Article | 13 min read

What is customer retention? Importance, metrics & definition

Customer retention is cheaper than customer acquisition. Here are a few ways to improve your retention strategies.

By Sarah Olson, Senior Associate, Content Marketing, @seolson5

Last updated July 13, 2022

Businesses work hard to attract customers through a mix of marketing, social media, and brand strategies. You’ve invested a lot of time and effort (and probably money) gaining your customers’ trust. It only makes sense that you want to hold on to them.

That’s where a strong focus on customer retention comes in handy.

To improve customer retention, you have to look at your entire customer experience. The customer experience involves everything customers think and feel when they encounter your brand. Customer-facing interactions, such as support ticket resolution or how a brand communicates its values, are a few factors that can affect a buyer’s relationship with a brand.

You’ll keep more customers by creating a seamless experience that makes them happy every step of the way. However, if your business falls short of customer expectations, you risk losing those customers before you even have a chance to make things right.

What is customer retention?

Customer retention definition: Customer retention refers to a company’s ability to turn customers into repeat buyers and prevent them from switching to a competitor. It indicates whether your product and the quality of your service please your existing customers. It’s also the lifeblood of most subscription-based companies and service providers.

Customer retention strategies are the processes and initiatives businesses put in place to build customer loyalty and improve customer lifetime value.

Customer retention is different from customer acquisition or lead generation. It focuses on customers who have already signed up for a service or purchased a product from you.

But retaining customers is about more than just transactions—it’s about relationships. Research shows that customers view their relationships with brands similarly to their relationships with friends. Customers like brands that are reliable, authentic, and aware of what matters to them.

Focus on buyer relationships with your existing customers to boost their brand loyalty. These shoppers will continue to choose your brand even when presented with other options. With this loyal base, your brand will be more likely to weather volatile markets.

Who manages customer retention?

Customer retention isn’t a responsibility that falls on any single team to earn on behalf of the entire company. Customer service, sales, product, and marketing need to work together to build customer loyalty and prevent churn.

For example, a customer support team can look at the top product pain points customers are reaching out about and share that information with product teams for potential product updates. Or, a marketing team might use customer service data to send an automatic apology email with a discount code after a customer complains about an order issue or delay.

Why is customer retention important for businesses?

Keeping your current customers happy is generally more cost-effective than acquiring first-time customers. According to the Harvard Business Review, acquiring a new customer can be five to 25 times more expensive than holding on to an existing customer.

Acquiring a new customer can be five to 25 times more expensive than holding on to an existing one.Harvard Business Review

You don’t need to spend big on marketing, advertising, or sales outreach. It is easier to turn existing customers into repeating ones, since they already trust your brand from previous purchases. New customers, however, often require more convincing when it comes to that initial sale.

Customer loyalty won’t just give you repeat business. Loyal customers are more likely to give free recommendations to their colleagues, friends, and family. Creating that cycle of retained customers and buzz marketing is one way your company can cultivate customer loyalty for long-term success.

Here are a few reasons why customer retention is so important for business success.

  • Cost savings: Customer retention is generally more cost-effective than acquiring first-time customers
  • Positive word of mouth marketing: Loyal customers are more likely to tell their friends and family about your brand
  • A better bottom line: Increasing retention rates by just 5 percent can increase revenue by 25 percent to 95 percent
  • Customer loyalty: Loyal customers are less interested in competitors, advocate for your brand, and bring in more revenue for the business.
  • Increased customer spend: Loyaly customers are more likely to purchase again, and willing to spend more when they do.

How to measure customer retention and key metrics

To measure customer retention focus on three key metrics: customer retention rate, customer churn rate, and customer lifetime value.

1. Customer retention rate

The customer retention rate is the percentage of previous customers who remained loyal to your business over a period of time.

To calculate it, pick a period of time you want to measure, and then identify the following:

  • Number of customers at the start of a given time period (S)
  • Number of customers at the end of that period (E)
  • Number of new customers added over the duration of that period (N)

Then, you can calculate your customer retention rate (X) with the following formula: [(E-N)/S] x 100 = CRR.

Customer retention formula

Customer retention rate measures the number of customers a company retains over a given period of time. It’s expressed as a percentage of a company’s existing customers who remain loyal within that time frame. (We’ll get into the formula a little later.) For example, if your business starts the year with 10 customers and loses two of them, you have an 80-percent retention rate.

Calculate retention rate with this formula: [(E-N)/S] x 100 = CRR.

2. Customer churn rate

A less direct indicator of customer retention is your churn rate—the percentage of customers lost during a period of time. Companies that struggle with customer retention usually have a high churn rate.

Customer churn rate formula: (Y/X) *100 = Z

Low retention rates or high churn rates could be bad signs. They may signal that something about your customer experience isn’t going well. But don’t panic—there are several changes you can make to turn the churn around.

3. Customer lifetime value

Customer lifetime value measures the total revenue you can expect from a customer, during their lifetime. It helps a business discover its most loyal customers. The longer a customer remains loyal to a company, the higher their lifetime value becomes. For example, a customer that signs up with a 50 percent discount and then closes their account would have low lifetime value. Businesses will want to find what customer groups have the highest lifetime value.

customer retention

6 customer retention strategies to improve retention rates

  1. Deliver fast support
  2. Personalize interactions
  3. Invest in employees
  4. Meet customers where they are
  5. Gather customer feedback
  6. Incentivize loyalty

Improving customer retention means improving the customer experience. In fact, 77 percent of customers surveyed in our 2021 Customer Experience Trend Report report being more loyal to a company that offers a good customer experience if they have an issue. 72 percent are willing to spend more from a company that offers good customer experiences. And 50 percent say that customer experience is more important to them now compared to a year ago.

customer retention

If you make interactions more convenient, personal, and rewarding for your customers, they’re likely to be more loyal in return.

1. Respond to customer support queries quickly

Data shows that quick first replies result in higher customer satisfaction. Our 73 percent of customers surveyed in our 2021 Customer Experience Trend Report said that speedy support resolutions are key to a good customer experience.

73 percent of customers surveyed in our 2021 Customer Experience Trend report said that speedy support resolutions are key to a good customer experience.

Ideally, speedier replies will go hand in hand with faster resolutions. But even if you can’t solve a ticket right away, it still pays to respond to the customer ASAP.

A quick reply can be a short message letting the customer you’ve received their question. Better yet, provide an estimate for the time it will take to solve their problem. Customers are more willing to wait if they know you’re actively working towards a solution. Setting time frame expectations upfront helps with that.

2. Use context to deliver personalized support interactions

Customers feel frustrated when they have to explain an issue over and over. Exhausting, repetitive interactions make customers more likely to leave.

Give support agents the tools they need to easily pull the customer information and elevate the conversation.

Zendesk’s streamlined workspace gives agents customer context to deliver a personalized experience. For example, agents can see relevant customer information (such as language, contact details, and notes). They can also view their previous conversations.

3. Simplify customer service workflows

Helping your agents can help your customers, too. Simplify customer service workflows so tickets get to the right departments and representatives. This makes the support process easier for agents and faster for customers.

Free customer experience guide

Find out how to create great customer experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.

Create multiple support request forms and conditional ticket fields. This will provide customers with a personalized form that only asks for information related to their problem. Then, streamline the process with support software. This will instantly direct different types of tickets to specialized agents.

Once you streamline and speed up ticket resolution, you’ll make agents happier and retain more customers.

4. Offer omnichannel support to reach customers where they are

Don’t limit your support channels to one or two select methods. Use omnichannel support to empower customers to choose the channel they like best. Omnichannel experiences are likely to increase customer retention. This is because you’re decreasing the effort it takes to make a purchase or contact support.

According to our 2021 Trends Report, 50 percent of high-performing companies have an omnichannel strategy in place, compared to just 18 percent of their lower-performing peers.

50 percent of high-performing companies have an omnichannel strategy in place, compared to just 18 percent of their lower-performing peers.

Zendesk enables customers to contact support any way they please—web, mobile app, email, phone, or chat. Customers can then continue the interaction across any other channel.

customer retention

Beyond support, some retailers also use omnichannel experiences to connect their customer’s online, mobile, and in-store visits. For example, UGG uses Zendesk to manage their “Click and Collect” and “Click and Reserve” programs. These services let customers buy boots online and have them shipped to their local store or reserve stock in-store before purchasing.

5. Consistently gather customer feedback

Customer feedback is one of the most valuable tools you have to increase customer retention and reduce churn rates. If you want to know what is and isn’t working for your customers, it helps to hear it straight from the horse’s mouth.

Customer feedback is one of the most valuable tools you have to increase customer retention.

Give customers a voice by conducting more surveys. Customer satisfaction surveys can be as simple as asking for a “thumbs up or thumbs down” after you resolve a ticket. But it is also useful to ask more specific questions, such as:

  • How would you describe your experience with our product?
  • What isn’t working for you, and why?
  • Which of the following channels do you prefer using for customer support?

Be sure to ask questions that get to the heart of customer effort. For example, customers often prefer self-service because of the convenience. So you might use surveys to see if your customers like your self-service options or if you’re making it too difficult for them to find the answers they need.

Supplement your surveys with feedback from customer service team members. They’re closest to customers and can identify common complaints and general preferences.

6. Incentivize loyalty

Rewarding customer loyalty is a good way to increase customer retention. Customers like it when brands appreciate them and give them reasons to stick around. Strong incentives include loyalty programs, discount codes, or special offers. These will motivate customers to continue buying from your business.

There are several types of loyalty programs, from points-based systems to tiered rewards. Loyalty programs also help your company collect more detailed customer data. The more purchasing data you have available, the more personalized rewards and offers you can provide to your customers.

A loyalty program can not only reward shoppers, but also provide a positive and customized experience based on sales insights. Both components are crucial to customer retention.

customer retention

Customer retention examples

  • Offer a seamless online experience (Amazon)
  • Make every customer feel like a VIP customer (Four Seasons)
  • Build empathic customer relationships (Zappos)
  • Be proactive (Dollar Shave Club)
  • Support causes your customers care about (Bombas)

1. Offer a seamless online experience (Amazon)

One of the most basic customer retention examples is meeting customer expectations. And customers today expect online experiences that are on-par with, or better than, in-person experiences. In fact, 65 percent of customers want to buy from companies that offer quick and easy online transactions, according to our Trends Report. And 49 percent gave Amazon the highest marks for service for that reason.

Are there pain points in your online experience? How can you make things easy for customers?

2. Make every customer feel like a VIP customer (Four Seasons)

Luxury hotels are known for their heritage of high-touch, exclusive customer service. The Four Seasons is able to expand that feeling of luxury to every customer through its combination of technology and white glove service. Guests can use Four Seasons Chat to message staff through channels such as WhatsApp for any inquiry or service, including requests for restaurant recommendations and reservations, ordering room service, arrival or early checkout, and even ordering a private jet.

3. Build empathic customer relationships (Zappos)

If there’s one thing the pandemic showed us, it’s that empathy is key to building lasting customer relationships. In fact, 49 percent of customers want agents to be empathetic, according to our Trends Report. During the pandemic, Zappos started a hotline where customers could call or chat its support team about anything, even the best Netflix shows.

4. Be proactive (Dollar Shave Club)

Customers expect brands to anticipate their needs and get in front of issues before they even happen. That’s why proactive service is so important in retaining customers. Dollar Shave Club welcomes website visitors with a chatbot to answer common questions before a customer has to reach out to customer support or abandons their cart.

5. Support causes your customers care about (Bombas)

54 percent of customers want to buy from companies that prioritize diversity, equity, and inclusion in their communities and workplaces and 63 percent want to buy from companies that are socially responsible, according to our Trends Report. Bombas donates a clothing item to a homeless shelter or homelessness-related charity with every purchase.

Customer retention statistics for 2022

Good service is critical to retaining customers and preventing churn. Here are a few statistics that show the impact of customer support on retention, according to our Trends Report.

  • 60 percent of business leaders say that customer service improves customer retention
  • 47 percent of business leaders say that customer service improves their ability to cross-sell
  • 78 percent of business leaders agree that service agents play a vital role in customer retention
  • 73 percent of say business leaders say there is a direct link between their customer service and business performance
  • 81 percent of customers say a positive customer service experience increases the likelihood they’ll make another purchase
  • 76 percent of customers say they would switch to a company’s competitor due to multiple bad customer service experiences
  • 74 percent of customers say they will forgive a company for its mistake after receiving excellent service

Improve customer retention with better customer service

Improving customer retention and building customer loyalty doesn’t happen overnight. It will take time and effort to grow your relationship with your customers and earn their trust.

Exceptional end-to-end customer experiences are the best way to earn customer trust. Provide great service and make customers’ lives easier, and they’ll likely turn into advocates for your brand.

Start investing in your customer experience today with a free trial of Zendesk.

Free customer experience guide

Find out how to create great customer experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.

Free customer experience guide

Find out how to create great customer experiences that will lead to loyal customers, improved word-of-mouth promotion, and increased revenue.

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