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 includes all subsequent interactions. Once customer retention is measured, organizations can utilize this feedback to perform data analysis on components of customer experience (CX) and customer success. For example, if a drop in customer retention is reported, an organization can use this to identify the root cause and make adjustments to their product offerings.
Customer retention is critical as 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.
Measuring customer retention
Customer retention is typically measured in terms of a 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 between a month, a fiscal year or beyond. 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) should be recorded. Then, the formula is applied as follows:
For example, if an organization starts with 750 customers and ends with 950, but acquired 625 over the period of time, the customer retention rate would be 43.3%.
Benefits of customer retention
Assessing customer retention is valuable to organizations as it measures the happiness of customers as well as delivers the following benefits:
- Can drive repurchase and product extension behavior.
- Provides a quantitative metric for customer loyalty that can be compared or communicated.
- On average, loyal customers are worth around ten times as much as their first purchase.
- Increasing customer retention leads to increased revenue.
- Drops in customer retention could help identify weak spots in business strategy.
- Customer retention is faster and cheaper than customer acquisition.