Customer retention: what it is and how to strengthen it

How to ensure customers keep coming back

In most cases, business marketing plans tend to focus heavily on customer acquisition and lead generation, yet rarely do they account for customer retention.

What is customer retention?

Customer retention refers to the strategy of engaging with companies that have already purchased from us—existing customers who return to make additional purchases. While it may seem an obvious concept, it is far from trivial: studies show that acquiring a new customer is five times more costly than encouraging an existing customer to buy again.

The root of this cost disparity between attracting a new customer and securing a repeat purchase lies in trust. For a new lead, considerable effort is required to establish brand recognition and build trust, whereas a returning customer has already passed the hurdle of the initial purchase; they know what to expect and feel more comfortable buying again.

The value of customer retention

One surprising fact is that customer retention is an incredible profit generator. According to research from Harvard Business School, a modest 5% increase in customer retention can drive profit increases between 25% and 95%—all at a much lower investment than generating new leads.

How to calculate your company’s customer retention

To gauge customer retention effectively, focus on four metrics: customer retention rate, purchase frequency, average purchase value, and customer value. Here are the specific formulas to calculate each within a chosen time frame (e.g., monthly, annually, or over a decade):

• Customer retention rate: $[number\; of\; customers\; who\; made\; more\; than\; one\; purchase\; within\; the\; time\; period\; /\; Total\; number\; of\; customers\; within\; the\; time\; period]\times 100$
• Purchase frequency: $[number\; of\; orders\; placed\; /\; total\; number\; of\; customers\; within\; the\; time\; period]\times 100$
• Customer value: [purchase frequency × average order value]

Studying the customer experience

Once you’ve calculated your customer retention rate, it’s wise to identify potential reasons for a drop or plateau in the rate. Why might customers be choosing a competitor? Studies often point to Customer Experience as the deciding factor—the overall experience a customer perceives from the point of purchase onward. Did they receive adequate support? Were they pleasantly surprised by any extras? Did the company meet all contractual promises?

For improving customer retention, these areas often require targeted adjustments, but how can you make these improvements effectively?

In this context, investing in a robust CRM system makes sense. A CRM can facilitate marketing automation, loyalty programs, and detailed tracking of each customer interaction. This system can help you anticipate customers’ “future purchasing desires,” manage customer service more effectively, and even enroll customers in special discount programs to make them feel valued. The true power of CRM lies in placing the customer and their needs at the center of your strategy.