Understanding Customer Retention

What is customer retention — the metrics, and the benefits? Learn why understanding customer retention helps brands elevate their customer experience strategy.

Customer retention is the byproduct of providing value and a great experience to your customers across their lifecycle — from initial purchase to the loyalty stage. By implementing a comprehensive customer retention strategy, you can curate more meaningful customer experiences that inspire one-time customers to become repeat customers.

Let’s take a closer look at how customer retention differs from acquisition, 8 customer retention benefits, and how to retain more customers for your organization.

What is customer retention?

Simply put, customer retention is the ability of your company to encourage customers to keep returning and paying. It is a measure of how many customers you can keep engaged and loyal over time with as little churn, or turnover, as possible.

Customer retention is typically calculated using the following formula: 

Customer Retention Rate = [ (Number of customers retained within a certain timeframe) – (Number of new customers acquired during time period) ] / (Total number of customers at the beginning of the same timeframe) x 100

For example, if your company had 1,000 customers at the start of the month, 500 new signups within the month, and 1,250 customers at the end of the month, using the customer retention rate formula above, your customer retention rate would be:

(1,250 total customers) – (500 acquired customers) / (1,000 existing customers) x 100 = 75%

In this example, your customer retention rate is 75%. This means that for every 100 customers you had at the beginning of the month, you would expect to retain 75 of them at the end of the month.

Customer retention vs. customer acquisition

Customer retention and customer acquisition are two sides of the same coin (business growth), but while the former is focused on keeping customers, the latter is focused on attracting them.

Customer acquisition is about bringing new customers to your business through outbound tactics — like sales outreach, social media, and marketing campaigns — that grow your customer base.

On the other side of the coin, customer retention is about keeping existing and acquired customers satisfied, increasing your customer lifetime value (CLTV). With retention, customers are incentivized to make repeat purchases and even build your acquisition pipeline by bringing in new customers via referrals.

Given that it is at least five times cheaper to sell more to a customer who’s already on your books than selling to a net new one, an ideal strategy for sustainable growth would be decreasing your organization’s customer churn rate and finding a balance between acquisition and retention.

The benefits of customer retention

By investing in customer retention, your company can open a treasure trove of value that drives business success and provides a positive experience for your customers and employees.

1. Enhanced customer loyalty

A significant benefit of customer retention is customer loyalty. Loyal customers are often less price-sensitive as they recognize the value of your product or service.

This means they are willing to buy more often and pay a premium for the quality and reliability associated with your brand, even when presented with alternative options from your competitors.

2. Increased revenue

A loyal customer base is a goldmine for businesses. Medallia research finds that customer experience leaders are 26 times more likely than laggards to achieve revenue growth of 20% or more. Existing customers, already acquainted with your product or service, are more inclined towards repeat purchases and are receptive to upsells or cross-sells. This predictability results in higher purchase frequency, unlike new customers who are still exploring your business. 

3. Reduced acquisition costs

Marketing, advertising, and promotions to acquire customers all come with a price tag — one that’s up to 25 times more expensive than keeping current customers happy.

By nurturing existing relationships, your company can increase profits by up to 95% for every 5% invested, which is more cost-effective than acquiring new ones.

4. Positive brand advocacy

Satisfied customers have the potential to become brand advocates who freely promote your business to their network through word of mouth. When retained customers generate word-of-mouth marketing on behalf of brands, that’s powerful, as referrals have been found to increase likelihood of a purchase by four times.

5. Higher employee satisfaction

Sudden dips in sales and excessive customer churn create an unpredictable business environment, potentially lowering employee lifetime value (ELTV).

Prioritizing customer retention leads to happier customers, who are more likely to provide positive feedback and make repeat purchases. This boosts employee experience and morale, and helps them focus on delivering excellent service.

6. Stronger customer connections

Successful businesses understand that customer retention hinges on building strong relationships and two-way connections that go beyond simply selling products and services. This sense of partnership turns customers into brand loyalists.

The key lies in actively gathering customer feedback. By listening, addressing concerns promptly, and being transparent about changes, you demonstrate that you value their opinion. And when customers feel valued, they’re more likely to make repeat purchases.

7. Unique selling proposition (USP)

When customers are loyal, you can differentiate your brand and stand out for what makes your product or service unique, not just your pricing. This way, you have more control over your margins and market position.

A well-defined USP based on impressive customer retention rates can set the business apart from competitors, attracting customers who value a personalized and satisfying experience.

8. Product and service improvements

When a repeat customer has an enjoyable experience when using your product or service, they often share valuable feedback for product development and spread positive word of mouth.

Insights like direct feedback, purchase history, and customer behavioral data from your customer experience platform, CRM, and digital behavioral intelligence tools can contribute to product and service improvements across the board.

Retain more customers with Medallia

To improve your customer retention rates and leverage all the benefits of customer retention, start by elevating your customer experience.

Medallia offers best-in-class customer experience management solutions for helping the world’s leading brands achieve strong customer retention rates. Get a demo to learn more!