How to improve your customer retention rates

Retaining your existing customers is just as important — if not even more important — than attracting new ones. It costs five times more to attract a new customer than retain an existing one, and improving retention rates by 5% can increase profitability by up to 95%.

What is customer retention?

Customer retention refers to any activities or strategies taken by a business to:

• increase the profitability of each customer

• convert first-time buyers into repeat customers

• prevent customers from churning

With customer retention strategies, businesses use their existing customer base to boost conversion rates and increase revenue. It takes hard work to acquire new customers, so it’s important to ensure they have a good experience and derive continuous value from your products or services. A good customer retention strategy is not just transactional; it also builds a long-lasting relationship between the business and customer.

How do you calculate customer retention rate?

There are several methods businesses use to calculate customer retention rate over a specific period of time. A basic formula is as follows:

Retention Rate = ((CE-CN)/CS)) x 100

Where:

• CS = total number of customers at beginning of period

• CN = total number of new customers acquired during period

• CE = total number of customers at end of period

To fill in the blanks with an example, imagine that Company ABC started 2021 with 1500 customers. It gained 400 new customers, but also lost 300. At the end of the year, Company ABC had 1600 customers.

1. 1600 – 400 = 1200

2. 1200/1500 = 0.8

3. 0.87 x 100 = 80%

The company’s customer retention rate in 2021 was 80%.

There are other metrics that provide a broader picture of your customer retention:

• Customer lifetime value (LTV) is a calculation of the overall profit an average customer contributes to your business across their lifetime as your customer

• Churn rate is the opposite of retention, giving you an idea of the rate you are losing customers

• Net promoter score (NPS) is a measure of how happy your customers are with your brand, and therefore how likely they are to remain a customer

What is a good customer retention rate?

It’s virtually impossible for a business to retain 100% of its customers in the long term, but what is considered a good customer retention rate? The answer depends on your industry and business model. According to Statista, typical annual industry benchmarks include:

• Media: 84%

• Insurance: 83%

• IT services: 81%

• Financial services: 78%

• Banking: 75%

• Retail: 63%

• Hospitality: 55%

Why is customer retention important?

Improving your customer retention rate is foundational to long-term growth. The higher your retention rate, the better your ‘base’ level of revenues that your business can rely on month-to-month.

It also saves money. The cost of onboarding a new customer is estimated to be five times more expensive than retaining an existing one. According to Invesp, the probability of selling to a new prospect is 5-20%, compared to 60-70% for existing customers.

Attracting and converting new customers involves considerable effort via multiple sales and marketing channels, such as direct mail, social media, online display advertising and paid search campaigns.

How to improve customer retention

Understanding the importance of customer retention is one thing. Putting into action a strategy to improve retention rates requires input from across the business. Here are seven ways to increase customer retention:

1. Provide a smooth onboarding process

Turning a new customer into a long-term brand advocate starts with a smooth, seamless onboarding process. That first impression can make or break your relationship, so don’t leave anything up to chance. This starts with a user-friendly website (that works seamlessly on mobile, too) and a personalised experience that gives your new customer everything they need to start using and getting value from your products or services.

In certain industries, like financial services and iGaming, a slow authorisation process can create a negative first impression. Technology like TrueLayer’s Verification API takes all delays out of the onboarding process using open banking technology, with 90% of good actors successfully verified in three clicks.

2. Excel at customer service

Some businesses make the mistake of focusing their sales efforts entirely on new leads. You need to make sure you’re reaching out to customers at all stages of their journey. Customer service is key to success, both pre and post-sale. Consider setting up a live chat tool for easier communication on your website and respond promptly to social media queries or comments.

3. Reward your existing customers

You may already offer special discounts to first-time buyers. Along the same lines, reward returning customers with something akin to a customer loyalty programme. This could take many forms depending on your industry and budget, whether it’s sending bonus gifts at special milestones, using a points-based system, or offering a discount for bulk orders. It’s easy to embed referral links into your social media and email newsletter outreach, drumming up new leads while rewarding existing clients at the same time.

4. Make it easy for returning customers to make further purchases

Making customer accounts a requirement can turn off first-time buyers. However, providing it as an option makes repeat purchases far easier for returning customers. With pre-filled personal and shipping details, there’s no need to type out a lengthy checkout form for each purchase.

You can strike the right balance by enabling an account sign-up form after the first purchase has been completed. This allows guest checkout without being pushy.

5. Improve your returns and refund process.

With no concrete way to try before they buy, online shoppers return products at a rate of 30%, in comparison to brick-and-mortar shoppers at 9%. According to a UPS study, most online shoppers check a company’s returns policy before making a purchase. To keep your customers happy — and willing to shop with your brand again — you’ll need to remove pain points from the returns process.

Make sure your return policy is clearly stated at multiple points on the website, including on your checkout page. You can include a pre-printed return label and offer free shipping for added convenience. It’s also important to make sure the customer receives the money back in their account with minimal delay. With TrueLayer’s Payouts API, refund money to your customers’ accounts instantly.

6. Make the most of cross-sell and upsell opportunities

Depending on what your business sells, it could be that the customer satisfies their needs with a single purchase. So how can you persuade them to come back? Make sure you communicate with existing customers about the full extent of your brand’s products or services. Whether you offer software and educate customers on additional features and potential upgrades, or your brand is online retail and you promote additional product lines, make sure your customer understands what you can offer them.

7. Listen and respond to customer feedback.

Finally, don’t forget to go directly to the source and ask your customers how your company is doing. One of the keys to customer retention is asking for – and implementing – feedback. Submit customer surveys and read online reviews to find areas for improvement. Close the customer feedback loop by responding directly to responses, to show you’re listening.

Improve customer retention with the help of open banking

Building brand loyalty takes time, but you can ease the path using automated technology. With a seamless onboarding, payment and payouts experience using open banking methods, you can build customer trust and improve your retention metrics.