How is Customer Retention Important for Increasing Profitability?

Customer acquisition is the first step towards the success of any new product. However, retention of customers is probably the most vital parameter to sustain the success of any new product. Often, customers don’t end their relationship with a company or product after a single purchase. Customers keep coming back to buy newer versions of the product or buy added services to this product. This repeat purchase scenario indicates a happy customer, quantified by a high customer retention metric.

There is a cost associated with acquiring a customer. Customer retention helps a company keep or carry forward the relationship with already existing customers.  Acquisitions bring you revenue while customer retention brings you a return on investment. In this article, we help understand customer retention and how you can benefit from this knowledge to make your product or company more profitable.

What is Customer Retention?

Customer retention is defined as a company’s ability to retain its customers over a period of time. It is the process of engaging existing customers to continue buying products or services from your business. Through customer retention, companies can generate additional sales through their existing customers. As a result, companies can earn more per customer without an increase to their customer acquisition cost. 

How do you calculate the customer retention rate?

A widely used methodology to understand retention metrics is through customer retention rates. Customer retention is not only impacted by how many customers are acquired but also how many customers churn (cancel their subscription, upgrade to a competitor’s products, etc.). The customer retention rate helps factor this in.

The formula for customer retention rate over a period is:

(Number of customers at the end of a period – number of customers acquired during that period) *100

Number of customers at the start of that period

Customer retention is a simple, yet powerful tool for companies to identify how happy their customers are. Eventually, happier customers come back for subsequent purchases, adding to the growth of the company’s topline revenue. Let’s understand this formula better with an example.

You have 200 customers at the beginning of the month. During the period your product has acquired 10 new customers. However, due to competition, 20 of your customers have churned out to use the competition’s products. At the end of the month, your total customer base is 190. Your retention rate for this product over a period of 1 month = (190-10)/200 = 90%

Importance of Customer Retention for ROI, Customer Loyalty, and Business Growth

Now that we know how to measure customer retention, let’s take a look at how this information can be useful for us.

Customer Retention and Return On Investment (ROI)

Research shows that a 5% increase in customer retention can increase company revenue by 25% – 95%. As mentioned above, it is cheaper for you to invest in existing customers to improve profitability than to acquire new customers.

High consumer retention indicates that existing customers continue to purchase goods and services with you. Thus, for the initial customer acquisition investment, you are getting multiple cycles of sales. Since the customer has already been acquired, the company does not need to spend any more for marketing or onboarding those customers and selling new products or services to them additionally.

Customer Retention and Customer Loyalty

Loyal customers not only provide you with additional sales as mentioned above, but they also help onboard additional customers through word of mouth marketing. A high consumer retention ratio implies a loyal consumer base. These customers help spread positive messages about the company and their products, acting as on the ground campaigners for your brand.

Apple is a prime example of the impact of loyal customers. Brand loyalty is so strong and fierce that patrons of the company actively promote their products to peers, offering another channel of consumer-led marketing.

Also, Read: The Importance of Customer Loyalty Programs

Customer Retention and Business Growth

Finally, the main benefit of retention is the higher business growth a company can achieve. Companies with higher retention rates will have more success in launching new products or adjacent products because of their good reputation and loyal following.

Customer loyalty and appreciation of a brand can also play a pivotal role in helping companies crack a new market or even venture into a new business vertical. The high rate of adoption of Apple TV is one such example of how companies can benefit from the loyal customer base.

Most Popular Customer Retention Strategies Help You To Increase Profitability

Given the plethora of benefits that increased customer retention can offer, there are numerous ways to go about improving the retention rate. The following are some strategies that you can use.

1. Understand Customer Needs and Solve for Those Needs

Customers are very picky about what they want to spend their money on. If they do not see value in your product, they will spend their hard-earned money elsewhere. Understanding customer needs and positioning your products to consistently solve those needs is paramount to keep customers coming back. As customer needs evolve, companies need to upgrade their solutions to cater to those very needs to avoid becoming obsolete.

2. Communicate Well With Your Customer

One of the key reasons for dissatisfaction is the difference between customer expectations and what they experience. Expectation setting through effective communication can help avoid this critical pitfall to happy customers. Companies also need to spend time and educate the customer base to help customers have a clear idea of how the products can solve their needs.

Communication has to be two-way, and companies need to have a frictionless feedback system. Listen to what your customers have to say, and implement those recommendations when possible.

3. Reward Your Profitable Customers

All customers are important, but some more than others. Every company will have lighthouse customers and it is important to take extra care of these customers. Loyalty programs help engage these customers and continue their valued support for the business. The Starbucks rewards program is one such example. Customers earn stars for every purchase, which can be redeemed for free food and drinks.

4. Offer Valuable Cross-Sell and Upsell Opportunities

Happy customers are willing to expand their purchases to other products within the same brand. Thus, companies need to encourage this by providing compatible avenues for cross-selling and upselling. In the case of Apple, accessories such as Airpods are a great example of a good cross-sell opportunity to a customer’s existing Apple products.

5. Establish and Train Your Customer Retention Team (Customer Lifecycle, Churn)

Finally, create and train your customer retention resources or you have to look in customer retention software. The consumer retention team should be well educated on the entire customer lifecycle so they can understand a customer’s pain point. They should also have a good idea of past issues so they can identify recurring pain points and solve these issues smoothly.

This team will be able to identify customer churn and prevent such an event from occurring by proactively reaching out to the customer and reconciling any issues they may have. The team can also offer valuable feedback on issues faced by the customer.

Final Call on Customer Retention

Improving a company’s retention rate is a tried and tested method to improve its topline revenues. A happy customer offers more sales for lesser acquisition costs than a new customer. Happy customers also help company sales externally, by spreading the word within their peer groups and social network.

Thus, companies should value this metric as a key contributor to their success. Investing in the improvement of retention is critical for companies to get the most out of their customers. Offering products that cater to client needs, communicating clearly with the clients, designing effective loyalty programs, and reducing customer churn through customer retention teams are some critical strategies that companies shall use to drive the customer retention metric.

What has been your experience with customer retention? Please share with us what strategies worked for you in improving your profitability?