Customer retention rate is the percent of current customers you are able to keep over a certain period of time. In a classic report from Bain & Company and Harvard Business School, they found “increasing customer retention rates by 5% increases profits by 25% to 95%.”
Not only that, but repeat customers spend more per visit than new customers, are easier to market to, and are more likely to send referrals. So, a healthy retention rate is table stakes for small businesses.
How to Calculate Customer Retention Rate
To calculate your customer retention rate you need three numbers:
- # of customers at the end of the period (E)
- # of new customers gained during the period (N)
- # of customers at the start of the period (S)
Customer Retention Rate = ((E – N) / S) X 100
So, the customer retention rate is calculated by dividing the difference between the number of customers at the end of a period and the number of customers gained during a period by the number of customers at the start of a period.
For example, let’s say you’re measuring your customer retention rate for the last three months and you have the following data:
- You had 55 customers at the end of the three-month period (E)
- Ten new customers shopped at your store during the three months (N)
- You had 50 customers at the beginning of the three-month period (S)
((55 – 10) / 50) X 100 = Customer Retention Rate
(45 / 50) X 100 = Customer Retention Rate
0.9 X 100 = Customer Retention Rate
90% Customer Retention Rate
In this scenario, you started the three months with 50 customers, gained 10 new customers, and ended the three months with 55 customers. All in all, you lost five customers and gained 10, so your customer retention rate is 90%—which is pretty good.
Customer retention rates and when you should measure them will vary widely by business and time period. Generally, businesses that rely heavily on high customer retention will measure their retention rate more frequently and have higher rates. Conversely, businesses that don’t rely on high customer retention will measure their retention rates less often and yield lower rates.
For example, if you have a coffee shop, it is very possible many of your customers are regulars that stop in almost every day on their way to work. So, you may want to measure retention on a weekly basis. If you have a spa that people only visit sparingly or for a special occasion, you may want to measure customer retention over a period of six to eight weeks or evenly quarterly.
To give you an idea of what a healthy retention rate would be for your business, here are some industry averages:
While you can track the customer retention variable yourself and calculate the rate manually, you can also have it done automatically with an integrated point-of-sale (POS) system. For this, we recommend Lightspeed. Lightspeed Analytics will calculate your customer retention rate and provide you with a whole custom reporting suite so you always have the data you need right at your fingertips.
7 Strategies to Drive Your Customer Retention Rate
As we have seen, customer retention is one of the most effective ways to drive your sales and grow your business. At the end of the day, to drive your customer retention rate, you are going to have to prioritize customer experience at every corner of your business and make a plan to realize that experience for every person who walks through your doors.
Here we will look at different ways to boost your customer retention rate:
1. Understand Your Customer Churn
Your customer churn is essentially the inverse of your customer retention rate. It measures the number of customers that your business loses over a certain period of time. While slightly depressing, understanding and tracking your customer churn will allow you to spot and address problem areas before they get out of hand.
As with customer retention, you can use an integrated POS system to track your customer churn rate. Or, you can do the calculation by hand using the following formula.
Customer churn rate = (customers at the beginning of the month-customers at the end of month) / customers at the beginning of month
Your customer churn can also help you identify your target market. If your churn rate is consistently higher than you want, it might be because you are looking to sell to the wrong people; increasing your customer retention and lowering your churn rate might be a matter of shifting your target market.
For example, say you own a flower shop marketing to women, but your churn is high and you want to increase your retention rate. For six months you launch a marketing campaign at men that advertises your bouquets as the perfect gift for their girlfriend. This marketing shift boosts your retention rates and slows your customer churn.
Use your understanding of both your customer churn and customer retention to determine your target market and devise a strategy that will attract customers to your business and boost your customer retention.
2. Collect Customer Feedback
Collecting consumer feedback is a great way to get candid responses from your customers about their perception and experience of your store. Send out surveys to customers to determine how satisfied they are and what areas they think you can improve.
The easiest way to do this is with a simple customer satisfaction survey. Send out an email asking customers questions about their experience and offering space for open-ended feedback.
In addition to sending out one-time surveys, it’s a good idea to regularly solicit customer feedback. This will not only allow you to monitor the performance of any changes you make to your business but will give you snapshots of the overall health of your business.
Send out post-purchase surveys to get people’s immediate reactions to your business. Or, create a schedule and send surveys out to your loyalty members on a periodic basis. Don’t forget–surveys are asking something of your customers and they might need some incentive. You can offer discounts or rewards for taking a survey to boost engagement. For example, you could provide a 10% off coupon or 100 rewards points upon completion.
Additionally, some POS systems like Square have customer feedback tools built into digital receipts. With Square, when a customer receives an email or text message receipt, they can indicate whether the experience was positive or negative and choose a reason for their ranking. This allows businesses to collect real-time feedback and respond to customer concerns immediately.
Most customers won’t tell you when they’ve had a bad experience–they just won’t return. Some two-thirds of customers said they have changed to a different brand because of a single poor experience. This leaves little room for rectification or communication, and one of the only places you can address customer issues these days is online. Monitoring and responding to online reviews are so important for maintaining current customer relationships.
Check your Google review page, Yelp, Trip Advisor, your customer service email, and other review platforms regularly. Address positive reviews with graciousness and invite people back. For negative reviews, be thoughtful with your responses, and work toward solving the customer’s problem rather than getting defensive.
For an easy and streamlined solution, Podium is cloud-based customer feedback software that aggregates online reviews from more than 20 different sites and text, email, and online communications, including Google and Facebook, into one dashboard. Podium helps businesses of all sizes collect customer feedback, solicit reviews, and respond to comments with ease.
Beta testing is when you hold trials or offer free samples of upcoming products in exchange for feedback that you can use to make adjustments before the final product is released. Beta testing is a great way to get customer impressions before you roll out a new item and can help you understand your customers’ preferences so you can make product tweaks for maximum appeal.
We recommend using your actual customers for beta testing. This will ensure that you are getting responses that reflect your target audience and that your adjustments are in line with their preferences.
Generally, beta testing is best for products that require customer use, like new software, beauty products, appliances, or tools. Beta testing is also great if you are trying something new in your business and want to see how your customers react before purchasing large quantities or doing a major rollout.
For example, say you are thinking of adding a body oil line to your clothing store. Before placing a large order, it might be smart to test this product with a few of your regular or most loyal customers. You might learn that they don’t like the scent or find the oil too sticky, so you need to source a new product. Or your customers might walk away with rave reviews, so you decide to bump up your order size.
You can check out this article for more on how you can set up your own beta testing group.
3. Revamp Your Customer Service
Strong and effective customer service will make or break your customers’ experience and impression of your brand, and will determine whether or not you are able to retain a solid customer base. Nearly 70% of Americans agree that they would shop more at companies with better customer service, and US companies lose $136.8 billion per year due to avoidable consumer switching.
Use customer feedback to create policies that are in line with the experience your customers want, and write down and train your employees on your customer service best practices to ensure that every person that walks through your door has a good time and is treated with respect.
When creating your customer service policies, here are a few guiding principles to help set you on the right track for creating a positive experience for your customers:
- Prioritize Customer Satisfaction: I am the first to admit that the customer is not actually always right. However, the goal of customer service is to create satisfied customers, so be sure that you are creating policies that prioritize happy customers over any other concern. For example, allow returns on damaged items, be lenient with your return window, and offer coupons or other compensation if anything goes wrong. Remember, you are a small business, so focus on being personable and not a corporate stickler for the rules.
- Show Appreciation: Your customers are what keep your business going, so show them you care by telling them “thank you” and making them feel appreciated. For example, at my boutique, we would offer $10 coupons to anyone that spent over $100, and we always reminded people what their support meant to us as a small business.
- Ensure Ease of Resolution: While you might want your associates to contact you every time there is an issue, this will slow that service process and lead to frustrated shoppers. In fact, a third of consumers consider having their problem solved in one single interaction to be the most important part of customer service. Streamline your customer service policies and empower your employees so that most, if not all, problems can be solved by a single person without overhead input.
- Maximize Convenience: When customers come to you with a problem or request, be sure that your business is the one carrying the onus of creating a solution. Make things as easy as possible for your customers to avoid frustration and show that you prioritize taking care of them.
- Take Responsibility: HubSpot Research found that, in cases of company error, 96% of survey respondents would continue buying from a company they regularly purchased from if it apologized and rectified the situation. If you make a mistake, don’t make excuses, but rather focus on fixing the problem and taking accountability for the issue.
- Train Your Associates: On the day-to-day, your employees will be the outward face of your store and will handle customer interactions. Be sure that customer service training is built into your onboarding process and periodic retraining occurs to keep things fresh. This will ensure that your associates are prepared to offer the experience you want to create in your shop.
4. Implement a Loyalty Program With Perks
A great way to keep people shopping at your business is to reward their support with a loyalty program. Loyalty programs offer rewards, exclusive updates, or special services—the main thing is you want to make people feel special and keep them thinking about your brand so they continue spending with you and not someone else.
For example, at my store, we had a VIP program that gave our most loyal shoppers access to “Item of the Month Deals,” early entry to sale days, and exclusive text updates to keep them in the loop about all of our discounts and offers. Our VIPs were by far our biggest spenders and most likely to form an attachment to our brand. Additionally, the program not only rewarded customer loyalty, but also reinforced it by maintaining a line of communication. (We’ll talk more about omnichannel marketing later on in this article.)
For smaller-scale operations, you can use Excel, Google Sheets, or other platforms to manually keep track of your loyalty members. Otherwise, you can use a loyalty program software that will give you much more control, the ability to reach out to customers instead of waiting for them to come to you, and data on loyalty program usage and effectiveness. Most POS systems (including Lightspeed and Square) also have built-in loyalty programs and tracking capabilities.
In addition to setting up a system for keeping track of your members, you should also determine the structure of your loyalty program. We detail two structures below:
One way that you can structure your loyalty program is to create a rewards program that gives your members access to special deals or gifts to “reward them” for their support. Some businesses that offer relatively uniform product selection or rely on frequent purchases will use punch cards as their reward. Essentially, you use a punch card to track how many purchases someone has made, and when they reach a certain number of buys, they are eligible for a free item.
Tip: Save space and money by printing punch card rewards on the back of your business cards.
Another rewards structure you can try is points. This means that as customers spend money with you, they accumulate points. Once they have reached a certain number of points, then they are eligible for deals, store credit, or free items. Generally, this structure relies on POS or loyalty software to keep track of all the moving parts
Finally, you can offer exclusive deals or products as your program’s reward. This might mean that the customers in your rewards program get access to their own sales or special deals. This rewards program typically relies on phone or email communication to let loyal customers know about your offerings
Another way that you can engage with your customers and help boost your retention rate is through subscription services. Subscription services offer either exclusive content or packages that are delivered on a weekly/monthly/quarterly/annual basis. Subscribers pay for the services in set amounts at scheduled intervals.
For example, a business that sells soap might offer a subscription service where people pay a flat monthly rate, and get three seasonally scented soaps delivered to their door on a bimonthly basis. This scheme creates a reliable customer base and fosters brand loyalty.
Consider if your customers already purchase your products at consistent intervals and create a subscription program. It might be a capsule wardrobe box for each season or a weekly coffee bean delivery service. Be creative, and ask yourself whether you can reinvent any of your products to work in a subscription service.
Another option is that you can offer exclusive content on a subscription-access basis. For example, you might offer a newsletter that gives subscribers access to goods before they hit the shelves. In this way, subscribers are not getting anything tangible but rather are receiving access to something. Generally, these packages come at a lower price and require lots of exclusive access to make them worth it for consumers.
5. Use Omnichannel Marketing Techniques
Omnichannel marketing is the integration of physical and digital marketing tactics with the goal of creating a cohesive and memorable brand experience. For example, say you are shopping in a local boutique and you give your email address at checkout to stay up to date on the newest arrivals. Then, when you get home a few hours later, you receive an email from the same boutique with a new member’s offer of 25% off if you follow its Instagram account.
Suddenly, you are seeing this brand all over your day-to-day life—from your email to your social media, as well as when you’re out shopping. As a byproduct, you become a regular customer and begin looking to this boutique for your clothing needs.
This integration of customer experience onto both digital and physical platforms is omnichannel marketing. And, as we can see from the example we discussed, this marketing strategy is also a great way to boost your customer retention.
6. Offer Something Unique
Another strategy you can use to boost your retention is by offering something unique. If no one else offers your specific product, service, or experience, people will have to shop with you to get what they are looking for.
For example, at my boutique, we spent a lot of time training our staff and kept our floor full of associates so that we could offer exceptional customer services like styling, clothing suggestions, and a friendly and outgoing staff. By offering a uniquely attentive and friendly shopping experience, shoppers not only referred others to our store more frequently but also were more apt to shop with us over other local boutiques.
Consider ways you can elevate your services, enhance your experience, or offer a specific product that can’t be found anywhere else. Market those unique elements, and be sure customers know about the exclusivity of what you offer.
7. Get Involved in a Community or Humanitarian Cause
In a recent study, Porter Novelli found that 78% of consumers are more likely to remember a brand with a purpose or mission, and 71% would purchase from a purpose-driven company over the alternative. If you are able to work with a local charity or align your business with a humanitarian organization, this will help your business stand out in the eyes of consumers and boost your customer retention.
You can donate a portion of your proceeds, hold fundraising events, or source from charitable groups. Along similar lines, you can partake in community events like farmer’s markets, pop-up shops, or collaborations with other businesses.
Customer retention is one of the most effective ways to drive your sales and grow your business. Although the formula for calculating customer retention is cut and dry, improving your rate can feel more like an art and takes a lot of experimentation. As a whole, driving your customer retention rate comes down to creating a positive customer experience and having strong communication with your customer base. Use the tips above to help guide your customer retention initiatives, and watch your business flourish.