The ability for a company to retain its customer for a period of time is called customer retention. Why is it so important? Because a study says that it is 5 times as difficult to get a new client as opposed to retaining an old client. With stats like that, no wonder customer retention metrics is the new catchphrase!
Not to forget the Pareto principle which states that 20% of your customers will give you 80% of your revenue which means a customer lost is not just a part of your revenue stream getting affected but the monetary effect can be much more than that of a fraction. Businesses stand to lose $1.6 trillion when customers move to their competitors. The goal of customer retention metrics is to retain as many customers as possible for a company through loyalty programs.
Benefits of Customer Retention Metrics
The benefits of customer retention metrics are many. Let’s look into some!
- Easier than Acquiring New Customers
As we mentioned earlier in the article that it is five times as difficult to acquire a new customer over keeping an old customer, the basic principle is that you need to give importance to keeping your present customers satisfied so that they do not find the need of using the services of your competitors. There has been so much written about acquiring new customers while retaining old customers has been overlooked.
- Stand Out from the Crowd
If you are a brand that interacts with customers on a regular basis and keeps them satisfied, then you are at a high chance of retaining them. There are very few brands that strive to keep their customers happy and this is why your business should be doing it which can help you stand out from your competitors.
- Spend Less on Marketing
Acquiring new customers means that you have to spend a lot of money on marketing, buying tools and hiring resources while all of this could be avoided if you keep the existing customers happy while having to spend only a fraction of the budget on acquiring new customers.
- Improves Brand Image
One of the best things that customer retention metrics does to your brand is that your customers would be able to identify what you stand for and will engage with your different social media handles. The data collected during the customer retention metrics can give you an idea of what they want which helps in providing a personalized product offering for them.
Here’re Some of the Key Customer Retention Metrics
Retention marketing is slowly becoming a catchphrase because companies understand the need to keep their customers happy. In order to leverage your retention activities, it is imperative that you should learn some of the key customer retention metrics. Here are 5 of the most important customer retention metrics that you should know about.
1. Customer Churn
Customer Churn rate is the rate at which customers do not remain a paying customer anymore. This could either be because they have not renewed your services, stopped subscribing to your products or moved to your competitor. In fact, attrition is bound to be present to a certain degree, if the number is more than 5-7%, then you might have to see where the problem lies. A high churn rate is indicative of your customers not being happy with your product or customer service.
How to Calculate Customer Churn Rate?
The number of times you calculate churn rate in a year completely depends on the volume of business that you do. If you have a small customer base, then calculating churn rate every quarter would not make much sense as you cannot come to any conclusion using the data.
The customers who were taken onboard during the time period churn rate is calculated are not to be counted. Here is the formula to calculate Annual Churn Rate:
ACR= (Number of customers at the year’s beginning- Number of customers at the year-end)/Number of customers at the start of the year.
By finding out the number of customers you lost vis-à-vis the number of customers you had, you will find out the percentage of customers who stopped doing business with you.
Why is finding Churn Rate important?
Finding the Churn Rate helps you determine what kind of retention strategy that you need to develop to retain your customers. The lower the Churn Rate, the better would be the cash-flow in your business; it is a determinant of the loyalty that you enjoy from your customers. By providing customers with incentives that they would prefer, you can reduce the Churn Rate. Remember that all a customer needs is a single bad experience to switch to your competitor.
2. Revenue Churn Rate
The revenue that you have lost out as a result of customers exiting is called Revenue Churn Rate. There could be many ways revenue can be lost:
- Losing out to competitors
- Downgrading their payment plans (usually happens with SaaS companies)
- Canceling orders
Revenue Churn Rate is an extremely important customer retention metric for businesses that thrive on a subscription model as you can expect RCC to fluctuate a lot. The overall Revenue Churn Rate gives you an idea of the health of a customer and how well the retention strategies are working. While the overall number is important, it is also vital that you look into each customer so that you know the reasons behind any of the above four actions that they could have possibly taken which resulted in lost revenue.
RCC is not only going to show you how much revenue you lost. If you look at customers who have downgraded their payment plan or asked for a refund and then take appropriate retention steps, there is still scope for you to make them change their decision.
How to Calculate Revenue Churn Rate?
The revenue churn rate should be calculated every month as you can understand the progress that you make every 30 odd days. To find the company’s churn rate, subtract the MRR (Monthly Recurring Revenue) at the end of the month with MRR at the month’s beginning. If there was any revenue that accrued as a result of upsell or cross-sell, then subtract it as well. Then divide the number that you get as a result with the MRR that you had at the beginning of the month. There are chances of a negative percentage showing up which means that you did not lose any revenue because of the gains made from the existing customers. Just like how we do not include revenue from new customers when finding Customer Churn Rate, we do not include it when calculating Revenue Churn Rate as well.
3. Customer Lifetime Value
It is a prediction of how much revenue a single customer would be able to bring in for the business over a period of time for your brand. This number is arrived based on the previous purchases made by the customer, and not necessarily a direct reflection of how much the customer will actually spend in the future.
Why is this metric important?
It is one of those customer retention metrics that can help you stop profligate spending in acquiring customers. How? Knowing how much a customer can provide for your business over a long-term means that you can gauge how much you need to spend on acquiring customers. The higher you find the Customer Lifetime Value (CLV) to be, the lower should be your acquisition cost. It will also help you calculate the Return on Investment on acquiring customers.
How to Calculate Customer Lifetime Value?
You need two things to calculate CLV: Customer Value and Store’s average lifespan. The customer retention metric can be calculated using the formula:
Customer Lifetime Value= Customer Value* Store’s Average Lifespan
When you have the average order value and the frequency of purchase, it will give you an idea of how customers are spending more at your store (read business). If the CLV rate increases gradually, it means that your business is in good hands. One of the biggest mistakes that startups these days do is that they spend truckloads of money on acquiring customers with the hope that they stay loyal, but it has been determined that customers do not show much loyalty, ‘most’ of them will go for the cheapest deal available. But there are still customers who choose convenience over a paltry discount, these are the customers who you can expect to spend money on your products thanks to your superior customer service.
4. Customer Retention Rate
It is the percentage of customers who chose to stay with your business. This metric is a clear indicator of how your retention strategies work. The higher the retention rate, the better you are at your business. Customer Retention Rate can be calculated on an annual, monthly or a weekly basis based on your business needs. Attrition rates complement your retention rate. If the attrition rate is 15%, then the retention rate is 85%.
How to Calculate Customer Retention Rate?
Here is the formula to calculate Customer Retention Rate:
CRR= ((Number of customers at the end of the month- Number of customers acquired in the month)/Number of customers at the beginning of the month))*100
The retention rate completely depends on the industry that you are in because there are different types of business relationships, there are one-time dealings while there are seasonal relationships as well. So you need to do your own discretion when analyzing CRR.
Staying on top of the Customer Retention Rate is important because quantifying what you have achieved will help you make moments to optimize your business. Customer Retention Rate is a very important customer retention metric because selling to your old customers is always easy while convincing a new customer to open their purse strings takes a lot more marketing, effort, and money. Loyal customers will improve your customer retention rate.
5. Net Promoter Score (NPS)
If there is one statement that sums up Net Promoter Score, then this is it: “On a scale of 0 to 10 with 10 being the highest, what’s the possibility of you recommending us to a friend or a relative?” Based on your customer’s response to your simple question, the Net Promoter Score is derived. This is a powerful metric because it asks if the customer is happy with recommending the product to their friends and family. This number shows how many people are 100% satisfied with your product.
How does NPS work?
NPS divides respondents into these three categories:
Detractors are customers who have given you a rating between 0 and 6. These are people who are totally unsatisfied with your product. They may never buy from you again and would even badmouth your brand on social media platforms and forums. If there is a chance for you to reconcile with them, try to at least make them not be repelled by your brand.
These are satisfied customers who have given the rating 7 or 8. The only thing is that they would never go out of their way to promote your brand because they are only mildly satisfied with the product. They may easily switch to your competitors and you would not have a chance to get them back again if they happen to like your competitor’s offering better.
These are the kind of customers that you need to get, they rate your brand 9 or 10. They would be the ones who will advocate your brand to everyone else and will help you during any of your marketing campaigns by sharing and talking about your brand to their friends and family.
How to Calculate NPS?
Subtract the percentage of detractors from the percentage of promoters to get NPS.
NPS= %Promoters- %Detractors
Asking your customer whether they would recommend your brand should be based on the whole experience and not one instance alone. Use NPS in the right place and at the right time.
It is very easy to vow to try out all the retention strategies with no specific objectives in mind, it will not help you because you would not know where to concentrate. Once the above five customer retention metrics show an improvement, it means that your business is creating a lot of value for customers and bringing in a lot of revenue for yourself.