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Customer Retention

If a business has any hopes of being successful in the long run, it must have great customer retention.

Acquisition also plays an important role but the cost of acquiring a new customer always outweighs the cost of retaining one. There are countless reasons why a customer chooses to take their business elsewhere. It could be due to a faulty product, bad service, or a new competitor entering the market with a better offer. The way a business deals with these hurdles will directly affect its customer retention.

On average, a business loses about a fifth of its customers per year across industries. This often happens as businesses fail to maintain a good relationship with their customers. Losing these customers could really hurt a business’s bottom line unless it has a high acquisition rate that can counteract the churn, especially when the cost of acquiring a new customer is taken into account. Although every business is different, the underlining principles of customer retention can be applied to most industries. Here are some of the main facets to consider.

Customer Service is paramount: Usually businesses only hear from customers when they have an issue with a product or service. The way a business handles a complaint can make or break that relationship. If the customers are well looked after, the business is more likely to retain them. However, if they feel wronged by or short changed, a business might not only lose those customers (increasing the churn rate), but also run the risk it will hurt its acquisition rate due to bad word-of-mouth.

Feedback: Some businesses underestimate the value of customer complaints/feedback. A complaining customer can help a business see pain points they did not realise exist and also give it a chance to save the relationship. Seeking feedback from customers can make them feel involved with the business and also provide user insight that can help to research and develop more products. 

Attrition rate: Losing customers is a natural part of owning a business. It is unavoidable. However, maintaining a relationship with a customer throughout the sales process AND also after the purchase has been made, will keep a business front of mind for its customers.

Keep on selling: Although some people do not react favourably when a business repeatedly tries to sell them more products, when done the right way and in the benefit of the customer (e.g. a telco company calling a customer to let them know there is a more suitable plan available for them) it could strengthen the relationship.  

Look after your own: A lot of businesses tend to neglect this, but making sure your employees are happy can also have an effect on how they deal with customers. A loyal employee could translate into a loyal customer.


Customer Retention Metrics

Most businesses are well covered when it comes to tracking customer acquisition. However, knowing how to calculate retention and churn is also very important due to the aforementioned reasons. Although there are several ways to calculate retention the most widely used formulas are as follows:

Customer Retention Rate (CRR) can be calculated by looking at three different figures. The existing number of customers (S) at the start of a period, the number of customers at the end of that period (E) and the new customers acquired within that period (N). Once these figures are at hand, CRR can be calculated based on the following formula:

CRR = ((E-N)/S)) x 100

Customer Churn Rate (CCR) is largely an inverted calculation based on the same principle of the CRR formula. All that is needed to calculate it is the number of customers lost per a time period (E) and the total customers at the start of that period (S). CCR can be calculated based on the following formula:

CCR = ((S – E)/S) x 100

Customer Lifetime Value (CLV): Knowing how long a customer stays with your business and how much they spend during that time can help your business plan ahead. CLV can be a bit tricky to calculate as the metrics can change based on industry but the basic formula is calculated by multiplying the single sale average (SSA) by the repeat transaction average (RTA) and retention period (RP). L can be calculated based on the following formula:


Using these formulas regularly will provide a business with insight on how its current strategies are tracking and better prepare it for the future.

In Conclusion

A business will find it a lot easier to generate growth if it has good customer retention to accompany customer acquisition. The bottom line is an existing relationship will almost always pay better than a new one. Finally, knowing the lifetime value of a customer will help a business see the big picture and plan ahead. 

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