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What is Customer Retention?

Definition of Customer Retention

Customer retention is defined as the ability of a business or brand to retain customers over a certain amount of time. Because it is such an integral aspect of a successful business, customer retention can also refer to the set of activities, strategies, and actions designed at retaining customers. These customer retention programs can consist of a wide variety of measurements, activities, and sub-strategies, but they should all be geared towards the overall purpose of retaining current customers.

Customer retention has been shown to have a direct correlation with the profitability of a business. Since retaining current customers is often simpler and less expensive than acquiring new customers, most successful businesses put a premium on retention.Customer retention begins at the very first contact between a business and a customer, and it lasts throughout the entire life of the relationship. Bain & Co.’s Frederick F. Reichheld first quantified the value of customer retention in the Harvard Business Review reporting that increasing customer retention rates by 5% increases profits by 25% to 95%.

Customer Retention and Customer Loyalty

In seeking to understand how loyalty program decision makers can optimize both their loyalty strategies and programs, Forrester Consulting conducted an online survey of 150 marketing directors and brand managers in the US and found that customer retention remains a key objective of loyalty programs. Over half of those surveyed identify it as a top three objective. And, 26% of loyalty program decision makers surveyed state that retaining customers is the primary business objective of their loyalty program.

Top Business Objectives of Loyalty Programs

Customer Retention and Loyalty Programs

Benefits of Retention Strategies

Forbes Insights and Sailthru recently completed a global study of 300 retail and media executives to find out if, and how, they take advantage of the benefits of retention strategies and how that impacts growth and performance. The study found that 32% of executives believe referrals and recommendations from existing customers are the most important benefit of customer retention; driving incremental purchase from existing customers (19%); reduction of marketing costs (16%); increased revenue per customer over time (14%); predictable revenue (10%); and profitable revenue (9%).

Most Important Benefits of Customer Retention

Benefits of Customer Retention

There are many factors that are directly related to successful customer retention, and it is not only dependent upon the specific product or service provided. Customer satisfaction is the measurement that is most closely related to retention, and a high level of satisfaction can be achieved with a quality product/service, exceptional customer service, a focus on customer relationships and many other factors.

What is the Formula to Calculate Retention Rate?

Formula to Calculate Customer Retention Infographic

Since successful customer retention is a key determiner in the overall success of a business, it is important to be able to quantify and track it. While there are multiple methods of measuring customer retention, there is a simple retention rate formula that is the standard tracking method.

There are three pieces of information you need to calculate customer retention:

CS: Number of customers at the start of the measured period

CE: Number of customers at the end of the measured period

CN: Number of new customers acquired during the measured period

The formula to calculate customer retention is: Customer Retention = ((CE – CN)/CS)) x 100

It is understandable to see the retention rate formula above and feel that it is overly complex, but it is not as difficult as it appears at first. It may be easier to understand with a quick example. Let’s say you want to measure your company’s customer retention rate for the first quarter of last year. You began the quarter with 100 customers (CS). Within that period you gained 20 new customers (CN) and lost 10, so you finish the quarter with 110 customers (CE). Using those statistics, your retention rate formula would look like: ((110 – 20)/100)) x 100 = 90

That means the customer retention rate for that period was 90%. For many businesses, 90% would be a good number, but acceptable retention rates will vary according to industry and other factors. Customer retention rates are a key indicator of the success of most businesses, and it is important to regularly measure retention and make adjustments to your strategy if rates begin to slip.

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Customer Retention Resources

The State of Small Business Marketing in 2016: Marketing & Customer Retention Trends

Customer Retention: How to Turn Unhappy Customers into Lifelong Customers

How to Design a Successful Loyalty Program