Debitoor's accounting dictionary
Customer retention

What is customer retention?

Customer retention identifies how long customers stay with a particular business. It is measured by the customer retention rate, which calculates the percentage of existing customers that are retained within a set time frame.

Customer retention is used to maintain existing customers. You should also measure the Customer Acquisition Cost (CAC) to determine the costs related to gaining new customers.

The opposite of customer retention is customer churn, which measures how many customers the business lost within a specific time period. Customer retention is a crucial factor for businesses to identify if customers are satisfied, and will continue purchasing their products or services.

The importance of customer retention

Customer satisfaction is key to making a business successful. Loyal customers mean repeat business, and they may even bring in new customers by recommending your products or services to friends and family.

It can also help a business identify what is going wrong. If your customers aren’t happy, and you’re losing business, you can ask them why they’re unsatisfied and make changes accordingly.

Having happy customers that continue to purchase from you means that you will have a better cash flow and ultimately a more stable and successful operation. In addition, it is usually cheaper for a business to retain existing customers rather than gain new customers.

Therefore, customer retention is important not only for keeping your customers happy but also for making a profit.

How to calculate your customer retention rate

The customer retention rate is the metric used to measure customer retention. It is the percentage of existing customers that have remained with the business over a set period of time.

To calculate the customer retention rate, you will need the following information:

  • The time period you wish to measure the customer retention rate
  • The number of customers the business had on the start date
  • The number of customers the business had on the end date
  • The number of new customers gained within the time period

Calculation for customer retention rate

The calculation for the customer retention rate is as follows:

((# of customers on end date - # of new customers) ÷ # of customers on start date) x 100

Therefore, if your business had 95 customers on the start date, 75 customers on the end date, and 10 new customers within the time period, the calculation would be:

((75 - 10) ÷ 95) x 100 = 68%

In this example, the business retained 68% of its customers and lost 32% within the specified time frame.

Customer retention strategies

If your business has a low retention rate, you should work on improving your customer experience and marketing tactics. Below, you’ll find some strategies that your business can use to improve customer retention:

  • Streamline your customer onboarding experience
  • Provide quick and effective customer service
  • Use customer feedback to improve your products or services
  • Upsell your products or services to existing customers
  • Create a customer referral program or loyalty program
  • Create automated messages for inactive customers or customers who are likely to churn
  • Offer discounts to customers who may churn
  • Regularly review what your competitors offer

By regularly reviewing your rentention rate and making changes accordingly, you can drasticly improve your customer loyalty.

Summary - Customer retention

Customer retention is an important tool to measure customer satisfaction and the likelihood of repeat purchases. The higher your customer retention rate, the happier your customers are, and the longer they will continue to purchase from your business.

It is recommended to calculate your business’s retention rate on a regular basis to identify any trends and make changes to improve customer loyalty.

Using strategies, like upselling products, reviewing customer feedback, or offering a loyalty program can greatly improve your customer retention.

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