For a company to be able to retain customers, that is, to persuade them to repurchase its products or services, is crucial. The ability to succeed in doing the above is called customer retention. In this guide you will find out what the best strategies are.
What is customer retention and why is it important?
The meaning of customer retention refers to a company’s ability to keep or retain (or conserve) customers who have already been acquired.
In more practical terms, customer retention can be understood as the set of activities a company performs to retain customers and increase the number of repeat customers (as well as their profitability) by incentivizing them to make regular purchases.
As early as 1990, the importance of customer retention was known: research by Harvard Business School revealed that a 5 percent increase in customer retention can increase a company’s profits by up to 95 percent.
But why is customer retention so important? First, for a very simple reason, which you probably already know: selling to existing customers costs less than acquiring new ones (there are many experts who agree on this). The ability to reduce marketing costs is, therefore, one of the benefits that good customer retention can offer.
Not only that: nowadays, competition between companies is increasingly fierce, and therefore, being able to maintain a large and solid base of loyal and satisfied customers over time becomes even more important, because it allows you to secure a good number of regular purchases. In addition to the obvious benefit to the company’s coffers, this also has another benefit: it allows for more accurate forecasting of future revenue streams.
The importance of customer retention for your business
Now that you know some of the benefits that customer retention can offer, you should reflect on one aspect that-please note-does not run counter to what has just been said: customer retention, as mentioned, is fundamental to the growth of a business, but its importance within a company is also linked to the life cycle of the company itself: for a company that is just starting up or growing, the priority must be finding customers. When the company is well established, on the other hand, greater efforts must be focused on customer retention.
We will return to what has just been said in a few lines. Now, in fact, there is another point to be made: what you sell conditions in an important way the strategy you adopt. You should know that the main beneficiaries of a good customer retention strategy are those companies whose customers most frequently purchase high-value items. The electronics and luxury fashion sectors, for example, fall into this category.
Customer retention vs. customer loyalty: differences
To best fine-tune your business model you need to know the difference between customer retention and customer loyalty. In fact, there is often a tendency to confuse these two concepts, partly because the former depends largely on the latter: increased customer retention, in fact, is related to the efforts put in place to build customer loyalty, that is, to increase customer loyalty to the company.
While both are marketing strategies aimed at customer loyalty, there is a major difference between customer retention and customer loyalty: the goal of the former is to push existing customers to make regular purchases (and increase spending in subsequent purchases), while the latter encourages customers to choose that very company in preference to its competitors.
There is, moreover, another distinction: the measurement of customer retention is based on the customer retention rate (you will find out how to calculate this in a moment), while customer loyalty makes use of other metrics, such as loyalty rate and propensity to buy.
Retention marketing: strategies to retain customers
The time has come to introduce the concept of retention marketing so that we can discover the best strategies for building customer loyalty. This particular form of marketing, in fact, includes all actions aimed at increasing the likelihood that a customer will still buy the company’s products or services or increase its profitability.
These practices include, for example, cross selling and up selling. The former consists of suggesting to the customer the purchase of a complementary product to the one he or she has already requested or purchased. A complementary product is defined as a product that can complement, supplement or enhance what the customer has already eyeballed, based on the interest and preferences shown by the consumer.
Up selling, on the other hand, is a sales strategy of recommending the purchase of a higher-end product or the purchase of a larger quantity of product.
Among the best strategies for building customer loyalty is offering discounts and other purchase incentives. Loyalty programs deserve special mention in this regard: the most common of these allow customers to accumulate reward points that they can then redeem for discounts, free gifts, cashback and other types of benefits.
Instead, to introduce the next loyalty strategy, it is necessary to quote a famous statement by Philip Kotler:
“The key to customer retention is customer satisfaction.”
In order to keep customers satisfied, it is necessary to offer them added value, and it is necessary to do so (also) through optimizing the customer experience: offering better products (or services) than competitors or better prices, in fact, is not enough. In this area, remember that using a CRM management system (Customer Relationship Management) gives you a big hand in managing customer relationships in real time, assisting them at different stages of the buying process and surprising them with personalized service and offers.
Earlier we mentioned offering better products or services than competitors: there is no doubt that maintaining high quality standards contributes decisively to customer satisfaction. For this to be possible, it is necessary to periodically analyze the production chain so as to make it as smooth and streamlined as possible and to listen to customer feedback so as to understand what needs to be improved.
Customer retention rate: how to calculate and improve this KPI
To measure your customer retention you can refer, among various business KPIs, to the aforementioned Customer Retention Rate. Calculating this rate returns to you the number of consumers who stay (i.e., continue to shop with your company) at the end of a given time period, without taking into account the number of consumers you acquired during the same period.
To calculate the customer retention rate you only need to know three pieces of data:
- the number of customers at the beginning of a given period
- the number of customers at the end of the same period
- the number of customers acquired during that period
The calculation procedure is as follows: you have to subtract the number of customers you have at the end of the period you have chosen from the number of customers you acquired in that same period. Then, you have to divide the resulting figure by the number of clients you had at the beginning of the given period.
The formula is as follows:
(CUSTOMERS AT THE END OF THE CHOSEN PERIOD – NEW CUSTOMERS IN THE PERIOD) / CUSTOMERS AT THE BEGINNING OF THE PERIOD
To express it in percentage terms, you simply multiply the result obtained by 100. Ideally, of course, you should be able to reach 100%, because it would mean that you have not lost any customers (on the contrary, a rate of 0 means that you have lost them all).
Now that you know the formula for calculating the customer retention rate, it is also important for you to know that the calculation of this rate proves particularly useful if it is done regularly and frequently, although the latter varies according to the specific needs of the company (fluctuating roughly between monthly and yearly).
Measuring this rate frequently also allows you to improve it over time. To do this, you must first set realistic expectations so you can deliver what you promise your customers. Listening to customers is key: social media allows you to listen to what they say and monitor sentiment, but you can also use text messages, WhatsApp messages and e-mails to gather their feedback directly so you know precisely when and how to improve the customer experience.
Overcoming the challenges of client retention: useful tips
Client retention is a marketing opportunity that involves relatively low costs and can bring important benefits, in terms of increased profits, even in the long run. One of the main challenges, as mentioned earlier, is figuring out when to focus efforts on this particular activity, rather than focusing primarily on finding new clients. The advice, in this case, is to find the right balance without giving up, at whatever point in the company’s life cycle you might find yourself, on one or the other activity.
There is another challenge for those who, today, want to do client retention: competition between brands is increasingly fierce, and product and service offerings have increased exponentially. Keeping the brand’s memory alive in the customer’s mind is, therefore, even more important today, but it must be done without ever being intrusive. Again, it is a matter of balance. The important thing, too, is to make sure that announcements of new products or services or special offers are tailored as closely as possible to the individual customer.
It’s time for your final piece of advice. Personalizing the customer’s buying experience and providing excellent customer service at every stage of the buying process is now not enough to build customer loyalty: the challenge to ensure that customer retention goes smoothly is also to surprise the customer. How? Between free gifts, discounts, and extra services, you are spoiled for choice.
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