Managing customer retention is an incredibly important part of growing a sustainable business. It matters because it helps you understand how loyal and satisfied your customers are, how good your products and customer service is, and what are the areas you need to improve upon to retain and regain your customers.
Keeping your current customers happy is generally more cost- effective than acquiring new customers. For existing customers you do not need to spend big on marketing and you don’t need to put that huge effort in convincing them about your products. It is easier to turn existing customers into repeating ones since they already have a good experience with your business. Moreover, existing and loyal customers not only give you repeat sales but also they will give free recommendations to their friends and known people.
Now how do you manage customer retention? Before anything, you need to measure how much you are able to retain your existing customers. For that, you need to understand the customer retention metrics.
Customer Retention Metrics
When monitoring customer retention, there are a few particular metrics we like to track. I’ll go through the ins and outs of them to have a better understanding.
- Customer Retention Rate
The customer retention rate measures the number of customers a company retains over a given period of time. It’s expressed as a percentage of a company’s existing customers who remain loyal within that time frame. You also have to account for new customers you took on so they don’t throw off your data.
When measuring your customer retention rate, ensure you choose a period that works for your business and how your customers buy.
For example, it makes no sense for a motorbike manufacturer to measure the retention rate within a year. Hardly any new motorbike buyers will purchase another bike after just 12 months.
Retention Rate Formula
Customer Retention Rate = [(Customers at the End of the Period) – (New Customers Acquired)/ Customers at the Start of the Period] *100
- Customer Churn
Customer churn rate is the percentage of customers your brand has lost during the period of consideration.
Your period of consideration could be a month, a quarter, or a year, but the most commonly used period is a month.
Customer Churn Rate Formula
Customer Churn Rate = [1- (Number of customers at the end of
the period) – (New Customers Acquired)/Customers at the Start
of the Period]*100
- Revenue Churn Rate
If your business provides various products/services at different prices, your revenue churn rate may be different from your customer churn rate. Revenue churn rate is a metric to identify which of your products are performing poorly. It helps in making strategic improvements in the retention plan.
Revenue Churn Rate Formula
Revenue Churn Rate= [(Revenue in the previous period) –
(Revenue in this period)/ Revenue in the previous period] *100
The period of consideration is usually a quarter, as monthly revenue doesn’t always give the best result due to smaller data sizes.
For multiple products, it is advisable to calculate revenue churn for each product individually.
- Existing Customer Revenue Growth Rate
Acquiring a new customer is four times more expensive than upselling an existing customer. If your existing customer accounts aren’t growing, you’re probably not spending enough time and budget on customer retention.
Existing customer revenue growth rate can be applied to a single account examined over a long period, or it can be measured to reflect the “big picture.”
Customer Revenue Growth Rate Formula
Monthly Revenue Growth Rate = [(MRR at the End of Month –
MRR at the Start of Month)/ MRR at the Start of Month] * 100
- Repeat Purchase Ratio
The Repeat Purchase Ratio is the percentage of customers who shop more than once with your brand. Repeat purchase rate helps retailers understand the tendency of the customers to return after their first purchase and hence design their loyalty programs.
Repeat Purchase Rate Formula
Repeat Purchase Rate = [Number of customers who shopped
more than once / Total number of customers] *100
This is effective when you assume that within a given time frame your customers shop with you not more than 2 times. However, when your customers shop more than 2 times, it has a compounding effect on your repeat purchase rate.
- Product Return Rate
It is the percentage of products that are returned by the customers during the return period.
The reasons behind product return are:
- a. The product quality doesn’t meet the expectations of your customers and
- b. The product quality differs between what was advertised and what was delivered.
Product Return Rate Formula
Product Return Rate = Total number of Products Returned Back
to the Seller / Total number of Products Shipped by the Seller
The total number of products returned and shipped by the seller also includes the number of products lost, damaged, or unclaimed in transit. PRR is a great indicator of the loyalty index of businesses.
- Days Sales Outstanding
Days Sales Outstanding is a financial ratio that measures the average collection period after sales. It ascertains the number of days the receivables lie outstanding. Days Sales Outstanding shows how quickly a company can convert its credit sales into liquid cash.
Days Sales Outstanding Formula
Days Sales Outstanding = (Total Accounts Receivable / Total
Credit Sales) * Number of Days
It is generally calculated on a monthly, quarterly, or annual basis.
Individually, a higher DSO could mean your customer is dissatisfied with your company’s product or service, or that your sales teams are nurturing and closing customers with credit or cash flow problems.
- Net Promoter Score
NPS is a measure of identifying a customer’s likelihood of recommending the product or service or brand to their family and friends.
Net Promoter Score Formula
NPS = % Promoters – % Detractors
To calculate NPS, customers are asked to rate the possibilities of them recommending the product or service to their family and friends on a 0-10 point scale. Customers are then classified into 3 categories:
Passives are not taken into account while calculating NPS.
- Time Between Purchases
This lets you understand the average time it takes for an existing customer before they shop with you again. This is an indicator of the propensity of a customer to become loyal to your brand.
Time Between Purchases Formula
Time Between Purchases = Sum of Individual Purchase Rates /
Number of Repeat Customers
If you’re noticing a lot of time between purchases that may indicate that your product or service isn’t differentiating itself from others in its industry.
- Customer Lifetime Value
CLV is the net profit attributed to the entire future relationship with your customer. It helps in segmenting customers that are worth retaining and ones that do not need to be retained on priority.
Customer Lifetime Value Formula
Customer Lifetime Value = (T * AOV * AGM * ALT) / Total
number of customers for the period
Where, T = Total number of transactions per year,
AOV = Average Order Value
AGM = Average Gross Margin (%)
ALT = Average Customer Lifespan in years
Retaining clients is a basic goal for all organizations. Regardless of whether your customers have made one buy or ten, you need to urge them to return and purchase from you once more. Hence, in order to maximize your customer retention efforts, you’ll need to understand, track, and analyze key customer retention metrics.
As in Digital Medio, we are expanding our scope in the market to work with businesses that have clients needing our services – so we are experimenting with different metrics to define our perfect match.