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How to optimize customer retention

This guide covers everything you need to know about effectively retaining customers and minimizing churn.

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Retaining customers and minimizing churn is vital to the success of your business. Optimizing customer retention helps your business grow at a sustainable rate and keeps your profits higher. Creating highly loyal customers who stay with your company for years to come is less expensive and generates more revenue. 

This guide will cover everything you need to know about effectively retaining customers. 

What is customer retention? 

Customer retention strategies are the collection of activities and tactics your business can use to increase the number of repeat customers, and also how much profit each existing customer generates. 

These strategies allow your business to provide more value to the customers you already have, and in turn, extract more value from them. They aim to optimize the customer experience and profitability of your existing customer base to create a more sustainable business foundation. 

This doesn’t mean gaining new customers goes by the wayside. Both strategies should work together. Your customer acquisition strategy attracts a strong base of customers while your retention strategy helps you build relationships with customers over time to maximize revenue. 

Why is it important?

Customer retention has multiple benefits for businesses of any size, no matter if they’re brand-new or well-established organizations. Mainly, customer retention capitalizes on the ease of turning existing customers into repeat ones.  By focusing on people who have already signed up for your services or purchased a product, you can reap many benefits for the long-term health of your business. Here are several other benefits of customer retention. 

Cost savings

Acquiring new customers is expensive. In fact, it costs five times to acquire a new customer than to retain an existing one. You need to spend money on marketing and advertising or offer enticing first-time discounts to get people in the door (whether in your brick-and-mortar shop or online). Thus, spending time and effort on keeping the customers you already have can create long-term cost savings. 

Positive word-of-mouth marketing

Loyal customers aren’t just saving you money on acquisition costs, they also have significant value to add to your marketing strategy. Happy and loyal customers are more likely to refer your brand to their peers. People are more likely to value and trust recommendations from people they know. 

Better bottom line 

Focusing on customer retention saves your business money, benefiting your overall bottom line. That’s why it’s such a powerful engine for business growth. And the increase in retention doesn’t need to be massive to make a difference. In fact, research done by Bain & Company shows that increasing customer retention rates by 5% increases profits by 25% to 95%. That’s why the advantages of customer retention are too important for any business to ignore. 

Customer retention metrics 

There are multiple metrics your business can use to calculate your customer retention rates, and using them together will help you get a good picture of where your company currently stands and where you should make improvements. Here are a few of the most common customer retention metrics and how to calculate them. 

Basic customer retention rate formula 

Your customer retention rate is the percentage of customers who remained loyal to your business over a specific period of time. 

To calculate your basic customer retention rate, first pick the period of time you want to measure. Then identify how many customers you had at the beginning of that period, how many you had at the end, and how many you gained. Finally, use this simple formula to calculate your customer retention rate: 

Customer retention = [(# customers at end of period - # customers acquired during period) / # customers at start of period] x 100

Repeat customer rate 

Your repeat customer rate measures how many people who purchase from your business who purchase a second time. The higher your score, the more willing customers are to return to your business. 

Calculating your repeat customer rate requires two pieces of information: 

  • The number of customers who have made more than one purchase in a specific period of time

  • The number of unique customers who purchased from your store in a specific period of time

Once you have this information, use this formula to calculate your repeat customer rate: # of customers that purchased more than once / # of unique customers. 

Purchase frequency 

Your purchase frequency metric shows you how often customers purchase your goods or services. Since repeat customers are often responsible for a large portion of annual revenue in many industries, this metric can be very important. 

Calculating your purchase frequency metric is similar to calculating your repeat purchase rate. Using the same time period you chose for your repeat purchase rate (such as a single quarter), then divide your store’s total number of orders by the number of unique customers. 

The formula looks like this: Purchase Frequency = # of orders placed / # of unique customers

Average order value

The average order value (AOV) metric can help you determine how much your customers spend, on average, when they make a purchase. Your average order value should be calculated using the same time frame you set for your repeat purchase rate and purchase frequency rate. From there, you simply divide your yearly revenue by the number of orders your business processed.

The average value order equation looks like this: AOV = total revenue earned / # of orders placed

Customer value 

The customer value metric helps you understand how much each customer is truly worth to your business. To calculate it, you need to multiply your purchase frequency and average order value together. Here’s the formula: Customer Value = Purchase Frequency x AOV 

By determining your customer value, you can accurately track your efforts over time and understand the power of customer retention.

Customer retention strategies 

Customer retention strategies, which are part of your customer retention management efforts, are the initiatives and processes that your business puts in place to build customer loyalty, increase customer satisfaction, and improve your lifetime customer value. 

Different strategies will work for different types of businesses. By combining the right mix of customer retention strategies, your business can effectively strengthen customer relationships and provide an exceptional customer experience. 

Gather customer feedback 

Customer feedback is one of the most vital tools to increase your customer retention and reduce customer churn. By asking your customers what they think using a customer satisfaction survey, you can ensure your products, services, and experiences are meeting their expectations and also understand where you’re falling short. 

Using feedback to make improvements that really matter to your customers is the most effective way to create an exceptional customer experience and increase loyalty.

Use customer accounts 

Ecommerce shops that enable your customers to create an account make repurchasing easier while removing friction from the experience. They will have instant access to their previous orders, and won’t need to fill out all their shipping and billing information when they repurchase. 

However, forcing new users to create an account can backfire as it can be seen as too much of a commitment. It’s a best practice to allow customers to create an account, but not to require that they do so.

Improve customer services 

Your loyal customers don’t expect that they will never have an issue with your products or services. However, they do expect that when one arises, your company will fix it quickly and effectively. If your customer service is not living up to those expectations, customers may churn. 

Instead, create a great support system for your customers by communicating effectively and enabling customer service reps to help customers both before and after they make a purchase. Offering the right level of support when needed can prevent customers from getting frustrated and turning to a competitor.

Start a loyalty program 

Loyalty programs are a very effective way of retaining customers and increasing purchase frequency. They motivate customers to increase their purchase frequency and amount in order to earn valuable rewards. It’s a win-win: your customers get more value each time they shop with you, and your business benefits from their repeat purchases. 

Offer a discount or credit to return 

Another effective way of encouraging repeat purchases is to send your first-time buyers a discount code after they make their initial purchase. It can nudge them to return again and become regular customers. Offering a discount code can also encourage customers who haven’t purchased from you in a while to return as well, as they’re reminded of your products or services and tempted by the additional value. 

Deliver fast support 

Speed is of the essence when a customer issue arises. Faster replies to questions result in higher levels of customer satisfaction and speedier resolutions. Even if you simply reply to each customer issue by letting them know you're looking into it, this enhanced communication is reassuring to customers. They feel that you’re taking their issue seriously and when you follow up fast, they feel satisfied by the results. 

Communicate with your customers 

The importance of communication doesn’t end with fixing issues. You should proactively communicate with customers on a regular basis. You can send them email newsletters about business and product updates, new product launches, personalized offers, or service success stories. 

Want to go above and beyond? Use your CRM data to personalize your emails to your most loyal customers and celebrate key milestones in their relationship with your brand. Your customers will feel seen and valued, and that leads to greater retention and loyalty. 

Examples of customer retention tactics

Some companies truly stand out from the crowd with their effective customer retention management tactics. These great customer retention examples can inspire you when you’re looking at how to create your own retention plan. 

Starbucks 

The Starbucks Rewards program is a top-notch example of an effective customer retention tactic. Using the Starbucks app, customers can earn rewards for every purchase they make. Those rewards can be used later to get free food and drinks. Since payment for all orders in the app needs to be made through the app itself, it generates a huge amount of customer data. Starbucks uses this data to gain a deeper understanding of what each customer needs, allowing them to personalize their offerings to each customer even further.

Amazon Prime

Amazon’s Prime membership program is both a customer loyalty and customer experience program. Customers pay an annual fee to be a part of it, which differentiates it from most other customer loyalty programs. In return, they receive extensive benefits such as same-day delivery, access to a vast library of streaming music and video options, and exclusive offers and discounts. 

By making purchases effortless (you can buy with just a swipe when using a smartphone) and delivering fast, Amazon Prime encourages customers to return again and again to purchase anything they need. Plus, since customers pay for the service, it also delivers revenue to the company. 

Nike 

Nike knows that exercising regularly is hard and people are more likely to do it if they’re part of a group than if they’re on their own. To encourage their purchasers to exercise more often, they developed apps and partnerships that help people build a sense of community such as the Nike Running Club. This club lets solo runners partner up with other runners online as a kind of virtual running club, replicating the sense of teamwork and the cheerful competition that happens in real-life running clubs. 

These free apps and partnerships boost Nike’s brand image and awareness, while also encouraging the purchasers of its clothing to go out and stay active. When those clothing items become worn with use, the members of the Run Club already have Nike on the brain and are likely to go back and purchase from them again. 

Key takeaways

Growing your business for the long term isn’t just about gaining as many new customers as possible - it’s even more powerful to turn those first-time purchasers into regular buyers. And that’s just what optimizing your customer retention rate can help you do. Start by calculating your customer retention metrics so you know where you stand, and then use one or more of the customer retention strategies above to boost your retention rate and bottom line. 

The most important element in any customer retention strategy is finding out what your customers think about your products, services, and brand by soliciting and acting on customer feedback.

3 Ways to Increase Retention with Customer Feedback

By analyzing customer feedback regularly, companies can stay in tune with their needs and ultimately increase retention. Here are three ways to do it.

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