What Is Customer Retention? Basics, Strategy, and Examples for 2024

The customer sales funnel doesn’t end when someone makes a purchase. Businesses experiencing the strongest growth know the key lies in convincing customers to stick around and buy again.

While acquisition is all about creating relationships with customers, customer retention focuses on nurturing those relationships to maximize the value you get out of each existing customer.

Want to know more about customer retention for your business? This article will explain:

• What is customer retention?
• Why is customer retention essential?
• How to use the customer retention formula
• Additional customer retention metrics to consider
• 7 customer retention strategies to keep in mind
• Examples of companies with excellent customer retention

What is customer retention?

Customer retention is the use of business practices to encourage brand loyalty from existing customers. This may mean nurturing existing relationships through the use of quality products and superior customer service that exceed customer expectations. It might also include brand loyalty initiatives, such as a program that rewards customers for making repeat purchases.

Why is customer retention essential?

Few efforts have a greater impact on a business’s bottom line than the ability to retain customers and build brand loyalty. The likelihood of selling to a new customer falls between 5% and 20%; however, the likelihood of selling to an existing customer jumps to 60% to 70%. Consider also that existing customers tend to spend nearly a third more per average order than new customers.

Customer retention comes with a wide range of additional benefits, including:

• Existing customers are more likely to try new products.
• Improving brand reputation and nurturing quality customer relationships can lead to increased interest from new customers.
• Customer retention is a lot more cost effective than customer acquisition—at least five times less than acquiring new customers.
• Loyal customers can lead to even more business through word-of-mouth referrals and testimonials. In particular, millennials are more likely to share their preferences over social media.

How to use the customer retention formula

The customer retention formula can help businesses better understand how well they retain existing customers during a given period of time. The formula requires businesses to track how many existing customers they have at the start of a given period, how many customers they acquire, and how many customers the organization has at the end of said period. The final number is then multiplied by 100 to get the percentage rate.

This can be especially useful when determining the success of a customer retention program, such as a loyalty program introduced over the last year. It can also help businesses determine whether certain marketing strategies and customer service programs are effective.

Retention rate = [(CE - CN) / CS] x 100

The formula tracks the following variables:

• CE = The number of customers at the end of the period
• CN = The number of new customers acquired throughout the period
• CS = The number of customers at the start of the period

Now, let’s put this into practice. Let’s go back to the loyalty program mentioned above. You’re interested in seeing how effective it’s been at retaining customers over the past year and if it’s worth continuing. At the beginning of the year, you started with 100 customers but acquired 20 customers throughout that period. Then, at the end of the year, you had 100 customers.

The formula would look like this: [(100 - 20 / 100] x 100 = 80%. Depending on your industry, you might consider this a relatively good rate and decide to continue with your loyalty program for the next period.

Additional customer retention metrics to consider

The customer retention rate plays a critical role in helping businesses gauge their success in retaining customers. However, it’s not the only metric that can be tracked to gauge customer retention. Other customer retention metrics include:

Customer churn rate

Customer churn rate essentially functions as the inverse of the customer retention rate. It tracks how many customers leave a business in a given time period. In other words, if you have a retention rate of 85%, the churn rate is 15%. As your retention rate goes up, your churn rate goes down.

The formula looks like this: (Number of customers lost / Number of customers at the start of the period) x 100

The churn rate can help you pinpoint how often customers decide to stop buying your products or services. For example, if you sell a magazine subscription, the churn rate will let you know how many customers cancel their subscription during a certain period of time.

You might choose to calculate your churn rate each month, which shows that your churn rate goes down around the holidays—when people buy presents—but up during other times of the year. You might then decide to focus your marketing and retention efforts on these times of the year to combat this issue.‍

Customer lifetime value

The customer lifetime value (CLV) refers to the amount of revenue a given customer brings to your business over their lifecycle. The basic formula looks like this: Average value of a purchase x Number of times the customer will buy each year x Average length of the customer relationship (in years)

Watching the customer lifetime value go up or down can help you understand the value you provide to your customers and the value of a given lead or customer brought into the business. For example, customers making smaller purchases or leaving your business faster will decrease the CLV, indicating to you and your team that your leads have lower value or your customers don’t see the value in your products or services as much anymore.

For example, let’s say you sell subscriptions for a SaaS marketing software and you notice that the CLV has dropped 10% over the past year. You might begin working to rectify this by interviewing departing customers, intensifying your market research, looking at competitive research more closely, and determining the SaaS capabilities that customers can get elsewhere. Adjustments to your products and services can then help you recover this value.‍

Repeat customer rate

The repeat customer rate functions similarly to the customer retention rate but with a greater focus on business models that don’t rely on subscriptions or contracts—allowing you to see existing customers versus departing customers. For example, if you sell appliances, it can be hard to know whether a given customer is still a current customer if you don’t interact with them again until they need a different product or service.

The repeat customer rate calls for you to take the number of return customers you have and divide it by the total number of customers. Then, you multiply it by 100.

(Repeat customers / Total number of customers) x 100

If you sell appliances, this formula can help you see how often you get repeat customers at your store. If you have 20 repeat customers among 100 customers, for instance, then you have a 20% repeat customer rate. If this number is higher than the previous month, this indicates that your retention efforts have been successful and you have more loyal customers than you did previously. More customers find your products valuable.

Purchase frequency

The purchase frequency rate tells you how many orders a given customer places within a particular time frame. You calculate this by dividing the number of orders placed in a time period and the number of unique customers you sold to.

Number of orders / Number of customers

A high purchase frequency indicates that customers happily return to your business to place new orders. However, this has to be customized to the industry. For example, a car dealership shouldn’t expect to have a purchase frequency similar to a grocery store.

If a grocery store notices a low purchase frequency, however, that tells them customers aren’t returning regularly for new orders. They may want to look at potential causes, such as the service their workers provide and their prices compared to the competition.

Average order

It’s also good to track the average order value for your business. Returning customers tend to make larger purchases; as your customer retention grows, so too should your average order value.

Average order value is calculated by dividing the total revenue by the total number of orders placed: Revenue / Total number of orders.

If you notice your average order value has decreased since the last time you calculated the value, you can take a closer look at the leads your team brings in, your ability to attract repeat customers, and the value of your customers to see if you need to adjust your prices, marketing strategy, or customer service to improve your rate.

Product return rate

Businesses with tangible products should expect some level of returns. However, a high return rate shows that your customers have grown disappointed by the quality of your product or have another motivation for returning the product. If you notice that one product has a significantly higher return rate than others, as well, this indicates that the product doesn’t fill customers’ needs in some ways.

The product return rate is calculated by dividing the number of products returned by the number of products sold.

Number of products sold but later returned / Number of products sold x 100

As an example, let’s say your appliance business sells 1,000 refrigerators but 500 were returned last month. Your product return rate is 50%, indicating a significant problem with the refrigerators. As a result, you might reach out to customers asking why they returned the appliance or read reviews to help you get to the answer so you can repair the situation and avoid further damage to your reputation.

Net promoter score

The net promoter score (NPS) helps you gain an accurate picture of how customers perceive your brand and how loyal they are to your business. The more loyal customers are, the more likely they are to refer others to your business by word of mouth.

To find the net promoter score, you can simply send your customers a one-question survey asking how likely they are to recommend your products or services to other people on a scale of your choosing. Depending on the scale, customers who choose a low score are considered “detractors,” while those with a high score are considered “promoters.” To find the NPS, all you need to do is subtract the percentage of detractors from the percentage of promoters.

Percentage of promoters - Percentage of detractors

For example, let’s say you have 1,000 respondents: 300 are considered detractors, 500 are considered promoters, and the rest are considered neutral. Your NPS would be: [(500/1,000) - (300/1,000)] = 20.

You’ll want to compare this number to the rest of your industry, as there isn’t an overall good or bad score. If you notice a very low score compared to others in your industry, you may need to reach out to customers to learn more about what’s not working from their perspective. Interview customers, review the feedback, and implement concrete changes to start addressing any issues.

Time between purchase

The time between purchases shows how long a typical customer will go before returning to buy again. Time between purchase can also tell you their likelihood of trying competitors in your industry.

To know the time between purchases, you first need to know purchase frequency. Begin by dividing the number of orders in a given period by the number of customers. Then, take the number of days in the period and divide it by the purchase frequency. This will give you the average time between purchases.

Time period / Purchase frequency

For example, it might be several years before a customer makes a repeat purchase from your appliance business. This metric can help you know when customers might be ready for re-engagement, such as promotional flyers or reminders about your business.

Existing customer growth

The existing customer growth rate provides insight regarding the value that customers see in your brand. An increasing rate indicates that customers are spending more at your business, whereas a decreasing rate shows that customers are buying from you less frequently.

To run this calculation, you’ll want to know the growth rate for existing customers. You can take your monthly revenue rate at the end of the month, subtract the revenue rate from the start of the month, and then divide that by the monthly revenue rate from the start of the month.

(Monthly revenue rate at the end of the month - Monthly revenue rate at the start of the month) / Monthly revenue rate at the start of the month

If you see a positive growth rate, you know the customer sees value in your business. Study the account to know what they appreciate about your business to help you replicate it elsewhere and maintain the relationship with the customer.

7 customer retention strategies to keep in mind

There are several customer retention strategies that can help you understand customer behavior, improve customer engagement, and create a better experience for customers so they begin to feel more loyal to your brand. Some strategies include:

Frequent customer tracking

Frequent customer tracking can help your business understand how customers move through the sales funnel, including their likelihood of buying again. Gathering regular data about customer movements can help your business identify areas where you want to improve.

For example, let’s say your content marketing business notices a regular pattern of customers expressing confusion with a particular part of the onboarding process. Many of these customers don’t renew their contracts.

Taking steps to improve the onboarding experience by improving the user interface and training your sales team to better explain the steps to customers can help alleviate this issue. Your tracking should then show better retention rates if the problem has been fixed as intended.

Personalized experience

Customers like knowing that businesses care about solving their pain points. Since increasing customer retention revolves around delivering outstanding experiences from the first interaction until checkout, tracking customer information using a customer relationship management (CRM) platform is critical. Then, when it comes time to sell to the customer again, your business can deliver more personalized services or products based on their data through automation and email marketing.

For example, let’s say a business learns there are problems during the pricing portion of the sales process, with customers indicating budget restrictions to sales representatives. If the business knows customers have a tight budget, they might offer a discount, bundles, or other opportunities to help manage the price to entice the customers to make a purchase.

Educate and inspire with content

Customer education plays an important role in retaining customers. Once someone has purchased your product or service, it’s important to follow up to make sure they understand what it can do for them and continue to show your business as an industry authority and their partner in conquering any pain points.

Providing regular content that addresses their needs can help tremendously. Customers will see that you have a genuine desire to help them, and they’ll learn from the material, keeping them engaged with the brand.

Consider a business that offers accounting software subscriptions. Regular content that helps businesses manage their accounting, tips for getting through tax time, and helpful suggestions about new features or utilizing the software can all help customers remember the value of their purchase and keep them engaged.

Expert support

Sometimes, customers need extra help, so make sure they see you as an expert ready to help them. Offering expert support can help them stay engaged with your company and improve your reputation in their minds.

Consider the accounting software company discussed in the previous example. If you have expert accountants on staff to answer questions around tax time—instead of just a sales team who knows how to use the software—customers will know they can trust you to navigate a wide range of tasks related to your product.

Prioritized customer feedback

Customer feedback and reviews tell you exactly what customers do and don’t like about your company. For example, if customers regularly leave reviews that they find your service team abrupt or unhelpful, you should prioritize this feedback by actively working on improving your business’s customer service.

You can solicit customer feedback directly, asking existing or former customers about their experiences with your brand. You can ask them about the best and worst parts of working with your company and what has inspired them to leave or stay. You can also look at various review sites and social media to see what customers have to say to the public about your company.‍

Customer incentives: discounts and rewards

Another strategy to retain customers is to offer discounts and rewards for customers who stay with your company. Rather than only offering deals to new customers and overlooking the revenue that your existing customer base can offer, tailoring rewards and discounts toward returning customers shows you care about them.

An example might be a magazine subscription company showing appreciation to existing customers by offering them a considerable discount on their renewal.

Evangelize information across teams

Make sure the importance of retention is well understood across your teams. Your marketing team, sales team, customer support team, and even your billing department should understand the value of retaining customers.

A company with strong customer retention plans across teams might institute policies like:

• Strong communication across workflows so the sales team knows the pain points discovered by the marketing team
• Customer support lets teams know the types of questions customers have
• Experts offer advice and help create content to engage existing customers
• The billing team works with the support team to make sure the renewal plan reflects customer concerns and pain points

Examples of companies with excellent customer retention

Several companies understand the importance of customer retention and how it impacts everything they do. Some examples of companies with excellent customer retention include:

Four Seasons

Staying at the Four Seasons offers customers the chance to experience customer service in an entirely new way. From the first interaction, guests are asked about their needs and interests and what brought them to the hotel. Hotel representatives then go out of their way to create an exceptional experience according to customer needs. The brand meets these needs by providing employees with the flexibility to fill customer requests rather than telling the customer they’ll have to “check” on what the customer asked for.

The company’s values center around the experience of guests and providing a culture of service. And although the Four Seasons doesn’t have a loyalty program, it shows loyalty by allowing its employees to give each customer the VIP treatment. This, in turn, makes customers more likely to return for another stay.

Amazon

Amazon understands that as an e-commerce company, purchases won’t always work out. Customers can’t see the item in person, which means it might not be what they wanted.

Items can also get damaged during shipping or arrive late. Rather than have a business model that forces customers to jump through hoops to make returns, Amazon allows customers to return items with the click of a button and by offering multiple drop-off locations for customer convenience. This helps remove barriers for people unsure about making an online purchase.

Amazon’s customer service similarly looks for ways to solve customer problems, often offering rebates or direct assistance. As a result, this has created a business model that encourages customers to keep coming back for the convenience and confidence in the purchases they make. It has helped Amazon become an e-commerce giant.

This practice reflects the “customer obsession” espoused by Amazon founder Jeff Bezos. Understanding the importance of satisfying customers has helped the business flourish and reflect these critical values.

Starbucks

Starbucks offers a customer loyalty program that allows customers to redeem points for a variety of food and beverage items. From free customizations to drinks or snacks, customers can redeem their rewards through the rewards app. Personalized touches, such as refills and birthday treats, are also a part of the program. Those who love the coffee chain will appreciate how easily they can use the rewards app to accumulate bonus points.

Starbucks expresses its goals of building a community around its coffee stores so people who frequent the shop can get to know each other. The rewards program, which encourages customers to keep returning, helps nurture this feeling. With generous possibilities for those who accumulate enough points, customers also know that the store values their business and become more likely to return.

Southwest

Southwest has built a rewards program that allows customers to quickly accumulate points that they can use toward free flights. Understanding that customers feel frustrated by expiring points or blackout dates, they have eliminated these two obstacles.

Southwest also has a reputation for having customer service professionals who genuinely want to help customers solve their problems. They have also built a reputation focused on hospitality throughout their flights. These policies have led to a steady stream of loyal Southwest customers.

Southwest prides itself on helping people travel more easily so they can connect with what’s important to them. Its rewards program and customer service help enhance people’s travel experiences and simplify the flying process.

Nordstrom

Nordstrom offers customers a generous return policy that allows them to return eligible items more than a month after originally purchased. Customers can also return items via mail or in person, further simplifying the process.

The brand prides itself on providing excellent customer experiences and a range of products. The generous return policy shows customers that they can easily return products that don’t work for them. It also encourages customers to try a wide range of products, as they know Nordstrom will help them if the purchase doesn’t work.

Conclusion

Customer retention plays a critical role in business growth. From making sure that customers’ online user experience is positive to providing outstanding customer service, keeping customers engaged and coming back for more will only benefit your business’s bottom line. Using customer retention metrics can also keep you abreast of any changes in brand loyalty.

Looking to increase customer retention through better customer service? Upwork can connect you to independent customer service representatives who have the experience and skills you need to improve customer experience and increase customer satisfaction.