A Guide to Customer Retention Strategies

Learn how trust and reliability can improve your businesses' customer retention.

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Winning new customers is exciting—and it’s essential to building a business. In a company’s early days, it’s the only way to survive. But as your business grows, relying too heavily on customer acquisition can drain resources and limit profitability. That might seem counterintuitive, but you also need to focus on your existing customers, who already know and like your business. Once your business gains traction in the marketplace, customer retention strategies can generate returns far beyond the best sales channel or lead-generating system.

Whether you’re an experienced business owner or you’re just starting your business, learning about customer retention and how to retain customers is important. Building a loyal customer base is a smart long-term move for your business, so customer retention is key.

When you cultivate loyalty and prioritize retention, you increase your customers’ lifetime value and boost your revenue. It can also help you stay ahead of your competitors. Continue reading to learn more about essential customer retention strategies for your business.

What is customer retention?

Before we get into how to retain existing customers, let’s first discuss the customer retention definition. Customer retention is the process of getting existing customers to continue buying products or services from your business. It differs from customer acquisition or lead generation because you appeal to people who have already purchased at least one product or service from your company. You may have heard it referred to as “customer loyalty” or “customer retention rate” in a data setting.

A business with high customer retention loses fewer new customers to competitors or inactivity. Effective customer retention strategies increase your percentage of repeat buyers and the profitability of each customer. These strategies allow you to form lasting relationships with customers who become loyal to your business and may become enthusiastic brand advocates who refer new business.

You work hard and spend money to win each new customer. Customer retention strategies help ensure your hard-earned customers have a great experience, get value from your products or services, and stick with you.

How is customer retention measured?

The formula for customer retention, or the customer retention rate, is:

((Number of customers at the end of a period - number of repeat customers) / (number of customers at the beginning of a period)) ×100

Consider an example of a makeup company that sells products online. At the beginning of a fiscal quarter, the company records 1,000 total customers. At the end of the quarter, 1,100 customers total are recorded, and 500 of them are return customers. The retention rate for the makeup company is:

((1,100 - 500) / 1,000) × 100 = 60%

Customer retention vs. customer acquisition

While customer retention and customer acquisition are similar, there are some key differences between the two.

Customer acquisition is the process of acquiring new customers, which is typically a lot more expensive than retaining the customers you already have. Customer retention strategies are also very different from customer acquisition strategies because the goal is to keep existing customers. However, focusing on both customer acquisition and customer retention rates can help you improve your overall customer experience.

It’s easier to sell to existing customers. The probability that a new prospect will buy from you is 13%, whereas there’s a 60-70% chance of making a sale to an existing customer.

Benefits of customer retention

There are several benefits of marketing to existing customers rather than focusing solely on acquiring new customers. Some of these benefits include:

Existing customers buy more, more often

While new customer acquisition costs have gone up by almost 50% since 2015, research shows that existing customers are 50% more likely to buy new products. They spend an average of 31% more when compared to new customers.

It costs less to market to existing customers

Since existing customers already know your business, you spend less on marketing and make more profit on each sale. A slight increase in customer retention can have a dramatic impact on your bottom line. In fact, increasing customer retention rates by 10% increases profits by an average of 30%.

Happy customers tell people about your company

If customers are happy with your products and services, they’re likely to tell friends and family about you. Customers referred by friends who like a brand are 4 times more likely to buy. Brand advocacy can also come naturally if customer experience and customer satisfaction are high.

Your loyal shoppers can provide valuable feedback

Customers who make frequent purchases from your business know what you’re doing well and where you can improve. They can help you see your products, services, and purchase process through the customer’s eyes. Consider following up with your loyal customers to ask for reviews (and make changes based on their feedback).

How can you increase customer retention?

The 4 factors with the most significant impact on customer retention are service quality, satisfaction, trust, and commitment. They’re the first places to look when you start to think about customer retention. Do you deliver on your promises? Is your customer service staff available, responsive, and well trained? Do your products and services fulfill the promises made by sales and marketing?

To get a sense of where your company stands with customer retention, you’ll want to track 3 key metrics:

  • What percentage of customers buy more than once?
  • How often do they purchase from you?
  • What’s their average order value?

These numbers offer precise measures of how effectively your customer retention efforts are working.

In general, businesses with good customer retention numbers do the following:

  • Deliver great service
  • Resolve issues quickly
  • Keep in touch with their customers
  • Encourage interaction
  • Reward loyalty
  • Build helpful communities

It’s a mistake to think you can stay top of mind with customers without keeping in touch. Alert your community to promotions, new products, heartwarming stories, and other interesting content that adds value to their lives.

Analyzing the customer journey

Examining your customers’ journey can offer insights into ways to improve your service quality, customer satisfaction, trust, and commitment. What’s the customer’s experience from their first exposure to your marketing to the moment they open the product or use the service?

Today’s customer journeys can be complex. A new buyer may arrive from multiple touchpoints—which are moments of contact with your business—online and in real life. They may encounter your business at the beginning of their research process or when they’re ready to buy.

Acquisition

The first stage of the customer journey is acquisition. This is when a consumer first learns about and engages with your company. Examples of acquisition touchpoints include:

  • Clicking on an ad campaign or a link from another website
  • Discovering your website through organic searches
  • Reading blog posts
  • Submitting forms to access gated content
  • Receiving email campaigns
  • Calling or emailing your company

Activation

The next step is when a prospect becomes a customer. They haven’t engaged with your product or service yet, but they’ve decided to try it. This is the activation stage, and touchpoints include:

  • Placing their first order
  • Creating an account and setting up a profile
  • Joining an online community or network
  • Downloading an app
  • Completing onboarding guides and reading documentation
  • Engaging with onboarding emails
  • Watching training videos
  • Submitting support tickets

Adoption

The customer journey doesn’t end with the purchase. Outstanding customer retention means extending your communication and great customer service through the adoption phase.

Your customer purchased your product or service to achieve something; here, you’ll help them understand how to realize their goals. Adoption phase touchpoints include:

  • Unwrapping and using the product or service
  • Enabling advanced features
  • Upgrading to higher tiers
  • Making a payment or interacting with their account
  • Inviting other users or referring friends

Once you’ve mapped out each step of the acquisition, activation, and adoption phases of the customer journey, you can look for ways to optimize the customer experience from start to finish. Remember to use customer feedback, which you can gather through surveys included in an automated follow-up email or first purchase automation.

Strategies to build customer loyalty and increase profits

Which customer loyalty programs are effective? The best ways to build customer loyalty will depend on your business, your customer base, and the products and services you sell. Here are 9 strategies that can strengthen customer loyalty and increase your profit margin.

1. Maintain a customer communication calendar

Avoid letting customers fall through the cracks by tracking how long it’s been since an existing customer interacted with your business. You can re-engage inactive customers with promotional offers. You can also acknowledge milestones like birthdays or get ahead of subscription expiration dates.

2. Send a company newsletter

Email newsletters help keep your brand fresh in the mind of your customers. Simple and inexpensive, email marketing can have a surprising return on investment (ROI), with an average of $42 return for every $1 spent.

3. Launch a customer education program

Help your customers succeed by giving them the information they need. Your customer education program can be focused on your product or service, or it can include supporting information as well. For example, a company that delivers hair color would offer detailed instructions on choosing and applying hair color. They might also add sections on homemade formulas to remedy dry or overtreated hair and how to keep your hair healthy.

4. Implement a multichannel or omni-channel customer service system

Combine live chat, call-in customer service, chatbots, email customer service, and a comprehensive FAQ section to make it easy for customers to get answers where and when they need them.

5. Deliver on your promises

Consistency builds trust. Customers appreciate a business that reliably delivers on its promises.

6. Own your mistakes

Up to half of consumers will leave a company after only one bad experience. Every business makes mistakes. When they do happen, it’s essential to address them quickly to show customers their business is appreciated.

7. Surprise them with added value

Customers remember and appreciate a positive experience. Events, contests, and vibrant customer communities are all ways to deliver more value.

8. Solicit and share positive feedback and testimonials

Social proof is a powerful persuader. 88% of customers trust online reviews as much as they trust referrals from friends and family. Plus, asking for feedback can help establish an emotional connection with your customers.

9. Reward customer loyalty

Customer loyalty programs give people who already enjoy buying from your company incentive to come back. Loyalty programs inspire customers to spend more at your business because they receive benefits in return.

10. Cross-promote with relevant brands

If your business has multiple related brands, you also have the option to cross-sell. Since a customer is interested in something you provided, they are likely to be interested in a product from a related brand, and reaching out is easy when you have a mutually beneficial opportunity to share.

When to prioritize customer acquisition versus customer retention

While retention has been shown to be more profitable than acquisition in general, it may not always be your best strategy. Although retention has some great benefits, you have to consider how relevant a strategy it is for your business. To determine how much your business should focus on one or the other, look at 2 primary factors:

  • Your current volume of incoming sales
  • The frequency at which your product or service is repurchased

For example, a brand-new business that sells an item people only buy once every few years, like cars or houses, would need to focus exclusively on getting their name into the marketplace and acquiring new customers.

On the other hand, an established business with a steady flow of new customers that sells an item that people have to buy regularly, like coffee or office supplies, should allocate considerable resources to customer retention.

For businesses in between these 2 scenarios, here are general guidelines on how to split your resources:

  • One to 5 sales a week: allocate 85% of resources to customer acquisition and 15% to customer retention
  • One sale per day: allocate 70% to customer acquisition and 30% to customer retention
  • 10 sales per day: allocate 50% to customer acquisition and 50% to customer retention
  • More than 10 sales a day: allocate 40% to customer acquisition and 60% to customer retention

Your business’s strategy will depend on the products and services you sell. A retailer that sells vitamins and supplements might offer a gift after 10 purchases, but that kind of loyalty program makes no sense if you’re selling expensive diamond jewelry. At the same time, a company that sells high-cost items customers can frequently purchase, like electronics or luxury fashion, has the most to make from an effective customer retention strategy.

Customer retention: FAQs

What is customer retention and why is it important?

Customer retention is the process of making sure your customers stick by your company. There are several reasons a customer might defect to a competing company, so things like customer relationship management and rewarding longtime customers can help you keep people around. Because customer acquisition can cost up to five times as much as customer retention, it’s best to focus on keeping the customers you have instead of finding new ones.

What are examples of customer retention strategies?

There are lots of customer retention strategies that you can use as a business owner. To start, you should make sure you’re maintaining good relationships with your customers, which means responding to customer service inquiries, reaching out about new products, and staying in touch in general. You can also offer loyal customers rewards and deals for sticking with your company, which gives people an incentive to keep shopping with you. Different customer retention strategies work for different types of businesses and customers.

How do you improve customer retention?

If your customer retention is lacking, there are lots of things you can do to improve customer retention rates. You can send out a company newsletter to keep in touch with your audience, plus you can keep a customer communication calendar to improve customer relations. You can even reward customer loyalty and launch educational programs to provide even more value to your customers. As we mentioned before, retaining customers is a lot cheaper than acquiring new ones.

Spend less and make more with customer retention strategies

Many consumers are overwhelmed with constant ads and seemingly limitless choices. When your business carves out a position as a trusted and reliable resource that delivers on its promises, your customers will be happy to return.

Customer retention strategies do more than increase the lifetime value of your customers. They create a win-win relationship in which your business delivers an outstanding experience and your customers benefit from doing business with you.

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