In the Middle Ages in Europe, loyalty was a pretty big deal: Subjects called vassals would kneel and pledge an oath of allegiance to their liege, or king, and the liege accepted by covering the vassal’s folded hands. The symbolism is clear: “You take care of me, I’ll take care of you.” The loyalty may have been forced, but it was a form of loyalty nonetheless.
Today, customers can easily choose whom they give their business to—and that loyalty must be earned. However, how do you build long-term relationships with customers to keep them coming back? It begins when you exceed customer expectations.
Acquiring a new customer can cost five to 25 times more than retaining an existing customer. Improve customer retention and you make up for the upfront costs of acquisition. But none of this works if you can’t retain customers.
What is a customer retention program?
Customer retention is transforming new customers into repeat customers. A customer retention program puts in place various strategies to improve customer experiences, enhance customer engagement, build customer loyalty, encourage customers to make repeat purchases, monitor customers at risk of leaving for the competition, and analyze why unhappy customers left. These customer retention strategies include loyalty programs, referral programs, personalized emails, special offers, and onboarding improvements.
An effective program understands customer needs, re-engages customers, and incentivizes repeat business. Client retention programs that work well increase the repeat customer rate. Existing customers will deliver a higher average order value per visit, too.
So how do you know they’re working? By measuring customer activity. Retention program metrics can identify customer needs, expectations, and problems.
Why is a customer retention program important?
Customer retention programs are important for businesses to be profitable, increase revenue, maintain customer loyalty, and gain new customers. In a study on the impact of customer loyalty economics, Frederick Reichheld and Phil Schefter proved that increasing customer retention rates by 5% can increase profits 25% to 95%. They also showed that acquisition costs are higher for online businesses. Acquiring customers costs 20% to 40% more than traditional retail, but over the long term, the upside is that return on investment is higher.
The cost of retaining customers is five to 25 times less than acquiring a customer. But it can take time to see results. In the short-term, upfront costs of a customer retention program might seem burdensome. But eventually, as customers begin to deliver repeat business, retention becomes more cost efficient.
And then there’s the “word of mouth” factor: loyal customers share positive experiences with others who then become new customers, which can reduce customer acquisition costs, too.
Satisfaction doesn’t always mean retention
Although it’s hard to imagine a repeat customer who isn’t also satisfied, it’s a mistake to equate customer retention with customer satisfaction. Customer satisfaction is a passive relationship. It suggests a positive experience (good sale, happy with the product), but it doesn’t guarantee a customer will return. If the competition offers a better deal, some customers defect. Enter the need for customer relationship management.
Retaining existing customers requires active, reciprocal customer relationships. Treat the customer well, keep re-engaging, and understand customer expectations, and a satisfied customer will transform into a loyal customer.
If you have a Shopify store, you can improve retention rates by building customer groups based on customer engagement, or lack of engagement. From there, you can use these to run email automations to reengage customers or visitors and turn them into retained customers.
How to develop a customer retention program
To increase customer retention, choose the best retention strategy that aligns with your business goals, then monitor the metrics for effectiveness.
Six customer retention strategies
An effective customer retention program includes these six customer retention tactics:
- Post-sale education programs. Education adds value to a product after the sale, shows commitment to a continuing relationship, and distinguishes your business from competitors. When a customer realizes that you are providing extra content, they are more likely to re-engage and brand loyalty improves. Examples include training videos, support forums, FAQs, and blog content. Some post-sale education programs are called customer success programs and might include an upsell or add-on component.
- Customer loyalty programs. Reward repeat customers by offering points or benefits they can redeem for discounts, products, or other rewards. Customer loyalty programs cement the bond between customer and brand. It tells the customer, “We value your repeat business.” Loyal customers translate into higher retention rate and reduced churn.
- Incentives. Incentive-centered customer retention strategy examples include freebies, downloads such as digital loyalty cards, and special pricing for current customers. Incentives improve the repeat business ratio.
- Referral programs. Reward existing customers with discounts, points, or money back offers for bringing in new customers. A strong and effective referral program reduces your customer acquisition costs.
- Customer feedback. Data from surveys, polls, comments, customer complaints, and reviews are markers of customer satisfaction, which stem from how well your customer service team is performing. Collecting survey data and reviews is the first stage of the customer feedback loop, which leads to analysis of behaviors and preferences. In turn, that leads to better customer experience management. Data analysis of feedback can help you lower the churn rate and increase repeat customer business.
- Marketing automation. Technology automation can streamline retention strategies in several ways: by updating customer data, tracking purchasing behaviors, managing tiered loyalty programs and incentives, and collecting feedback.
Strategies look great on paper, but you’ll need to analyze performance to know whether you really have a strong customer retention strategy. That’s where customer retention metrics come in. The eight retention metrics that determine whether you are keeping (or losing) customers are:
Eight metrics for measuring customer retention
- Customer retention rate. Customer retention rates measure how many customers were kept over a specified period. Customer churn (lost customers) and customer acquisition (new customers) impact that rate. To calculate retention rate, take the total customer count, subtract the number of new customers acquired, then divide by the number of customers at the beginning of the period and multiply by 100. The formula is: End-of-term Customer Count - New customers acquired / Beginning-of-term customer count) x 100 = Customer retention rate
- Customer churn rate. Churn is the percentage of lost customers. If the churn rate increases in response to a customer retention strategy you’ve recently launched, it could be an indication that the strategy isn’t working.
- Monthly recurring revenue churn (MRR churn). This measures the revenue lost due to customer churn. Negative MRR trends indicate that it’s time to up your customer retention game.
- Existing customer revenue growth rate. The formula: Monthly revenue growth rate = (Monthly recurring revenue at the end of the month - Monthly recurring revenue at the start of the month) / Monthly recurring revenue at the start of the month. This gauges how well the customer retention program is working toward bringing in repeat business and yielding higher purchase amounts.
- Customer lifetime value. This measures customer lifetime revenue potential based on projected repeated purchases. The formula is: Customer lifetime value = (Customer value x Average customer lifespan). Because customer lifetime value hinges on repeat purchases, a rising value indicates retention program strength.
- Net promoter score. If you ask customers how likely they are to recommend, or promote, your products, their answer is key to finding the net promoter score. The formula: Net promoter score = (# of promoter scores / Total # of respondents) - (# of detractor scores / Total number of respondents). High scorers are the most loyal customers. Mid-range scorers are a churn risk. Low scorers pose a threat to your brand because they spread negative word of mouth about your business.
- Repeat purchase ratio. This calculates the proportion of customers who make multiple purchases over a specified time period compared to your total customer base. It’s an indicator of customer success. So, the higher the number, the more likely it is that your retention program is successfully building customer loyalty.
- Repeat customer rate. How do you measure repeat business? Divide the number of customers who made multiple purchases by the number of unique customers. The formula: Total customers buying more than once / Total of all customers = repeat customer rate. The higher the percentage, the better the retention strategy is working.
Customer retention programs FAQ
What is an example of a customer retention program?
There is no shortage of customer retention examples. A familiar one is the Starbucks Rewards system. When a customer uses the Starbucks mobile app to pay for coffee, the transaction is logged. Starbucks gathers information on customer buying trends and location data, which leads to more personalized incentives. Value across the customer lifetime is tracked more easily, too. If your business can’t afford to develop its own app, you can gather customer data at the point of sale.
What are three types of customer retention methods?
- Loyalty programs. Rewards customers for continued use of your product, repeat purchases, or new product purchases. The program can be structured in a number of ways: tiered, points based, cash back, punch cards, or subscription service.
- Customer education. This might consist of YouTube videos, blog posts, customer support team documents, or podcasts—linkable from personalized email messages and social media posts.
- Personalized offers. The better your customer data tracking is, the more you can match special offers to individual customer preferences. Dynamic offers use machine-learning analytics to construct offers or step-by step-programs to achieve higher-value rewards.
What is the most important factor in customer retention?
Superior customer service. Service begins with the onboarding process, which can involve a seamless sign-up process (to reduce potential customer drop-offs early on), a personalized welcome email message, product demos and walk-throughs, tutorials, and responsive customer support. By cultivating excellent customer service interactions, you earn trust and loyalty.