- Financial Cost: Acquiring a new customer can be five times (or even more) expensive than retaining an existing one.
- Predictable Revenue: A base of loyal, returning customers can provide a steady stream of revenue. This predictability is essential for financial planning, budgeting, and forecasting.
- Organic Growth: Satisfied and loyal customers are more likely to recommend the company to friends, family, and colleagues.
- Cross-selling and Up-selling Opportunities: Existing customers are often more receptive to other products or services the company offers because they already have an established relationship.
- Operational Efficiency: Companies can optimise their operations and address the needs of customers, leading to streamlined processes and better resource allocation.
- Investor and Stakeholder Confidence: High customer retention rates indicate a strong value proposition and effective operations, instilling confidence in investors and other stakeholders.
Customer Retention Metrics Come First
Leading companies use a combination of metrics to measure customer retention. Metrics depend on the industry, business model, and company goals, here are some of the most common and valuable customer retention metrics:
Customer Retention Rate (CRR)
- is the number of customers at the end of a period.
- is the number of new customers acquired during that period.
- is the number of customers at the start of the period.
Customer Churn Rate
- is the number of customers at the beginning of the period.
- is the number of customers lost during that period.
Repeat Purchase Rate (RPR)
- is the number of return customers for a period.
- is the total number of customers for that period.
Days Since Last Purchase/Engagement: This can help identify potential churn before it happens. If a customer typically makes a purchase every month but hasn’t made one in three months, they might be at risk of churning.
Net Promoter Score (NPS): A metric that gauges customer loyalty by asking customers: “On a scale of 0-10, how likely are you to recommend our product/service to a friend or colleague?” Responses are categorized as: Promoters (score 9-10), Passives (score 7-8), Detractors (score 0-6).
Customer Satisfaction (CSAT): Usually measured by a single question survey asking customers to rate their satisfaction with your business, product, or service. The score is typically given on a scale, e.g., 1-5, and then the results are averaged out to give a CSAT score.
Customer Lifetime Value (CLV or LTV): Businesses use this metric to identify significant customer segments that are the most valuable. This metric indicates the revenue expected from a customer. It considers a customer’s revenue value and compares it to the company’s predicted customer lifespan.
Average Revenue Per User (ARPU): This metric divides the total revenue by the number of users, giving an average revenue for each customer. It’s especially popular among subscription-based businesses.
Expansion Revenue: For businesses with upsell and cross-sell opportunities (like SaaS companies), it’s essential to measure not just the revenue retained but how much it grows due to existing customers purchasing more or upgrading.
Redemption Rate: For businesses with loyalty or rewards programs, the redemption rate (the percentage of rewards or offers that are used or redeemed by customers) can be a good indicator of engagement and retention.
Organisations will often use a combination of the above metrics to get a comprehensive understanding of customer retention. Best practice is to regularly monitor these metrics, understand their implications, and make data-led decisons in improving customer retention.