Customer retention – how to measure it and how to improve it?

Customer retention is an important aspect of any business. Maintaining customer relationships is often more effective than continually acquiring new consumers.

From this article you will learn:

• What is customer retention?
• What are the benefits of customer retention?
• How do you measure customer retention?
• How to improve customer retention?

Customer retention – definition

Customer retention (also known as consumer behaviour) describes your company’s ability to maintain customer relationships over time. It plays a key role in customer relationship management and often uses CRM systems for this purpose. The main objective of customer retention is to minimise turnover and churn of your company’s products or services.

Customer retention includes factors such as:

• Customer satisfaction, which is about providing the highest possible quality products or services. Your offering should meet or exceed customer expectations as this will increase their loyalty to your brand.
• Loyalty programmes used to reward customers for long-term use of your products or services.
• Customer service that should be of the highest possible quality. Companies that resolve issues quickly and efficiently boast higher customer satisfaction and consequently higher retention.
• Personalisation, i.e. tailoring your offer to the individual preferences of your consumers increases customer engagement with your brand.
• Regularly collecting feedback and responding to it appropriately can help you understand customer expectations and identify areas for improvement.

Customer retention is a company’s ability to retain existing customers over time by providing them with valuable products or services, building relationships based on trust and satisfaction and taking action to meet customer needs and expectations. It contributes to revenue stability, increasing customer value and building a loyal customer base, leading to increased profitability and competitiveness for the company.

Definition of customer retention

Benefits of customer retention

Customer retention is usually cheaper than acquiring new customers. Acquisition often generates costs in the areas of marketing and the entire sales process and involves other financial or material expenses. With customer retention, there is no need to commit existing resources. In addition, it can translate into increased revenues. Higher retention means higher consumer loyalty and therefore a propensity to buy again and use your company’s services.

In addition to this, regular customers can be your best brand ambassadors and contribute to the acquisition of new ones through their recommendations. Referrals from loyal customers are often perceived by potential customers as more credible than advertisements. Such recommendations can also have a positive impact on brand image, which contributes to improving your company’s market position.

An important benefit of customer retention is financial stability. Regular revenue provides a steady flow of funds, which is particularly important in the event of seasonal fluctuations or unforeseen events. In addition to this, customers who are loyal to a brand are less susceptible to offers from competitors, even with lower prices or other incentives from other companies. This increases the overall stability of your business.

Through customer retention, your company can increase customer lifetime value (CLV), which is the total value a customer brings to a company during the time they use its products or services.

Customer retention is also key to innovation. Through long-term relationships, your company can better understand customer preferences, which can be used to create new products or adapt existing offerings.

Indicators used to measure customer retention

A variety of performance evaluation metrics can be used to measure customer retention. However, the best results come from a combination of metrics depending on the nature of their business and objectives. The most commonly used metrics are:

Customer Retention Rate (CRR)

The primary indicator in measuring customer retention. It allows you to calculate the percentage of people who have used your company’s services over a specific period. The formula for CRR is:

CRR = (E - N) / S * 100

E – the number of customers at the end of the adopted period.

N – the number of customers acquired during the period.

S – number of customers at the beginning of the period.

Customer churn rate

This rate shows what percentage of customers have stopped using the company’s products or services over a certain period of time. Formula:

Churn Rate = (number of customers who left during the period / number of customers at the beginning of the period) * 100

Customer Lifetime Value (CLV)

CLV measures the total revenue that can be generated from a given customer over the lifetime of that customer’s use of a company’s products or services. This indicator determines the potential effectiveness of investing in the retention of individual customers. The formula for CLV is:

CLV = (Average purchase value per customer) * (Average number of transactions per customer over a specified period) * (Average customer retention period)

Net Promoter Score (NPS)

This measure shows the extent to which customers are willing to recommend your company’s product or service to others. It is often used as an indicator of customer satisfaction, closely related to retention.

The formula for Net Promoter Score (NPS) can be calculated based on the results of a survey in which customers answer how likely they are to recommend our company to others.

The NPS is calculated from customers’ responses to a question along the lines of: “On a scale of 0 to 10, how likely are you to recommend our company to others?”.

Customers are then divided into groups based on their responses:

• Promoters (promoters), i.e. people who ticked 9 or 10, so they are very likely to recommend the company to others.
• Neutrals (passives), i.e. those who ticked 7 or 8, meaning they are satisfied but not very determined to promote the company.
• Critics (detractors), meaning all those who ticked 0 to 6. This means they are dissatisfied and can negatively impact the company’s reputation.

To calculate the NPS, first calculate the percentage of promoters, neutrals and detractors among the respondents. Then subtract the percentage of detractors from the percentage of promoters.

NPS = Percentage of promoters - Percentage of detractors

The NPS score ranges from -100 to 100. The higher it is, the higher the percentage of customers likely to recommend your business to others.

Average Retention Period

The average retention period allows you to assess the average length of time customers remain loyal to your company. This is particularly useful in industries where they use your services over a period of time. This can be calculated using the following formula:

Average retention time = (Total retention time of all customers) / (Number of customers)

The formula assumes that you are in possession of retention time information for each customer. To calculate the average retention period, add up the time each customer has stayed with the company and divide this total by the number of customers.

Renewal rate

The renewal rate is most useful for companies offering subscriptions or contracts. It shows how many people renew contracts when they expire, which is a direct indication of their brand loyalty. The renewal rate can be calculated by comparing the number of customers who have renewed their subscriptions, contracts or services to the total number of customers at a given time. The formula is (the result is expressed as a percentage):

Renewal rate = (Number of customers who renewed contracts / Total number of customers) * 100

Customer Engagement Metrics

This metric is a set that covers various aspects of customer engagement – frequency of purchases, social media interactions or use of mobile apps. To calculate it, the different aspects of customer engagement need to be analysed. For this purpose, the following measures can be considered:

• Frequency of interactions over a specific period, such as visits to the website, participation in webinars, etc.
• Time spent on the company’s website or app.
• Social media engagement, i.e. the number of likes, shares, comments and other forms of interaction.
• Email open and click-through rates, i.e. the frequency of opens and clicks on emails sent by your company.
• Purchase activity, which is the frequency of purchases and the number of products or services purchased.

Various methods can be used to calculate an accurate customer activity rate. In general, you collate and analyse data on selected engagement metrics and then calculate relevant indicators, such as the average number of customer interactions per month or the average time spent on the website.

Customer Recovery Rate

This measure shows how many customers who have stopped using your company’s products or services at some point have been recovered through various actions. It can be calculated by looking at the number of customers who have abandoned and then started using your company’s offerings again. The formula is (the result is expressed as a percentage):

Customer Recovery Rate = (Number of customers recovered / Total number of customers who have abandoned) * 100

Ways to improve customer retention

Improving customer retention is crucial to a company’s success. However, it is important to remember that it is not a one-off action, but a process that requires ongoing commitment. The following actions can help improve it

Ensuring high quality products or services

Customers are more likely to remain loyal to companies whose offers meet their expectations. In a world of fierce competition and easy access to information, the quality of a product or service often determines consumers’ choice of a particular good.

High quality not only satisfies needs, but also contributes to building trust and influences your brand image. Focusing on continuous quality improvement, innovation and providing added value is the most important thing your company can do to keep customers with you.

If there are problems with your product or service, your company should proactively resolve them. It increases customer trust and satisfaction and leads to higher retention.

Excellent customer service

Resolving problems reported by customers quickly and effectively and supporting them when necessary significantly affects their satisfaction and willingness to continue working with you. It is worth remembering that today’s customers have many options to choose from and can leave for a competitor at any time. In such a situation, excellent customer service can become an element that sets your company apart from others.

When a customer encounters a problem or has a question, their experience with your customer service team shapes their perception of your brand. Friendly and knowledgeable support can not only solve a problem, but also increase trust in the company. If, on the other hand, a customer encounters a lack of understanding, inadequate support or tardiness, they may become frustrated, which can lead to them losing a customer. For this reason, investing in training your customer service staff and providing them with the right tools and resources not only allows you to effectively resolve customer issues, but also impacts your overall brand image.

Personalising your offering

In the age of technology and widespread access to data, customers expect companies to approach each of them individually. With personalisation, you can target offers and messages to make them more appealing to individual customers and tailored to their preferences.

By analysing purchase history, your company can offer individual customers products that are likely to interest them. Also personalising communications, for example by using the customer’s name in emails, can create a more personal experience. Personalisation also leads to a deeper understanding of the customer’s needs, which allows you to build long-lasting and valuable relationships.

Loyalty programmes

Loyalty programmes are very effective in building and maintaining customer relationships. One example is loyalty cards, which allow you to collect points for every purchase and redeem them for discounts or special gifts once a specific number has been accumulated. To be effective, a loyalty programme should be easy to use and offer attractive rewards.

Communicating with customers about the benefits of the loyalty programme can further increase customer engagement. A well-designed loyalty programme not only increases customer retention, but can also encourage more frequent purchases.

Regularly collect and use customer feedback

You should know what customers think about your products and services and then make changes to meet their needs. Gathering customer feedback on a regular basis (which can be done through surveys, online reviews or direct communication) allows you to find out what is working well and what can be improved.

Analysing information and acting on customer reviews does not allow you to adapt your products, services and processes to better meet customer expectations. This opens the door to building greater loyalty and trust. It is also important to keep customers informed of the results of changes made and to strive for continuous improvement based on their feedback. A proactive attitude towards customers’ opinions builds long-term relationships based on mutual understanding.

Communication and engagement

Communication with customers helps to keep them interested and engaged. Through regular updates, customers find out about the latest products or services. Company channels can also be used to publish offers that are only available to certain customers, giving them a sense of uniqueness and influencing their loyalty to your brand.

Encouraging customers to interact (participate in competitions, surveys or brand discussions) improves their engagement and allows them to influence the growth of your business. This builds emotional bonds and brand loyalty. After a period of time, a community can develop around your business, where members can share opinions, experiences and recommendations, which can contribute to the acquisition of new customers.

Flexibility and adaptation

Being flexible to customer needs, such as offering different payment options, adjusting contract terms or adapting to changing market trends, can increase retention. Customers expect companies to be able to adapt to their preferences and individual situations. Offering different payment options, such as credit cards, mobile payments or instalments, allows customers to choose the method that best suits their needs. Tailoring contract terms, such as duration or scope of services, to the customer’s specific needs shows that the company is willing and able to adapt to their requirements. Additionally, adapting to changing market trends, such as new technologies or consumer preferences, allows the company to remain relevant and competitive. Flexibility in areas that are important to customers creates greater value and competitive advantage, resulting in greater customer retention.

Customer education

Customers often need support and guidance, so providing them with educational material (e.g. tutorials, webinars or instructional articles) helps them feel more confident in using your products or services and increases customer satisfaction.

Extending a helping hand to customers also influences the perception of your brand as trustworthy. When a customer feels that a company is interested in their satisfaction, they may be more likely to remain loyal to it.

Win-Back Campaigns

Campaigns to win back customers who have already left (so-called win-back campaigns) can be an effective strategy. Most often, they involve special offers (e.g. discounts, free services or bonuses) that can persuade customers to use your company’s offerings again. Also, addressing the issues that prompted customers to leave shows that your company is listening to their feedback. A proactive attitude can rebuild customer trust and encourage them to return.