Having been a multi-business owner as well as a business consultant for over 35 years, I firmly believe that in some circumstances going with your gut instincts is the right thing to do, such as with human resources and public relations.
However, going with your gut when it comes to key business objectives being met, production and operations management, and finance, for example, simply relying on your gut instincts can be very misleading.
And in today’s highly competitive marketplace keeping customers is far more cost-effective for businesses than finding new ones, so customer retention should be a priority for all business owners.
Loyal customers tend to be repeat customers, and it’s more effective to upsell or cross-sell to existing customers since you’ve already built a relationship.
And most importantly, happy customers refer new customers.
What Is Customer Retention
Customer retention refers to the rate at which customers stay with a business over a given period of time. You may have also heard of this called churn rate, and it is a key metric (KPI) for all B2B and B2C businesses.
The longer you hold onto a customer, the more loyal the customers are and the more successful the business is.
Leverage Data
As I always say, it’s all about the numbers and this is no different.
If you want to implement a successful customer retention program, you need to dig into your numbers. Data will tell you for sure if your retention efforts are paying off and exactly where you need to tweak or make improvements to your strategy.
There are three key metrics that will show you whether your efforts to turn one-time buyers into lifelong brand advocates are working.
Customer Retention Rate – CRR
Customer retention rate (CRR) calculates how many customers you’ve kept over a given period of time. It’s usually expressed as a percentage. Start by defining a period, such as three months. This should be the period of time when you’d expect the customer to make a second purchase. This will depend on your industry, market, and product type.
Take your number of customers at the end of this time period.
Subtract the new customers you’ve gained during this period. We’ll call this X.
Divide X by the number of customers at the beginning of the period and multiply by 100 to get a percentage.
For example, your period is January to March. As of March 31, you have 340 customers. Thirty are new, so subtract this and you have 310. On January 1, you had 380 customers.
340 / 380 = 0.894736…
0.89 x 100 = 89%
Customer Acquisition Cost – CAC
Customer acquisition cost (CAC) is the cost of turning a potential customer into a buyer.
CAC is calculated by defining a period and dividing all the costs associated with acquiring new customers by the number of new customers acquired. These costs include marketing, advertising, promotions, and labor, but note that it only includes those aimed at gaining new customers. Don’t include marketing costs for existing customers.
For example, you choose June to August as your time period. Taken all together, you spend $1,000 a month on new customer acquisition. You’ve acquired 20 new customers from June 1 to August 31. This means that your CAC is $50 (It costs $50 to acquire one new customer).
If the CAC is too high, this might mean there’s a shift in the market. It could mean that your targeting is off, or your offer isn’t appropriate for your target market.
Life-Time Value – LTV
Life-time value (LTV) calculates the net profit you gain from each relationship with a customer. When you look at LTV in relation to CAC, you can easily see whether your retention efforts are paying off.
Define a time period and measure average purchase value. Add up the total number of purchases during this period and divide by revenue. This tells you how much each purchase is getting you on average.
Calculate purchase frequency for each customer. Divide the total number of purchases by the total number of customers.
Multiply average purchase value and average frequency. This gives you a figure for the value of each individual customer.
Now, average the lifespan. Take all your customers and determine the average length of time they continue to buy from you.
Multiply the average customer lifespan by individual customer value. This gives you the LTV.
For example, your average purchase value is $30 over the course of 3 months. Each customer makes an average of 2 purchases over this 3-month period. This means that each customer gives you about $60 per 3 months. If you usually retain a customer for 2 years, your business’s LTV is $480. This means that each person spends $480 during their lifetime with your company.
Create A Data-Driven Customer Retention Strategy
Retaining existing customers is fundamental for a business’s short-term and long-term success which makes customer retention a key KPI.
“If your retention is poor, then nothing else matters.” -Brian Belfour
Retention must be your top priority!!
Calculating these three key metrics should be a regular part of your customer retention strategy. The objective data they reveal will help you guide your future efforts towards success.
You can learn more about your customers’ preferences and personalize your interactions, which will lead to a higher customer retention rate.
Additionally, focus on creating loyalty programs and other customer retention initiatives that will keep your customers coming back. By understanding your customers better and implementing data-driven retention strategies, you can improve customer satisfaction and ROI.
Schedule a consultation with me if you need help creating a data-driven customer retention strategy. I can help you understand your customers better and guide you toward success. Together, we can improve customer satisfaction and your ROI.
