It’s a tired saying, but still true that it costs much less to retain an existing customer than it does to acquire a new one. That’s why organizations invest billions every year into customer retention programs with the aim of driving customer loyalty and encouraging their customers to spend more.
In this guide we’re looking at the strategies and methods companies can employ in order to improve customer retention and deliver back to the bottom line.
It’s 5-25X more expensive to acquire a new customer as it is to retain an existing one (HBR)
What is customer retention?
A customer retention program is a business strategy that aims to retain as many customers as possible and improves customer relationships.
As you might expect, there’s more than one way of doing it — by and large any process that promotes customer loyalty can be classed as a customer retention activity.
Customer retention management strategies
Customer retention management is a formalized process by which organizations manage the relationships with existing customers with the aim of encouraging customers to stay longer, and spend more.
In B2B, it’s usually managed by a customer success team that builds close relationships with individual accounts and customers and works closely with them to retain and grow the account.
In B2C it’s slightly different – while you might have a customer retention team, it’s almost impossible to build 1-to-1 relationships with every customer. So instead, the customer retention team usually sets a strategy and works closely with other customer-facing teams from across the organization to deliver on it.
For example, your customer retention team may look to introduce personalized offers for certain customer segments in a bid to boost loyalty. They may then look to the marketing team to help them establish a regular communication to those customers.
Or, you may offer a special discount or price for customers at risk of churn. This is something you’d likely have agreed with the product team, and then communicated to your contact center agents, giving them something to offer customers if they phone to cancel a contract for example.
What does a customer retention strategy involve?
Most customer retention strategies are based on the numbers – ie how much you’re willing to invest in order to keep your customers loyal. That investment could be put into developing exclusive product offerings for your best customers, or invested in discounting to prevent churn.
When you’re starting to think about your retention strategy, there are a few questions you’ll need to answer:
Who are your customer segments? Not all customers are the same, so it’s worthwhile using customer segmentation to identify the needs of different groups of customers as well as identify which ones are your ‘best’ customers.
What’s your cost to serve? You need to know how much you’re paying to serve each customer segment in order to make an informed decision about how much to invest in customer retention.
How much do you know about your customers? If you’re investing in retention programs, you need to know what appeals to different customer segments. Some customers may be driven by price, while others might be driven by exclusivity or service level. Deep customer research will help you understand what drives loyalty for different groups, and using those insights you can design a retention strategy that’s tailored to your customer base, rather than a one-size-fits-all strategy.
How much customer churn are you willing to take? It’s important to remember that not all customers need saving. Some customers cost more to serve than others, so you need to be able to understand the value of each customer or customer segment to your business.
If two customers spend the same amount every year, but one costs 3 times as much to serve and retain, it may be worth cutting them loose and investing that money in another segment or customer that would ultimately deliver more profit to the bottom line.
It’s why not all churn is bad, and most companies will have an acceptable level of churn as they look to let the unprofitable customers go, while retaining customers who are most profitable.
Customer retention tactics
There’s no hard and fast rule about what tactics to use to drive customer loyalty — in fact, some of the most successful ones are those that differentiate one brand from its competitors and are based on unique insights into their customer base.
That said, there are a number of tried and tested customer retention tactics many brands will employ:
1. Email newsletters and personalized offers
When a customer shares their email address with you and opts into marketing messages, it’s a strong sign that they already feel positive towards your brand and your cue to build relationships. You can build on this and keep them onboard over a longer period of time by being a regular presence in their inbox. As email is a free channel, it’s a relatively low-cost way to improve customer retention.
That doesn’t just mean sending out blanket marketing messages though. For best results, use your CRM data to personalize emails to loyal customers and celebrate their relationship with the brand. Try a birthday discount code, or a message that lets them know they’ve been shopping with you for a year (or more) and thank them for their business.
2. Pre-empting churn
As well as looking after the happy customers you have, extend your reach to the ones who have wandered off, or are about to. Reactivation for customers within the EU may have gotten trickier since GDPR regulations came in – you can no longer simply use a mailing list – but you can still reach retained customers who are showing signs of being about to lapse.
To discover which of your existing customers are at risk of churn, it’s helpful to have data showing how previous customers behaved in the same situation. Less frequent purchases of products and services, lower levels of engagement or lukewarm feedback can all point towards a customer looking for the exit. Another good argument for tracking your customer journeys.
3. Rewards for your best customers
Not all customers are created equal. Big spenders, repeat purchasers and those who bring in new customers with referrals and reviews all deserve some recognition and a special effort when it comes to increasing customer retention. You can give it to them through a rewards program which ties extra benefits to loyalty behaviors.
For some companies, this is linked to spending – they might earn 1 loyalty point per $ spent, for example. For others, a multi-faceted strategy works better. The customer may receive a reward for leaving a review, recommending a friend or following one of your social media accounts. Which option you choose might depend on the number of customers you have or your other business goals.
Regardless of the tactic, the underlying principles are the same — get to know your customers, what drives their loyalty, and look to invest in the kinds of experiences they want whether that’s rewards, discounts, or access to different service levels.
5 examples of customer retention tactics
When it comes to knowing your customers, CVS’ ExtraCare® program is a great example of how to use customer insights to your advantage. The program uses demographic data, and purchase patterns to deliver hyper-targeted offers to its members.
Now something of a staple in the food and drink industry, Starbucks was something of a pioneer with its Starbucks Rewards program. Using its app, customers can earn rewards for every purchase to be used later on free food and drink. Payment needs to be made through the app itself, generating even more customer data Starbucks can use to personalize its offering and gain a better understanding of what each customer needs.
Something of an outlier, Amazon Prime is part customer loyalty program, part experience. Customers pay to be part of the service and in return receive benefits like same-day delivery, access to video and music streaming and exclusive discounts and offers. Yes, customers pay to join, making it a service in itself, but the knock-on effect for Amazon is a huge boost in retention as the subscription makes Amazon its members’ first choice when it comes to online shopping.
A great example of understanding your customers is TOMS’ ‘One for One’ program. When customers buy a pair of TOMS shoes, the company donates a pair to people in need. It harks back to the company’s brand values and acknowledges that its customers are driven not by discounts and rewards, but by their desire to do good. It just goes to show that not all customer retention programs need to focus on monetary rewards for your customers.
The sportswear giant understands that sport and exercise is a team game — people are much more likely to exercise more as part of a group than on their own. So they developed apps and partnerships to build a sense of community like Nike Running Club, encouraging solo runners to team up with other runners online and replicate the sense of team and competition that many demand.
Measuring customer retention in your business
Customer retention isn’t a ‘one and done’ activity — it’s an always-on program that needs careful monitoring to ensure it continues to deliver back to the business.
Many organizations will use customer retention software to monitor retention, understand their customers better, and take action to evolve their retention program to react to customers’ changing needs.
The first step is to calculate your customer retention. It’s a pretty simple calculation – customer retention rate is usually expressed as a percentage of customers retained in a particular period.
Retention Rate = ((CE-CN)/CS)) X 100
CE = number of customers at end of period
CN = number of new customers acquired during period
CS = number of customers at start of period
So, say you had 1,000 customers at the beginning of a quarter, acquired 200 new customers during the quarter and had 800 customers at the end of the quarter, your retention rate would be:
((800-200)/1,000)) x 100 = 60%
That means over the quarter you retained 60% of your existing customers.
Here’s a few tips to measure and monitor customer retention in your business:
1. Track customer retention in real-time
You need to know how your retention strategies are working – and the only way to do that is to have a measure of customer churn. While some organizations will report on it periodically, say quarterly or annually, the best brands have always-on data, showing them day-to-day what’s happening to their retention rate.
2. Understand the bottom-line impact
We talked about it earlier in this guide, but it’s essential to understand how much churn is acceptable, and which customers you are happy to let go. So make sure you include operational data about which customers are churning. It’s useful here to have a metric like customer lifetime value (CLV) to refer to when deciding which customers you want to invest in retaining.
3. Understand why people churn
Whether you have an existing customer retention program or not, it’s impossible to optimize it if you don’t know why people churn. So ask your customers for feedback when they do churn, and use that experience data to get to the root cause. Combined with your operational data, you can get a picture of who’s churning, what drives the actions of different customer segments, and crucially the actions you need to take to fix it.
4. Share insights across the organization
We’ve already seen just how many teams are involved in driving customer retention. So it’s essential to share your customer data with the rest of the organization so they can take action on it.
Make a list of all the customer-facing teams that have an impact on retention, and make sure they have all the information they need to make the right decisions for customers, whether it’s designing a broader retention strategy or they’re on the frontlines making in-the-moment decisions that will drive customer satisfaction and ultimately impact retention. Working with those teams, you can ensure that your customer experience program plugs into the systems they’re already using so they can take the right actions for customers in their day-to-day work.
Want to learn more about how to increase customer loyalty and boost customer retention? Dig deeper with our guides.