Customer retention and loyalty is a large determinant in what differentiates a good business from a great business. This is dependent on your brand, reputation, and more recently, the customer experience and journey. The ability to build trust and loyalty is crucial for your business’ sustainable growth and success. The costs associated with acquiring new customers; marketing, acquisition, sales processes, etc. - are much greater than the cost of maintaining existing customers.
It’s important to establish a customer success strategy through the early stages of your business. Within this strategy, there should be a number of metrics that you can use to identify, measure, assess, and re-allocate efforts and resources into business practices that build your relationships with your customers, encouraging customer retention. Some key metrics that should be included within your customer success strategy include customer retention and churn rates, repeat purchase ratios, existing customer growth rates, loyal customer rates, and customer lifetime value.
Customer Retention & Churn Rates
Understanding your current customer retention rate is crucial before implementing any strategies to improve it. You need to be able to see if your current strategies are encouraging customer retainment or speeding up the customer churn rate. The Customer Retention Rate measures the number of customers your business retains over a set period of time.
Customer Retention Rate formula:
Customer Retention Rate = (Customers at the End of the Period) - (New Customers Acquired)/Customers at the Start of the Period.
Alternatively, Customer Churn Rates measures the number of customers who stop doing business with you over a set period of time.
Customer Churn Rate formula:
(Number of Customers at Start of Year - Number of Customers at End of Year)/Number of Customers at Start of Year
Repeat Purchase Ratio
The Repeat Purchase Ratio measures the customers who have made more than one purchase over a set period of time in comparison to your overall customer base. This particular metric is also a great indicator of customer loyalty - companies can look into the demographics of returning customers and adjust to their target buyer’s personas accordingly.
Repeat Purchase Ratio formula:
Number of Returning Customers/Number of Total Customers
Existing Customer Growth Rate
This metric looks at how your business is generating revenue from customer success efforts. This formula only takes into consideration revenue generated from existing customers. A climbing rate suggests that customer success efforts are successful in motivating customers to increase their spending, subsequently customers also realise the value from your engagement.
Existing Customer Growth Rate formula:
(MRR* at the End of Month - MRR at the Start of Month)/MRR at the Start of Month
*MRR = monthly recurring revenue
Loyal Customer Rate
This ratio refers to the number of customers who have made repeat purchases with you over a set period of time. As your most loyal customers buy from you the most, this metric identifies the percentage of your customer base that’s demonstrated loyalty to the business.
Loyalty Customer Rate formula:
Number of Repeat Customers/Total Customers
Customer Lifetime Value
Customer Lifetime Value (CLV) is a measure of the total income you can expect to generate from a typical customer. Ideally, CLV should either rise or remain consistent, as a declining CLV suggests that you’re capturing low-value customers or losing customers than you had previously.
Customer Lifetime Value formula:
(Customer Value * Average Customer Lifespan)
Where Customer Value = Average Purchase Value * Average Number of Purchases
With the following metrics, you should be able to assess key areas in which your business can improve on, re-allocate resources to and efficiently build on your relationships with your customers. After building a strong relationship with them, customer retention happens organically.
Finding out where customer pain points are and getting to the root of those issues has in their journey with your business, addressing the issues and maintaining strong relationships with them has proven great benefits for businesses. Retain your customers and you’ll observe increased value in all of your sales, reduce the cost of acquisition and reduce your customer churn.
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