Key Performance Indicators to Evaluate Customer Retention

Customers are the most important asset for a business. Putting efforts to retain your customers builds trust among your buyers and helps your business grow. Acquiring a new customer costs 5 times more than retaining the existing customers. Besides, loyal customers have the highest chances of repurchasing products or services from your brand. What’s more amazing is that increasing the customer retention rate by 5% can raise profits by more than 25%. Hence, customer retention should be a priority for every business. There are several metrics to measure customer retention which we will discuss in this article. This article will also explain the key indicators to measure to help you maximize your customer retention rate.

What Is Customer Retention?

Customer retention is the barometer that states your customer loyalty rate and potential to keep customers engaged over time. Your customer relationship starts with the interaction and intent to buy a product, and the first and subsequent purchases measure the customer retention period.

Why is Customer Retention Important?

Customer retention is a crucial factor in analyzing your business’s SWOT (Strengths, Weaknesses, Opportunities, and Threats). The ultimate goal of any business is to keep buyers happy and build healthy relationships with them.

Here are the top advantages of customer retention for your business:

• Retaining your existing customers is a lot cheaper than acquiring new customers.
• It’s easier to sell your existing customers than convince new customers.
• There is a high probability of getting into the limelight through word of mouth and referral initiatives by existing customers.
• Long-term customers can help your profits grow exponentially as they are more likely to spend on your products and services, thereby improving your ROI (return on investment).
• Existing buyers can help you gather valuable data and product feedback for campaigns and products.

Key Customer Retention Metrics

To analyze the retention rate better, you need to conduct an internal study on your customer loyalty. Here are the top customer retention metrics that will help tell you how well your products and services hold customers:

1. Churn Rate

The churn rate is the percentage of your customers who have stopped using your product and services over a period of time. It is usual for your customers to leave your products or switch to competitors, and there could be various valid reasons. But if your churn rate is more than 5% – 7% p.a., it is a matter of concern. You should re-evaluate your product and services and discover why the customers leave.

Here is the equation to calculate the annual churn rate:

Annual Churn Rate = {(No. of Customers at the Start of the Year- Number of Customers at the End of the Year)/ No. of Customers at the Start of the year} x 100

2. Existing Customer Revenue Growth Rate

Existing customer revenue growth rate is the metric that tells you how much sales you generate with customer success and loyalty efforts. Increasing the revenue growth rate automatically implies that your team is excellently retaining your customers and inducing them to improve their spending with you. If your revenue growth has stagnated and your existing customer base is not increasing, there is a possibility that you are not putting enough effort and resources into retaining your customers.

Here is the formula to calculate the existing customer revenue growth rate:

Monthly Revenue Growth Rate = {(MRR at the Start of the Month – MRR at the End of the Month)/ MRR at the start of the month} x 100

*MRR – Monthly Recurring Revenue

3. Repeat the Purchase Ratio

The repeat purchase ratio is the rate at which your existing customer returns to you for the next purchase in a given period. Repeat purchase also applies to the subscription and plan renewal. This metric is the perfect indicator of customer loyalty. It can be used by sales and marketing teams to analyze and improve their strategies for customer behavior and performance based on repeat purchases. Through purchase demographics, you can look at the section of customers making the most repeated purchases, focus on those, and adjust your targeted customers accordingly.

Here is the formula to calculate the repeat purchase ratio:

Repeat Purchase Ratio = Number of Returning Customers / Total Number of Customers

4. Customer Lifetime Value (CLV)

CLV calculates the total revenue generated from a single customer. This metric indicates how well you retain your customers. A customer renewing his subscription or purchasing your product states that you are on the right track with your marketing and sales techniques.

Moreover, customer lifetime value helps you decide the budget for acquiring and retaining new customers. A larger customer lifetime value means you must spend less time and resources to acquire new customers.

Here is the formula to calculate CLV:

Customer Lifetime Value = Average Value of Customer (monthly or Annually) X Average Customer Lifespan

*Average Value of Customer – Gross Annual Sales / Total Number of Unique Customers (monthly or yearly)

5. Product Return Rate

The product return rate is the percentage of the total items returned to you after final sales. This measure applies to firms that sell tangible products. There could be many reasons to return a product, but returning goods is not good for your company’s growth. Although a zero product return rate is considered ideal, keeping in mind the different tastes and preferences of the customers, it’s almost impossible to keep the return rate zero. You must aim to keep the number as low as possible.

The sales and customer success team must be well-informed about the product return rate to improve delivery and customer satisfaction. To retain the customers, your team must act immediately and control damage to the return request before the consumer loses faith in your brand.

Here is the formula to calculate the product return rate:

Product Return Rate = (Returned Units / Total Number of Units Sold) x 100

6. Net Promoter Score

The net promoter score is a buyer satisfaction indicator that shows how likely your buyers are to recommend your brand to others. A high NPS does not assure customer retention but can drive referral business. Also, a low NPS score allows you to rectify weak areas and improve the customer satisfaction index. This index contributes to content marketing creation, such as case studies, testimonials, reviews, etc.

Here is the formula to calculate the net promoter score:

Net Promoter Score = % of Promoters – % of Detractors

How To Measure Customer Retention?

We use a metric called the customer retention rate to measure customer retention. Customer retention rate is the percentage of existing customers who stay loyal to the company after a given period. For example, if you acquire 10 customers each month over a period of six months and 30 of them continue to buy products from you even after six months, then your customer retention rate would be 50%.

The ideal customer retention rate should be 100%.

You can also use a customer analytics tool, such as Finteza to measure customer retention.

Finteza offers a report called Retention to Measure Actual Customer Retention. All you need to do is to define some event for a category of users. It is called a Start Event. For example, if you run a promotional campaign for Christmas, you need to know the users who registered on the site on the day of the promotion. Then, you should create Tracked Events to track repeated orders.

Here is what the report looks like:

With the help of the Finteza retention report, you can know the number of users who registered on the day of the promotion and stayed with the company months after the campaign was over.

How Can You Boost Your Customer Retention Rate?

When you have recognized your business’ major performance indicators, you must focus on growing the customer retention rate. Here are the ways to improve your customer retention rate:

• Provide your existing customers with better prices and discounts to retain them for longer;
• Focus on creating a customer loyalty program and reward your loyal customers with discounts, points, and incentives to give them a reason to stay with your brand for longer;
• Upsell and cross-sell to engage customers and draw their attention to your company’s products. Keeping your existing buyers updated about your company with all the product launches, blogs, learning sources, videos, and webinars is a great way to keep them engaged with your company;
• Provide your customers with a smoother and better buying experience at each step of their purchasing journey. This will encourage them to buy your product regularly.

Conclusion

Customer retention rate is a key feature to recognize and evaluate your company’s overall performance, and it also helps your sales team improve their loyalty marketing techniques.

Understanding the key performance indicators in this article will help you better identify your business’s strengths and weaknesses, rectify the loopholes, and reinforce the vital areas.