It’s not just a business strategy to keep customers happy, it should be the heart of every business operation. research has shown that increasing customer retention by 5 percent can increase profits anywhere from 25 to 95 percent.
Furthermore, 60 to 70% of existing customers are likely to be sold successfully. However, new customers only buy at a rate between 5 and 10 percent.
At every step of a transaction, user data is collected. This data can be used by your marketing and customer service teams to determine how satisfied your customers are with your product and to help you figure out what to do to make them happy again.
Let’s first establish the context and agree on what retention means.
What is Customer Retention?
Customer retention is the ability to continue using a product or service. It is calculated by dividing the number of customers a company has at the end of a period by the number of customers who have acquired or left the service.
Businesses must define what constitutes product usage when it comes to retention. You can log in to an app, visit a website or use a feature.
Therefore, retention is important and customers should interact with the product as many times as possible. This increases the likelihood of a successful transaction.
Customer Retention and Loyalty Metrics
We now know what customer retention is, so let’s look at the most important KPIs that can be used to measure it.
You can track the following metrics, regardless of whether you are an ecommerce business, SaaS or any other type, to get a complete picture of how loyal and happy your customers are.
Customer Retention Ratio (CRR)
Customer retention rate (CRR), is the most important metric to determine how loyal and satisfied your customers are.
This shows how many customers have used your product for a certain period of time. It is usually calculated on a weekly basis, monthly basis, or annually.
CRR can be calculated by subtracting the number acquired customers from the number at the end of a given period. This is then divided by how many customers are at the beginning of the period.
CRR = CustomersEnd – CustomersAcquired / CustomersStart
You might start the month with 500 customers. You lose 30 customers, but gain 50. You have 520 customers at month’s end.
This would give a monthly CRR of (520-50) / 500 = 0.94 = 94%.
This will depend on your industry rates. B2B businesses generally have higher CRR because switching between products is often tied to the underlying processes and other management decisions.
It is a good idea to compare yourself with industry standards and to try to improve your CRR over the period you were considering.
Customer Churn rate (CCR),
It is important to know how loyal your customers really are. Also, you need to determine at what rate they leave your company. This is what your customer churn rate tells you.
CCR is calculated when the number of customers at a given end of a period is subtracted from the number of customers at its beginning. The result is then divided with the number of customers at beginning of period.
CCR = CustomersStart – CustomersEnd / CustomersStart
If you had 500 customers at start of month and 480 at end, the Monthly CCR would be = (500-480) / 500 = 0.04 = 4. percent. This would indicate that 4 percent of customers quit your business in a single month.
There are many factors that can cause customer churn, including:
- Competitors offer better products
- Product that is expensive
- Manufactured without any features
- A bad user experience
- Poor customer service
There are many ways to reduce or minimize churn. These options can make your product more user-friendly or allow you to personalize it.
Recommend Read: Five Factors that Influence Customer Retention
To find out what your customers like and dislike about your product, it is important to talk to them on a regular basis. It doesn’t matter if you call customers, conduct surveys or collect usage data. It all depends on what product you offer.
Repeat Purchase Price (RPR).
In simple words, the repeat purchase ratio (RPR), is the percentage of customers who have transacted with your company more than once.
This is done by multiplying your total customers by the number of customers who have purchased from you multiple times.
= Customer > 1 transaction / Total Number of Customers
If you have 10,000 customers, and 1,500 of them bought more than once from you, your RPR equals 1,500 / 10,000 = 0.15 = 15%.
RPR can vary from 0 to 100%. Therefore, you should maximize it.
There are many ways to increase RPR. These include emailing customers about new offers or sending push notifications to the user’s mobile phone. The type of product you offer will determine the possible strategies that are available.
Participation & Redemption Rate
When a company offers loyalty programmes to its customers, participation and redemption rates will be measured.
Loyalty programs can be a marketing strategy that encourages continuous shopping. When a customer completes a transaction, they are rewarded. Loyalty programs often work in conjunction with other merchants. They offer customers their goods and services as a shopping reward. You can earn miles by flying or redeem cashback for your credit card use at a selected merchant.
Participation and redemption rates are measures of how engaged customers with loyalty programs. Participation rates are the percentage of customers who have used your loyalty program. There are many criteria that can be used to classify active members, but the most common is whether the customer has earned a reward or signed-up for the loyalty program.
This is done by subtracting the total number of customers from the active users of the program.
Participation rate = Loyalty members / Total number of customers
If you have 10,000 customers, and 2,000 of those customers sign up for your program then your participation rate equals 2,000 / 10,000 = 0.2% = 20%.
In reverse, redemption rates are the percentage of customers who have used your loyalty program points. This is done by subtracting the total number of coupons or points issued from the coupons or coupons used.
Redemption rate = Total points used / Total points issued
There are many ways to encourage people to sign up and spend points.The Top 10 Business Podcasts
- Customers should be made aware of the existence of the program by advertising on your platform or sending notifications. Advertise on your platform and send notifications to customers
- Rewarding merchant partners with attractive incentives
- Customers can earn rewards from different merchants and areas of their lives (e.g. From online shopping to supermarket purchases
- Different ways to earn points, not just through purchases, include sharing your social media posts or referring others.
- Provide frequent updates about how many points your customers have, and how far away they are from redeeming them for the reward they desire.
Net Promoter Score
The Net Promoter Score (NPS), measures how likely customers are to recommend your product/service to others. The Net Promoter Score (NPS) is a measure of how satisfied a customer feels about your product or service. This will increase the likelihood that they will be loyal to you.
Ask your customers to rate your product on a scale of 0-10 to determine your NPS. In this example, 0 means no recommendation and 10 means that they would absolutely endorse your product.
The NPS scores can then be divided into three distinct categories:
- Customers who give a score between 0 and 6 to detractors
- Passives (customers who give a score of 7 and 8)
- Promoters (customers who give a score of 9-10)
Add the percentages of promoters and detractors to calculate NPS.
NPS = % Promoters – % Detractors
This calculation should give you a score between 100 and 100. If you have 80 percent of promoters, 10% passives, and 70% detractors, your NPS would equal 80% – 10% =70.
You can gauge how satisfied your customers have been over a period of time by consistently measuring NPS.
It is important to give survey respondents the option to explain their scores (e.g. Through a comment box included in the survey. This will allow you to identify the root cause of customer dissatisfaction and help customers resolve it quickly.
Avoidable Pitfalls When Measuring Retention
It is important to focus on just a few metrics. It is tempting to measure every interaction and movement you see. The key to great data driven companies is to understand the essence of their product or feature and then create key metrics around that. By being selective in your KPIs, you can be more aligned within your company (since everyone is aware of the key metrics), and externally with customers (by measuring precisely what is required).
You should not choose a wrong time period. It is dependent on the type of business you are running. A timeframe that is annually feasible to consider if you are selling vacations would be more practical than a social media app that measures daily usage. It could be misleading to choose the wrong timeframe. The result of looking at flight booking retention on a weekly basis would be very unhealthy. On the other hand, annual retention might look much better.
You are measuring the wrong events. It doesn’t matter if it’s logins or repeat purchases or even posting a comment, you need to define what constitutes a retained user. Amazon, for example, would not consider website visits or logins to define a retained customer, but repeat purchases. Netflix, on the other hand would likely consider video consumption.