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How To Increase Retention Rate: 9 Tips for Small Businesses

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Have you ever tried to fill a leaky bucket? Or heat a house with open windows? Trying to build a business without a customer retention strategy can feel similar—you’re trying to address a continuously worsening problem. Without a customer retention strategy, you may constantly try to acquire new customers to compensate for lost ones, which can be costly and time-consuming. Research shows it costs between five and 25 times more to obtain a new customer than to retain an existing one.

On the other hand, a solid customer retention strategy helps keep customers loyal and engaged, reducing the need for constant customer acquisition and helping you build a more stable and sustainable business. Here’s how to boost your retention.

What is customer retention?

Customer retention is your business’s ability to keep its existing customers long term. It’s a crucial part of any long-term business strategy because it generally costs less to retain an existing customer than to acquire a new one. 

Whereas customer acquisition efforts focus on attracting new clients to your business, customer retention tactics are designed to encourage repeat purchases and engagements from returning customers.

How to calculate your customer retention rate

Customer retention rate measures the percentage of customers that continue to do business with a company over a given period. Tracking your customer retention rate can help you evaluate how successful you are in retaining customers.

To calculate customer retention rate, you need the following variables:

  • A measured period
  • The number of customers at the end of the measured period (E)
  • The number of customer acquisitions during the measured period (N)
  • The number of customers at the start of the measured period (S)

For example, let’s say you want to calculate your customer retention rate for the third quarter of the year (Q3).

First, subtract the number of customer acquisitions during Q3 (N) from the total number of customers at the end of Q3 (E) to determine how many customers you successfully retained during this quarter.

Then, use the number of customers retained to find your retention rate. Divide the customers retained during Q3 by the number at the start of the quarter (S). Lastly, multiply the result by 100 to convert the fraction to a percentage. 

Here’s the formula:

Customer retention rate = [(E − N) ÷ S] × 100

How do you calculate customer churn rate?

Many businesses also calculate customer churn rate, which measures the percentage of customers lost during a specific period. A positive churn rate indicates a shrinking customer base, and a negative churn rate means your customer base is growing. 

To calculate customer churn rate, you need the following variables:

  • A measured period
  • The number of customers at the start of the measured period (S)
  • The number of customers at the end of the measured period (E)
  • The number of customer acquisitions during the measured period (N)

Here’s the formula for calculating customer churn rate:

Customer churn rate = [(S - E + N) ÷ S] × 100

Companies with high customer retention rates aren’t just lucky—they work hard to implement specific customer retention strategies to encourage returning customers and incentivize repeat purchases. 

Here are nine customer retention tactics to help you build a robust and loyal customer base:

1. Provide a seamless customer experience

Customer retention efforts start as soon as a potential customer interacts with your business. Provide a positive customer journey from the presales consultation through the purchasing process. Then provide quality customer service beyond the transaction. Customers with a good experience with your company are likely to continue doing business with you.

2. Implement a customer loyalty program

Customer loyalty programs reward customers who repeatedly interact with a brand. Loyalty programs can encourage repeat purchases and discourage customers from switching brands. There are many customer loyalty programs; some award points for purchases or other activities, like making referrals or leaving a product review; others reward returning customers with VIP perks or elevated status. Consider offering loyal customers VIP discounts or allowing them to shop for new products or deals before the general public. 

3. Seek customer feedback

Seeking customer feedback is essential to understanding customers’ needs, preferences, and satisfaction levels. It’s also a great way to make your customers feel heard. Using customer surveys to obtain customer feedback can show customer appreciation and increase customer engagement with your brand.

4. Make changes

The second part of receiving customer feedback is making changes based on what you learn. Use the data you obtain to adjust your offerings and business strategy. Responding to customer input shows appreciation for their feedback and can improve their overall customer experience.

5. Look for ongoing relationship opportunities

Find opportunities to provide lasting value to your customers. If you sell mechanical equipment, consider offering a service program or a free annual check-up on all purchases. Turning a one-time transaction into an ongoing service-based relationship can help increase customer retention and ensure you remain a vendor of choice.

6. Plan strategic outreach

Staying top of mind doesn’t mean bombarding your customers with promotional emails. Instead, plan outreach around strategic events and sales, and factor in your customers’ journeys (such as peak buying seasons or changes in market conditions). Stay in touch with customers through email marketing or social media. For example, you might create an email newsletter to inform and entertain subscribers and increase brand awareness.

Beyond promotion, consider marketing campaigns that provide educational or entertainment value to your customers. For example, if you run a party decorations shop, offer an opt-in email series with party-planning tips, recipes, and games. Providing value can encourage repeat purchases and remind your existing customer base what you offer.

You can use a CRM to monitor customer engagement and adjust your communication plan according to customer behavior.

7. Make it personal

Building a personal connection can help you retain customers and increase customer satisfaction. Consider sending a birthday or business anniversary postcard, or even making quarterly or annual calls to high-value customers to thank them for their business, check in on their level of satisfaction, and inquire about current or upcoming needs.

8. Get social

Increase connection, community, and customer engagement by hosting in-person events, digital panels, or forums. You can also encourage your customers to stay connected with your brand on social media.

9. Say thanks

Consider personal thank-you gifts like seasonal gift baskets or branded items that customers can display in their homes. Even something as simple as a refrigerator magnet can keep your brand top of mind—and your contact information readily accessible.

Increase your customer retention rate FAQ

What does it mean to increase customer retention rate?

Increasing your retention rate means increasing the percentage of customers who continue to do business with you over time.

Why is a high customer retention rate good?

A high retention rate signals satisfaction with your products and services and positions you for growth. It’s significantly more cost-effective to retain customers than to convert new ones. A high customer retention rate usually indicates a large customer base and less need for marketing and sales spending.

What are different customer retention strategies?

Customer retention strategies might include:

  • Offering customer loyalty programs and discounts
  • Planning strategic marketing outreach
  • Providing good customer service
  • Building personal relationships with your customers
  • Seeking customer feedback
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