, content, and loyalty rewards.
Why is customer retention important?
Customer retention is important because it costs significantly less to keep an existing customer than it does to acquire a new one. In fact, it’s estimated that the cost of acquiring a new customer is five times more than the cost of retaining an existing one.
In addition to being more cost-effective, customer retention allows you to build a relationship with your customers. The longer a customer stays with your company, the more likely they are to become a brand advocate and recommend your product or services to others. This sort of extensive relationship also gives you the opportunity to understand your customers better and demonstrate ROI, providing a higher possibility of upselling or cross-selling.
Finally, customer retention helps you predict future sales and increase your customer lifetime value. If you have a high customer retention rate, you can be fairly confident that your customer base will continue to grow over time. Plus, if you notice trends in the types of customers that tend to stick around, you can refine your ICP and focus sales efforts on similar prospects.
Customer retention rate explained
Customer retention rate is the percentage of customers who continue to do business with your company over a period of time. It’s important to track your customer retention rate because it gives you insights into the health and valuation of your business.
How to calculate customer retention rate
The most common method for calculating your customer retention rate is to do the following:
- Take the number of customers at the end of a period of time
- Subtract the number of new customers acquired over that same period of time
- Divide this number by the number of customers you had at the beginning of the given period
- Multiply that number by 100
The resulting number is your customer retention rate.
What customer retention rate means
It’s important to note that benchmarks for customer retention rates vary by industry. For example, the customer retention rate for SaaS is generally much higher than the customer retention rate for the retail industry.
This metric measures the health of your business since it directly indicates how well you’re retaining your customer base. A high customer retention rate means you’re keeping your customers happy and satisfied, while a low customer retention rate indicates you may need to address issues with your customer experience and implement some new customer retention strategies.
When you examine your customer retention rate alongside other metrics, you can build an even more complete picture of the state of your business. If you analyze your customer retention beside your customer lifecycle phases, for example, you can see at what point customers most often discontinue service or where they get the most excited about your product.
Customer retention rate can also provide more context to data like product feedback and feature usage and help you improve sales touchpoints and support interactions.
4 benefits of customer retention
1. Increases the value of every sale
Customer retention increases the value of every sale because each customer you retain is worth more to your company than a new customer you acquire.
Remember, the cost of acquiring new customers is much higher than the cost of retaining existing customers.
So, not only does customer retention increase the value of each sale, but it also increases the lifetime value of each customer. The lifetime value of a customer is the total amount of revenue that a customer will generate for your company over the course of your relationship with them.
The longer a customer stays with your company, the higher their lifetime value will be. They will continue to make purchases over time and, hopefully, refer new customers to your services.
2. Provides a deeper understanding of your customers
The longer a customer stays with your company, the more data you can gather on their purchasing habits and preferences.
This data allows your team to make better decisions regarding marketing strategies, product development, and sales efforts. With a clearer understanding of what your customers want, you can successfully provide them with the solution to their problems.
3. Builds referrals, references, and loyalty
Customer retention builds customer loyalty, which in turn helps increase the number of referrals you receive. Satisfied customers are more likely to tell their friends, family, or colleagues about your services.
The longer a customer stays with your company, the stronger their sense of trust in your product and brand becomes. These loyal customers are more likely to continue to do business with your company even if/when they run into problems. They now have a personal connection to your brand and trust that you’ll resolve any of their issues.
4. Reduces customer churn
Since customer churn really is the opposite of customer retention, this benefit may seem obvious. The better you can retain your customers, the less likely they are to churn, and the less likely you are to lose their business to a competitor.
Customer churn is the percentage of customers that stop doing business with your company over a period of time. A high customer churn rate indicates major problems for a business because it means they’re losing more customers than they’re gaining, signaling a decline in revenue and profits.
Increasing retention reduces customer churn.
Getting down to the basics
Customer retention is one of the more basic and more important metrics for your Customer Success team. If your customer retention rate is low, you should be focusing all of your efforts on improving it. Not only does it affect your sales, but it can also affect your word-of-mouth referrals and ability to secure outside capital.
If you’re looking for more foundational Customer Success information, read through the rest of our Churnopedia, an extensive glossary that can help boost your strategies by offering a deeper understanding of SaaS business.
If you’re ready to put your new knowledge to the test, check out our blog post: “9 customer retention strategies for a SaaS company.”« Back to Glossary Index