October 18, 2022

Customer Retention Part 1 - Calculating your Customer Retention:

Photo by Amina Filkins

Customer retention. What is it? A metric, or a strategy?

Essentially, it's both. It focuses on having a trusting relationship with your customers. We briefly touched on it in the last blog post, A Blog about Blogs, and compared customer loyalty to a mentor that you choose over a stranger. If you know of a company and are familiar with its levels of expertise, and are satisfied overall with its services, you are less likely to choose a competitor. 

A common theme throughout all of these blogs is that companies/businesses/services are simply not implementing very basic yet important strategies that are easy to understand and execute. 

Customer retention is one of these strategies. And a metric often overlooked.

Although it's becoming a popular buzzword thrown around amongst business strategists today, a lot of businesses aren't aware of what it is or what it can do for them. What's interesting is customer retention is the baseline from which your business grows, so you are probably already using retention strategies without really knowing it. 

If you are a startup and thinking, how can we better serve our customers? You have retention on your mind. It's the foundation for the success of your business. However, instead of blindly using retention strategies, we’ll be discussing what they mean and how you can improve on them. 

By definition, retention is keeping the continuation of something, whether it be the use of an object, one's attention span, a service, etc. We often talk about retention when it comes to video watch time, i.e: the length of time someone spends watching a video. You don't want people losing interest and clicking on a different video because they are bored. So, clicking out of a video is considered poor video retention.

This video by College Humour explains how people's attention nowadays has become more and more short-lived, which is why we see so much short form content, and videos with cuts or graphics every second. It's not a bad thing, but it is something that creators and companies need to be aware of if they want to keep audience retention. 

Customer retention is more specific but still falls under the same sort of definition: keeping the interest of customers ensuring repeat business as opposed to trying other services. In Part 2 we will discuss how to improve customer retention, but for now, we will discuss how to calculate your customer retention.  

Okay, so Customer Retention Rate. Let's get into the numbers. 

The norm is to browse over numbers and if that works for you, sure! But genuinely calculating your retention rates can help put things into perspective so you can move forward onto specific strategies and improve your CRR (that’s Customer Retention Rate, btw).

Okay, stay with me now. Let's go over the variables. 

CE: the total number of customers at the end of the time period 

CN: the total number of new customers that were gained during the time period 

CS: the total number of customers at the start of the time period

So the calculation goes as follows:

Retention Rate = ((CE-CN)/CS)) X 100

Let's say you had 1000 customers at the beginning of the year, a month, a week, whatever your time frame is, it all depends on how you want to keep track of your CRR. 

You gain 100 more customers but 60 customers end up leaving your services after the first try. 

So you end up with 1,040 customers at the end of the period. Okay cool, but what's the percentage of your CRR? 

1,040 - 100 / 1000 = 0.94. 

0.94 x 100 = 94% 

A+ retention rate. 

But wait. Hold on a second. This may look like a really good percentage but the fact of the matter is, it all depends on the context and where you plan for your retention to be! And if your CRR is high and right where you want it, don’t forget it takes an effort to keep it up there. The higher your retention rate, the more repeat business you get. The more repeat business you get, the lower your marketing spend. The lower your marketing spend, the higher your margins. 

Now if you are looking at these numbers and it’s all feeling a bit useless, let's chat about why all of this is important. 

It's less expensive to retain customers than to attract them, anywhere from 5x more to 25x more to be exact. Advertising and other forms of marketing can be really difficult to keep up with, and also a drain on resources, time, and cost. So, it's easier to keep customers than to make up for lost ones, but that should be a given. According to Shopify, returning customers spent 67% more during the later months of their shopping relationship at a company than their first ones. So again, keeping an eye on your CRR can be super beneficial if you want to increase your revenue. 

The longer someone stays a customer, the more likely they will spread the word about you. That's free advertising. And we all know this by now but people tend to trust those they know. A friend of a friend can go a long way. Dropbox went from 100,000 customers to 4 million in only 15 months due to its clever referral program. Their referral program awarded their customers 500MB of space for each friend that the customer referred to dropbox. Now, this is a marketing strategy that utilized customer retention, but loyal customers often will refer you even without rewards for the best interest of their family or friends. 

Of course, you always want to gain new customers, but businesses thrive on the success of repeat customer/service relationships. You’ve got to keep your long term valuable customers happy, a happy customer is a happy and successful business.

create something brag-worthy.

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