Customer Retention Guide

Customer retention fuels faster organic growth when combined with customer acquisition. After all, net customer and revenue growth is the product of losing fewer customers than you gain. And loyal customers lead to increased lifetime value. Understanding how to retain customers is vital to building a successful business. The truth is there is no one shoe fits all but there are many universal truths.

Customers are the purpose and profit for many, if not all, organizations. Attracting them is crucial. But unless you can retain customers too, your efforts are like carrying water in a leaky bucket.

This is our comprehensive guide to customer retention. It’s packed full of expert tips, great ideas, staggering stats and real-world examples. Use it to understand customer retention from base principles and shape a winning customer retention strategy.

Set Up Your Customer Satisfaction Survey Create a free Customer Thermometer account (No credit card required – Fully functional account). Set up a CSAT survey and discover why over 10,000 teams choose Customer Thermometer to track, measure and improve their customer retention program.

What is customer retention?

Customer retention is the program of activity carried out by an organization to keep its customers. By acknowledging customer retention as a business imperative, organizations can avoid neglecting this discipline or leaving it to chance.

A structured approach to customer retention typically takes the form of a customer retention program. These incorporate a host of activities from customer loyalty schemes to marketing activities and communications campaigns. Often, these programs are focused on the highest value/margin customers. We’ll go into more detail throughout this guide about the strategies that govern such programs, and the tactics organizations can deploy to achieve their goals.

A manifesto for customer retention

One of the best introductions to the spirit of keeping a customer – a kind of manifesto – is attributed to a US company in the early part of the 20th century. Find out about the origins of these principles here.

A Customer is:

the most important person ever in this office – in person or by mail.
not dependent on us – we are dependent on him.
not an interruption of our work – he is the purpose of it. We are not doing him a favor by serving him – he is doing us a favor by giving us the opportunity to do so.
not an outsider to our business – he is part of it.
is not a cold statistic – he is a flesh-and-blood human being with feelings and emotions like your own, and with biases and prejudices.
not someone to argue or match wits with. Nobody ever won an argument with a customer.
a person who brings us his wants. It is our job to handle them profitably to him and to ourselves.

What are the benefits of customer retention?

Customer retention is a wise move for various reasons. It’s completely logical, but it’s worth dwelling on some of the specific benefits to totally understand why you should do it.

Retained customers are like money in the bank

Retaining customers is crucial to financial planning. Being able to count on revenues instils greater confidence in investment decisions. This is essential to supporting any kind of growth strategy. It also means you never have to suddenly drop everything to shape your business 100% around customer acquisition because departing customers have torn a hole in your finances.

Retention drives profitability

Most businesses want to be as profitable as possible and to grow as much as possible. However, customer churn kills that growth dead. When it comes to growth, so many companies focus solely on the top line (acquiring new customers) and forget that the gap between the customers you win and the customers you lose is what matters. Growth can only be attained through mastery of BOTH of these factors, not just one.

Customer retention is a critical part of profit and profit growth. Increasing customer retention rates by just 5% can increase profits by 25–95%.

Retention breeds loyalty and advocacy

Customers who stick around are more likely to form habits in their purchasing behavior. You could argue that retention is loyalty. What we’re talking about here is the incremental shift toward more loyal behavior. For example, making your brand their first point of contact for a certain kind of purchase, or being more receptive to supplementary offers.

There are those who believe loyal customers produce the most positive word of mouth, and this is at least partly true. Loyal customers stick with you for a reason, and this is typically because they like doing so. This positivity is then shared with others in the form of recommendations and reviews. But sustained loyalty can also come from necessity, ignorance, laziness and lack of alternatives. It’s important to understand what’s driving individual customer’s retention and loyalty.

Retained customers are cheaper to sell to

Convincing a prospect to make their first purchase with you is a science in itself. That’s especially the case for high value items. Whether large or small, it’s still a commitment. Getting over that initial obstacle makes subsequent sales easier. This is really important in e-commerce, where customers are typically encouraged to create an account and enter payment and shipping details. Once that’s done, subsequent purchases are much faster.

The generally accepted view is that selling more to an existing customer is both cheaper in terms of marketing outlay, and more profitable in terms of sale, than selling to a new customer.

Retained customers are also a captive audience for marketing programs that upsell and cross-sell related products. This explains why the probability of selling to an existing customer is 60–70%, compared to just 5–20% for new customers.

In any event, purchasing once makes you a known quantity in the customer’s eyes. And as long as the actual experience met their expectations, the next time won’t feel like such a leap of faith.

You get more feedback the more engaged customers are

If you want to know how the market feels about your product, you might need to commission expensive market research. But finding out what customers think should be much quicker and cost hardly anything at all.

Customer feedback is great for validating the work you’ve put into shaping the customer journey and overall customer experience. And while one-time or first-time customers can share valuable first impressions, it’s your longer-term customers that give just as good, if not richer insights. The longer you retain customers, the better you can chart CSAT and other metrics over time.

Retained customers are more forgiving

Customers who’ve been with you a while will have seen you at your best and your worst. They’ve demonstrated a certain lack of fickleness. That doesn’t mean you can afford to be complacent. After all, one misstep could be ‘the straw that breaks the camel’s back.” These instances aside, loyal customers can tend to let your minor misdemeanors slide.

A Temkin Group study into the ROI of customer loyalty found some illuminating results. They found that the most positive customers (i.e. NPS ‘promoters’) are 5 times as likely to repurchase and 9 times as likely to try a new offering. They’re also 7 times as likely to forgive.

Why do customers leave? Here are 10 causes for customer churn

When customer retention fails, you get customer churn. Churn is simply the movement of customers out of your business. Slow churn is largely inevitable – the vast majority of customers will leave at some stage. Fast churn – where customers leave within a short space of time – can be disastrous.

What causes customers to leave? Study these 10 warning signs that customers could be about to churn.

Your service/support isn’t good enough

People don’t contact customer support for fun, but because they have to. The way organizations respond to that need is critically important. Long wait times, poor response times, being impolite or just downright rude. Simply failing to fix the problem when it happened or – worse – failing to deliver on a promise to make things right.

They don’t know what you stand for

Business ethics are an increasingly important factor in customer behavior. You might have a great product, but you’ll lose customers if you employ child labor to manufacture it. Sometimes customers are simply put off by a lack of drive and vision – particularly if that’s what attracted them to you in the past. Customers want to feel confident your organization is heading in their direction with new features, improvements to old bugs, etc.

You’ve become “too expensive”

Price isn’t everything and cheapest doesn’t always win – even in a crowded market. Price sensitivity is often less about saving money and more about no longer seeing the value in your product/service. Raising prices always risks customer attrition, but something is badly wrong if they leave in droves.

Customer communications aren’t clicking

As far as communications go, do you treat customers like mushrooms? In other words, keep them permanently in the dark and occasionally throw manure on them? Effective communications are essential. For example, catering from communications channel preferences e.g. email, chat, phone, social.

You just don’t care

A common complaint is that organizations don’t care about customer problems, just their money. It’s immensely frustrating when trying to get assistance takes hours, but getting through on the sales hotline takes seconds! It’s worth keeping customers informed on pertinent matters, encouraging dialogue and offering support.

The customer won’t or can’t pay

Stating the obvious perhaps, but some customers churn because of bankruptcy and credit problems. In other cases, the cause for non-payment is a legal dispute (or vice versa). Eventually, customers – it’s sad to say – may become seriously ill or die. B2B customers may retire or change jobs, and their replacements have greater loyalty with a competitor.

You aren’t helping them achieve their desired outcomes

Customers have an idea in their mind about the problem your product or service helps fix. If you fail to do that, the customer quickly loses faith. The reason for churn could be that you never achieved the outcomes they wanted, or that you’ve just not done it recently. Ultimately only the customer could tell you one way or another.

The customer doesn’t feel valued

Sometimes everything is right, except a sense of value. Maybe you were “all over them” to get their business, and now you don’t treat them so well. Maybe you aren’t listening to them enough, or treating them as an individual. Many organizations guard against this by making processes and internal culture more customer-centric. Affirming customers with courtesy and a little star treatment does wonders for customer retention.

They were never right for your product/service

Sometimes signing up to become a customer was an honest mistake. We’ve all done it. The same is true of buying things on somewhere else’s behalf – such as a gift. In this instance, you were never really a customer in the first place. It’s a more worrying issue if you’ve been attracting the wrong customers and setting incorrect expectations you can’t deliver on. This is a case of your customer acquisition and customer retention efforts working against one another.

Aggressive or compelling competitor offers are too good to miss

Losing customers to competitors is often misinterpreted as a cause of customer churn, when in fact it is merely the consequence. However, there are occasions when competitive pressures – or even market forces – drive customer churn. In some cases, when competitors are particularly disruptive (such as Uber’s disruption of established taxi businesses) customers only have to ‘try’ the alternative to begin churning. They might be back – they might not. Other times, your product or service might have been overtaken by market forces. Witness the demise of high street music stores and video rental shops in the wake of media streaming.

Where does customer retention activity begin?

Retaining customers begins almost before the first ‘real’ contact a customer has with a company.

Customer retention can be strongly influenced by the way existing customers talk about the business. In other words, the prevailing reputation of a company can influence preferability and favorability in potential new buyers, even before they’ve bought.

As Warren Buffet said:

Greater focus on corporate reputation has given rise to the concept of “word of mouth” marketing. Many commentators argue that a company’s brand is basically its reputation. It follows, therefore, that early positive word of mouth and overall positive sentiment in the public sphere has a decisive effect. Specifically, a pronounced effect upon interest and favorability to buy, even before ‘first contact’ between potential customer and the brand in question.

The start, middle and end of customer retention activities

That initial contact between customer and supplier is part of a company’s customer acquisition strategy. The objective here is to win the customer i.e. for the first time. But immediately following this – it may even be part of the same interaction – comes some form of customer onboarding. Here’s where customer retention comes back to the fore.

Customer onboarding is the opportunity to set expectations and make a good impression. It sets the tone for the future relationship and is the springboard for future communications and transactions. Well onboarded customers are more likely to stick, and feel more relaxed and accommodating to any hiccups in service delivery.

Good customer service companies will continue to plan the customer journey throughout the lifetime of the relationship. An element of this will be to encourage the steadily maturing customer to perpetuate word of mouth about their experience/s. In this way, customer retention becomes self-perpetuating.

Does customer retention end when the customer leaves? Well, no. It ends after the customer has churned. It’s because defining the end of a customer relationship is often open to interpretation. Say a regular customer of yours hadn’t bought anything in a year. What purpose would it serve to break-off contact? Why not instead treat the apparent end of the relationship as a hiatus? Your customer retention activities can continue accordingly. For example, with win-back initiatives designed to ‘unpause’ the break in purchasing behavior.

How do you measure customer retention?

However you measure it, keep measuring customer retention forever. It’s important to track retaining individual customers over the long term, as the early stages of a relationship can often have pronounced ups and downs.

The most common measurement is the customer retention rate. This involves a calculation based on how many customers exist at the beginning and the end of a given period, also taking into account how many were acquired.

How do you calculate customer retention?

The customer retention rate is the direct opposite of the customer churn rate. For example, if your customer retention rate is 85%, your churn rate is 15%.

The formula for customer retention rate is:

[(CE-CN)/CS] x 100

Where CS is the number of customers at the start of the period. Let’s say 500.
CE is the number of customers at the end of the period. Let’s say 600.
CN is the number of new customers acquired during the period. Let’s say 200 (the variance revealing the fact that 100 customers were therefore lost).

Selecting an appropriate period is crucial and should reflect your line of business. Specifically the frequency of purchasing and customer engagement. A car dealership might look at a 3-year period simply because few customers purchase a new vehicle more frequently than that. A catering supplies firm might choose an annual or quarterly period to analyze.

Using the figures above, the math works out as follows:

600-200 = 400
400/500 = 0.8
0.8 x 100 = 80
The retention rate for the period was therefore 80%

You can get more granular than this by applying monetary values such as sales revenue and profit. These measures are known as profit adjusted retention rate and sales adjusted retention rate. Find out more here.

How does customer retention relate to customer lifetime value (LTV)

Customer lifetime value (LTV) is the likely profit/revenue to be made from a customer over the lifetime of that customer’s loyalty to them. Companies can approximate average per customer LTV based on sales data.

The result is a dollar value, per customer, to be used in future planning. It can show how much money you’re likely to make by increasing your customer retention rate. It can also show how much it’s worth spending on customer retention activities.

The other cool thing with customer LTV is demonstrating how you can increase it by cultivating your existing client base. Even if your organization is primarily focused on customer acquisition, knowing your LTV and boosting customer retention helps optimize a business case for feeding your sales engine with extra existing customers to sell more to.

Who should be in charge of customer retention?

All kinds of things can impact customer loyalty. Literally any aspect of the customer experience, from the payment process to product quality. Customer retention objectives are typically laid at the door of operations and customer support teams. In truth, it is just as much the responsibility of sales people and the finance department! Customer retention should be a key priority for everyone within an organization.

More and more companies are getting involved in the science of ‘customer success’. This is otherwise known as ‘customer excellence’. This manifests itself in the deployment of various customer success roles, e.g. customer success manager. These are employees whose job it is to advocate for customers in general, and support their objectives and aspirations at an individual level. This is directly in support of customer retention but shouldn’t detract from the criticality of taking a holistic, companywide approach.

Which kinds of organizations should focus most on customer retention?

It may be simplistic to imply all organizations should put maximum effort into customer retention. There are two spectrums on which all organizations exist. Both inform the extent to which customer retention should be prioritized. These are:

Business maturity
Purchase frequency/value

Business maturity

Most organizations start life with zero customers. Over time, and with the success of their individual business strategies, numbers of customers will increase. At some point, the organization and its brand will be well established, with significant market share. In some markets, this final stage may coincide with a tailing-off of product and service innovation and a steady commoditization of customer offerings.

The groupings can be expressed as:

Start-ups
Scale-ups
Newly established
Mature

Businesses at the earlier stages of development will naturally need to focus the majority of their attention on customer acquisition. Organisations with a larger proportion of their addressable market already on their books will prioritize differently. It isn’t an exact science. For example, start-ups will need to retain the customers they acquire or risk failing to survive. And mature organizations that put all their effort into retention will simply be managing decline rather than growth.

Purchase frequency/value

If you draw a graph on two axes, “purchase value” and “purchase frequency”, you can separate all kinds of businesses into one of 4 groups, like this:

The left quadrants are governed by low frequency which means loyalty and retention are not driven by habit or continual need. The opposite is true in the right quadrants.

The thinking goes that the further to the right your organization is, the more you should focus on customer retention. The lower-right quadrant should focus on customer retention activities that are commensurate with customer lifetime values. For example, coffee shops that issue ‘stamp cards’ for a free beverage after every 10 purchases. The upper-right quadrant can afford more personalized and bespoke activities. For example, the office supplies store that periodically invites customer decision makers to corporate hospitality events.

Which kinds of customers are worth working hardest to retain?

Imagine you could segment customers according to how willing they were to recommend your company. What you’re imagining is called NPS, or Net Promoter Score. This measurement determines – on a scale of 0–10 – where customers sit in terms of loyalty and advocacy.

Using this scale, it’s pretty clear that 9s and 10s don’t really need much customer retention focus. They’re really positive already! It makes sense, therefore, to focus on the remainder.

However, that remainder is quite a large cohort so the next question is how do you prioritize them further? Do you focus on the lowest scoring (i.e. unhappiest and least loyal) and work your way up? Or focus on the highest scoring (closest to being ‘loyal’, but aren’t quite there) and work your way down?

Forrester did some really interesting research in this area, the results of which are at odds with what most organizations do. Instinctively, organizations are prone to fix the unhappiest customers first, and ‘galvanize’ the retainability and loyalty of ‘middling’ customers second. But the research showed this made poor commercial sense. Companies who prioritize the middling customers ahead of those with a poorer impression of them make significantly larger revenue gains.

What impact does customer satisfaction have on customer retention?

Customer satisfaction plays a big part here, but how is not always as clear. Research shows that customer satisfaction is definitely a driver for keeping customers. Just how much effect one has on the other varies depending on the industry, the customer themselves, the product involved, etc. Research aside – it makes sense, right?

Think of customer satisfaction as creating push and pull factors for customer retention. Customers who are happy with what you do for them are ‘pulled’ in because they want more of the same. They are also ‘pushed’ away from going elsewhere because they need bigger reasons to stop being customers.

The internet gives consumers universal access to everything. Customer experience – and satisfaction with that experience – is a major differentiator.

McKinsey agrees that satisfaction does have an impact on customer retention and that consistency is key.

“Customers are valuing an “average” experience less and have even less patience for variability in delivery. Making additional investments to improve the customer experience without tightening the consistency of experience is just throwing good money after bad.”

Brilliant basics vs. magic touches

A great deal has been written about how businesses should really wow their customers with amazing, over the top service. Another body opinion posits that the customer doesn’t want to be wowed, they want to have an easy, effortless experience. So which is it?

The answer is “a bit of both.” Specifically, building on solid foundations before putting the finishing touches on top. In other words, companies should first deliver on basic hygiene factors like a smooth ordering process and a reliable way of getting queries answered. We love eye-catching ‘magic touches’ that live long in the memory. But they fall flat when the broader experience is not so good. What difference can you expect to make by remembering to send customers a birthday message if your customer support line is always lousy?

What is the goal of customer retention?

The objectives for customer retention range from the fundamental to the extreme. The goal of a retention program is plainly to help businesses keep as many customers as possible. Judging success, therefore, begins with determining how many customers didn’t leave over a given period.

The broad umbrella of “customer retention” can also cover further objectives, such as:

Retaining customers for the purpose of upselling additional products and services
…for the purpose of increasing market share
…for the purpose of demonstrating expertise/relevance in a given market sector

To put it another way, it’s one thing keeping customers and another thing capitalizing on it. Customers to a supermarket will make purchases every week, so retention activities are designed to keep them happy. This is because keeping them as customers has a demonstrable impact on revenue. The approach may be subtly different for other types of businesses. For example, less frequent interactions from customers could skew the customer retention approach toward greater upselling.

What are some examples of activities designed to retain customers?

There’s lots you can do to improve customer retention. Here are just some examples:

Loyalty programs
Reward programs
Frequent communications and company news
Welcome packs
Customer birthday communications
Exclusive discount codes for existing customers only
Referral vouchers where the giver and recipient receive money off their next purchases
Frequent buyer points programs
Courtesy systems
Customer winback programs
Adding new and complementary product and/or service lines to a business’ offerings
Corporate hospitality
Key account management and account-based communication
Purchase reinforcement

Read more about customer retention techniques.

Using surveys for customer retention – how understanding customers’ problems stops them from leaving

Customer feedback surveys are an essential element in customer retention. Without them you can’t identify which customers need more attention, and in what ways.

Asking for feedback is also key to tracking metrics that relate to customer retention, like CSAT and NPS. What’s important is getting as much feedback as possible – the more the better.

Sending a long, annual customer survey isn’t going to cut it. Nobody fills those in. Getting a high response rate is imperative. What you need is fast, simple and non-disruptive to the customer’s day. As a minimum, feedback surveys should:

Take just a few seconds for customers to complete
Be very simple for customers to understand how and why they need to complete them
Not disrupt the customer experience
Be contextually appropriate to the customer’s experience
Align to your company brand and values
Integrate with existing platforms and communications systems
Collect and track quantitative customer metrics like NPS over time
Surface actionable data in real-time and alert appropriate follow-up action

Start retaining more customers today

Start by giving your customers a chance to give you feedback. Customer Thermometer delivers all this and more – perfect for anyone implementing a customer retention program. See for yourself and put us to the test with a free trial account.