Customer retention is the effort businesses make to retain customers over a period of time. Because it is more expensive to find new customers than to keep existing ones, customer retention is an important part of any successful customer relationship strategy and can help your business be more profitable.
How Customer Retention Works
Customer retention works by taking action to strengthen and maintain customer relationships and prevent them from finding another service provider. It encompasses efforts from a variety of teams within a business including sales, customer support, and oftentimes in larger businesses, a dedicated customer retention department. These teams work to address customer needs as well as problems as they occur, to try to retain customers over the long term.
For example, I remember several years ago when we wanted to cancel the internet service at our office because we were unhappy with the performance and the amount of money we were spending. When I called our provider to state our intention, the customer service agent eventually asked if he could transfer me to their customer retention department.
That second agent was able to solve our performance problem by sending out new equipment with a technician. The agent also offered us a promotional price on our service, which addressed our concerns and resulted in our continued business relationship.
Here are a few specific ways that businesses work to retain more customers:
- Providing training and support: One of the most effective ways to make sure that your customers are satisfied is to provide them with the training and support they need to use your product or service effectively.
- Handling problems: In addition to making sure your customers can use your product, customer support teams can help troubleshoot and solve any problems that occur.
- Evaluating performance: Looking at how your business is performing is an important key to retaining your customers in the long run. You can identify areas that might be failing to live up to customer expectations and make necessary changes.
How to Calculate Your Customer Retention Rate
Customer retention rate is the percentage of customers that you retain over a period of time and is calculated by taking the number of customers you have at the beginning of a time period and dividing it by the number of those customers who remain at the end of the period. The retention rate doesn’t take into account new customers since those customers haven’t been retained as they signed up.
For example, if you had 100 customers at the beginning of June, and at the end of June you had 115, with 20 of those being new sign-ups, that means you retained 95, which, in this case, is 95% of your customers.
This formula helps businesses evaluate how well they are doing at retaining customers over time and provides the ability to create a metric to measure their retention efforts. However, it is more common to measure the churn rate, which is the inverse of this calculation.
Customer Retention Roles
Generally, customer retention is the result of a range of business activities across different areas of your company. Even in a small business, the chances are that there are multiple people involved in interacting with, and serving, your customers, which means that each of them has a role in customer retention.
A few of the specific roles that often play a part in customer retention include:
- Sales and account management: Your sales team is usually the primary driver of the customer relationship, especially in a business-to-business (B2B) environment. That means they are the first line of offense in terms of creating strong customer relationships that last.
- Customer support: Your customer support team is often one of the most important factors in retaining customers since they are the people most likely to be involved in handling, and hopefully solving, customer issues.
- Community specialists: Many businesses increase “stickiness” or the connection and loyalty of their customers, through user and/or customer communities. These often provide peer support, best practices, and even training, and result in better retention.
- Product development: Changes you make to your products can certainly affect the decision customers make to remain with your business since customers may decide that they are unhappy with changes and seek alternatives elsewhere.
- Retention specialists: At larger businesses, there is often a team dedicated to handling escalated cases, whose primary job is to retain customers. Often these individuals can take more drastic action to resolve issues or make customers happy.
In reality, it’s everyone’s job to serve the customer, and when a business does that well, it will lead to better customer retention naturally. It is also helpful to establish specific retention policies that you can use to help guide decisions about what measures are worth taking based on the overall lifetime value for individual customers.
Customer Retention Tools
There are a variety of tools that your business can use to make your customer retention efforts more successful. For example, customer relationship management (CRM) software can help you keep track of sales opportunities and find opportunities to meet your customer’s needs better. A help desk tool, on the other hand, helps you organize and address customer problems and support issues.
Who it’s for: Small businesses who want a robust CRM to help manage customer relationships and improve customer retention.
What it costs: $29 to $60 per user, per month, billed annually.
Insightly is a powerful CRM that, in addition to robust contact and deal management features, includes project management tools. This makes Insightly a good choice for agencies and designers that sell recurring project-based services. Paid plans start at $29 per user, per month. However, there is also a free plan for teams of two or less, making it also a good option for solopreneurs who want an affordable CRM and project management tool.
Who it’s for: Small businesses who want a flexible help desk tool to help manage customer support and improve customer retention.
What it costs: Free to $49 per user, per month, billed annually.
Freshdesk is a simple-to-use help desk tool for small businesses looking for a combination of automated workflows, user-friendliness, and affordability. Freshdesk makes setting up and managing customer support across different channels―email, chat, and so on―easier by automating many of the support processes you handle on a daily basis. It is great for small businesses that want to improve customer retention and are getting started using help desk software.
Who it’s for: Small businesses that want an easy-to-use customer loyalty program that works on mobile devices.
What it costs: $45 per month.
CandyBar makes it easy to retain customers through a virtual punch card app designed to help you reward loyal customers. It doesn’t require integration with your point-of-sale (POS) software, making it simple to set up and get started. You can create customer rewards that motivate your customers to return and refer their friends, helping increase both customer retention and new sales opportunities. CandyBar is $45 per month, and a free trial is available.
Customer Retention Costs
Most of the costs associated with retaining customers fall into either the category of employees who interact with customers on a regular basis, or other types of costs associated with things like discounts provided, software tools, and loyalty programs.
Here are a few specific costs you should consider:
- Ongoing account management: Your account management team handles much of the customer relationship, and efforts to retain customers should be considered as a part of the cost of doing business.
- Customer support teams: The time and effort spent by your customer support team is a cost to your business. The greater the effort required to retain customers, the more support people may be needed, resulting in higher labor and wage expenses.
- Discounts and adjustments: Because it is usually more valuable to try to retain a customer, businesses will often provide incentives and discounts to keep customers around. These are indirect costs since they result in lower overall revenue generated.
- Loyalty programs: Many businesses use incentives to keep their customers around. Probably the most common example is an airline loyalty program, which provides a reward for continuing to travel with that specific company.
- Software and tools: Customer support helpdesk software and CRM tools are specific costs that are associated with maintaining strong customer relationships and should be considered a cost of customer retention.
The most important factor to consider in terms of cost is that it is always less expensive to retain a good customer than it is to have to go out and replace him or her with a new one. Focusing on the most effective tools and resources to increase your retention rate can help your business be more profitable since you are reducing the cost of customer acquisition associated with replacing lost revenue from those customers who left.
Benefits of Customer Retention
The primary benefit of better customer retention is that it helps your business be more profitable since you are keeping more of your customers for a longer period of time. Being proactive about your customer retention efforts can also benefit your business by freeing up resources that are required to handle support issues.
Here are a few of the most significant benefits associated with retaining customers:
- Lower expenses: Most businesses find that the cost of keeping a customer is usually less than the cost of acquisition, meaning that customer retention efforts usually have a stronger return on investment than marketing campaigns.
- Higher customer satisfaction: When your company focuses on the customer and meeting their needs, it results in greater overall customer satisfaction. This benefits your business because generally, satisfied customers tend to be more profitable customers.
- Frees up time: When you can retain your customers, your sales organization has the freedom to pursue the best opportunities instead of feeling like they have to work to backfill the customers that are leaving.
Frequently Asked Questions (FAQs)
Are there times when a business shouldn’t retain a customer?
Yes. In fact, knowing when to “fire” a customer is an important factor in being able to retain other customers better. Sometimes, a customer isn’t profitable, or requires excessive amounts of your support resources, and isn’t worth the effort to retain.
Is there a normal customer retention rate?
Customer retention rates range widely based on industry and the type of business. It’s more common to measure churn rates, which have the same variability. However, it is common to see average churn rates of 4% to 8% monthly, which means that the customer retention rate would be roughly 92% to 96%.
Bottom Line: Customer & Client Retention
Improving customer or client retention is an important factor for small businesses that want to grow and increase profitability. Knowing what causes customers to leave and creating best practices that address those causes results in greater customer satisfaction and stronger relationships, leading to greater customer retention.
As you look at ways that you can increase customer retention in your business, consider how a small business CRM like Insightly can help. It offers lead, contact, and deal management tools as well as the ability to manage customer projects within the same tool. Paid plans start at $29 per user, per month, with a free plan for up to two users. Visit Insightly for more information.