Definition

customer retention

What is customer retention?

Customer retention is a metric that measures customer loyalty, or the ability for an organization to keep its customers over time. In addition to identifying the number of loyal customers, customer retention can reflect or predict customer satisfaction, repurchase behavior, customer engagement and emotional ties to a brand.

While customer relationships typically begin with an initial interaction, customer retention metrics are related to the first purchase made by a customer and include all subsequent interactions. Once customer retention is measured, organizations can use this feedback to perform data analysis on components of customer experience and customer success. For example, if a drop in customer retention is reported, an organization can use this to help identify the root cause and adjust its product offerings.

Customer retention is critical because the cost of acquiring new customers is much higher than retaining existing customers. Retained customers are also more likely to engage in word-of-mouth marketing or become brand ambassadors.

Why is customer retention important for businesses?

If an organization does not focus on customer retention but instead focuses solely on expanding its customer base, it is potentially losing out on repeat customers. While the process of gaining new customers, or customer acquisition, is important, it is also much more expensive. Maintaining customers and transitioning them into recurring customers is just as important of a process as gaining new ones.

According to the Annexcloud.com blog post titled "21 Surprising Customer Retention Statistics For 2021," almost 65% of a company's business comes from repeat customers, while focusing on increasing customer retention by 5% can increase profits by 25% to 95%. The more loyal an individual becomes to a business, the more likely they will try new products or bring in new customers.

Both customer retention and customer acquisition are important and should be balanced fairly.

How to measure customer retention and key metrics

Customer retention is typically measured in terms of retention rate and should be monitored continuously. The first step to determining this rate is to identify the period of time an organization wants to record. This can range from a month to a fiscal year or beyond. Other factors used to determine the retention rate include the following:

  • the number of customers in the customer base at the start of the period (S);
  • the number of customers at the end (E); and
  • the number of new customers acquired over time (N).

These metrics should be recorded. Once retrieved, the formula is applied as follows:

E-N/S x 100 = retention rate

For example, if an organization starts with 750 customers and ends with 950, but acquires 625 over the period of time, the customer retention rate would be 43.3%.

How to calculate customer retention
This image shows how to calculate customer retention.

Customer retention strategies

Some best practices and strategies to follow when considering customer retention strategies include the following:

  • Offer personalized service. Personalizing services to the customer can improve a customer's experience and lead them to become repeat customers.
  • Use data to provide personalized support interactions. Data gathered about customers can help aid organizations in knowing their preferences, enabling them to build more personalized services.
  • Build trust. Building relationships with customers will help increase brand loyalty and trust.
  • Use social media. Social media sites such as Twitter, LinkedIn and Facebook can help an organization reach out to its customers, build relationships and trust, and even respond to customer support queries.
  • Incentivize loyalty. This can be done through customer loyalty programs or by offering discounts or credit.
  • Gather customer feedback. Gathering feedback from customers enables an organization to further personalize experiences.
  • Improve customer support services. Implementing a live chat or help desk tool, putting an emphasis on responding to customer support queries quickly and encouraging customers to create accounts can all help increase customer retention.

All these customer retention strategies together can help build more trust between an organization and a customer, which can help increase the chances of current customers becoming repeat customers.

Examples of customer retention

Because customer retention can be achieved through various strategies, one organization's attempt to gain repeat customers may look very different from another. Here are a few examples:

Collecting customer data
This image shows different ways to collect customer data.

Sock and apparel retailer, Bombas, donates a clothing item to a homeless shelter or homeless charity with every purchase. This process helps people in need while also enabling the customer to help by purchasing items. This can help build customer retention, as individuals may want to become repeat customers in order to fill their needs and give to their surroundings at the same time.

Websites, such as Dollar Shave Club's landing page, have a bot that will answer customer questions. Customers can type a question or select from a preset list of commonly asked questions. This can increase the chance of a customer making a purchasing decision, make them feel more welcome and potentially leading to repeat purchases.

Businesses such as London-based Caffé Nero offer loyalty cards to incentivize customer retention. For example, if a customer orders a coffee or tea, they get a stamp punched on a card, and after nine stamps, they can get a free beverage. This strategy gamifies customer retention, as buyers will feel more accomplished coming back to fill out the stamps for the reward of a free drink. 

Assessing customer retention is valuable to organizations as it measures the happiness of customers and delivers the following benefits:

  • It can drive repurchase and product extension behavior.
  • It provides a quantitative metric for customer loyalty that can be compared or communicated.
  • Loyal customers are worth approximately 10 times as much as their first purchase.
  • Increasing customer retention leads to increased revenue.
  • Drops in customer retention could help identify weak spots in the business's strategy.
  • Customer retention is faster and cheaper than customer acquisition.
This was last updated in October 2021

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