Which of the following is not a key action that can help organizations retain customers?
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Focusing on customer retention is a requirement for brands that want to succeed in our current era of customer-centric commerce. But knowing it’s critical versus measuring it and acting on the results are two different things. To improve customer retention, your brand must look at metrics like customer lifetime value and churn rate. Show
In this blog, we’ll explain how to calculate customer retention, what other metrics to evaluate alongside it, and how to use those insights to maximize the retention rate for your brand. However, before evaluating your customer retention rate, it’s important to clarify how your company defines customer retention. What Exactly is Customer Retention?“Customer retention in marketing is the process of engaging existing customers to continue buying products or services from your business.” But, your criteria for retaining those customers will vary based on your company’s industry or vertical. A travel company will need to measure their customer retention long-term because on average people fly only once a year. At the same time, if a quick-serve restaurant (QSR) were only to measure their retention yearly, they would miss a number of important trends and opportunities. And some eCommerce brands even measure their customer retention daily to catch any and all fluctuations. Customer Retention vs. Customer LoyaltyCustomer retention and customer loyalty are linked—customer retention metrics can be used to measure customer loyalty—but they do not mean exactly the same thing. Customer loyalty refers to customers who continue to buy from a particular brand, company, or business because they’ve created an emotional connection with that brand. Loyal customers may also promote the brand via word of mouth, be more receptive to other products and services from the same company, and be more likely to provide feedback and reviews. They are not actively looking for the same product or service elsewhere and are less receptive to marketing from competitors. Unfortunately, customer loyalty is no longer as guaranteed as it once was - 75% of US consumers changed their shopping behavior and shifted to new brands during the COVID-19 pandemic. Customer retention is a more general term that refers to a business’s ability to turn new customers into repeat customers. Customer retention often is the first step in creating long-term customer loyalty. Why is Customer Retention so Important?Customer retention is vital to your company’s success. To start, it’s cheaper to cultivate loyalty than to acquire new customers. According to Harvard Business Review, attracting new customers will cost your company 5 to 25 times more than keeping an existing customer. And loyal customers are likely to be better for your bottom line as well. Inc reports that current customers spend 67% more on average than those who are new to your business. Your customer retention rate measures what percentage of your existing customers continue to do business with you over a given period of time. Your customer retention rate is the opposite of your churn rate, which measures how many of your customers left for another competitor—or stopped purchasing altogether—over the same time period. Three Key Ways to Boost Your Customer Retention RateBefore we dive into the exact calculations for the different metrics you can use to measure retention, let's talk about the ways you can improve it. If your brand is looking to increase its customer retention rates, start with these three areas: 1. Understand your churn Calculate your retention and churn rates to determine how many of your customers are coming back vs. leaving—but do you understand why? If the answer isn't clear from your data, consider sending feedback surveys to churned customers and A/B test your questions to improve your response rate. A platform like Formation that can analyze and act on customer behavior is also helpful because it can catch early indicators of potential churn and automate offers to re-engage the customer before they churn. 2. Improve customer experience A positive customer experience goes a long way toward retaining customers. Detailed customer feedback should give you some good starting points for what to improve. But if you don’t have any yet, start taking steps to encourage brand loyalty:
3. Deepen customer relationships We’ve said it before, and we’ll say it again: today’s customers are looking for personalized experiences and brand relationships that create an emotional connection. One of the best pathways to delivering that value is a customer loyalty program. Loyalty programs build a continued relationship with your customers, with repeat purchases earning them repeat rewards. This helps to keep your customer retention rate steady, and can even increase it. A loyalty program can lead as much as 54% of your customer base to do more business with you. Create a gamified loyalty
program, and you’ll engage and improve customer experience even further. 10 Key Customer Retention Metrics You Should Be Tracking1. Customer Retention RateCustomer retention rate is the most straightforward metric for understanding your customer loyalty and how much repeat business you are generating. There are several other metrics that can be tracked along with it to give you a
deeper understanding of how your brand or business is performing. How To Calculate Customer Retention RateCustomer Retention Rate Formula: The formula for customer retention calculation is reflected as a percentage, and is calculated for a specific time period, such as by week, month or year.
2. Churn RateAs mentioned above, churn rate measures what percentage of your customers have stopped doing business with you over a given period of time. Some churn is normal for any company, but if your churn rate is above
5%-7%, it’s time to examine what’s impacting your customer satisfaction. Customer Churn RateCustomer churn rate measures the rate at which customers stop buying your products or services. This can take the form of a customer opting out of or ending a subscription, or otherwise discontinuing to engage with your company. How To Calculate Customer Churn RateChurn Rate Formula:
Churn is a hotly debated topic in marketing and data science, so it actually has several formulas, the simplest of which is the one shown above. But as many experts point out, this formula lets your growth, or new customer acquisitions, skew your churn rate. So several organizations have developed alternatives—for example, Hubspot recommends eliminating newly acquired
customers before you calculate to avoid this issue:
To browse several other churn formulas, including a predictive churn formula from Shopify, check out
this post. Revenue Churn RateRevenue churn rate refers to the percentage of revenue your business has lost from existing customers in a given period of time. There are a number of customer behaviors that can lead to revenue churn, including cancelling an order, downgrading a subscription or plan, or completely cutting ties with your business. How To Calculate Revenue Churn RateMonthly Revenue Churn Rate = [(MRR at Start of Month - MRR at End of Month) - MRR in Upgrades during Month] / MRR at Start of Month
3. Existing Customer Revenue Growth RateIn essence, this metric looks at how much revenue you are generating from your customer success, retention and loyalty efforts. If your loyalty marketing team is able to upsell, cross-sell, increase purchase frequency and so on, this rate will continue to climb. If not, your numbers will flatten or fall. How To Calculate Existing Customer Revenue Growth RateExisting Customer Revenue Growth Rate Formula: This metric is typically measured monthly. To calculate it, you’ll need to find out your monthly recurring revenue amount (MRR), then plug it into the formula. Once again, because you’re measuring customer retention, you should calculate MRR numbers from existing customers only, and exclude any revenue generated by new customers.
4. Net Incremental RevenueNet Incremental Revenue (NIR) measures the change in net revenue earned by the company after running a promotional offer campaign, while also taking into consideration the cost associated with the offer. NIR helps tie marketing to the larger business objectives and goals, the most common being increased revenue. NIR is an important measurement because it provides a clear picture of revenue minus expenses, helps executives understand the impact of a program and proves marketing ROI. How to Calculate NIR:Total Net Revenue = Qualifying Revenue – Incentive Costs
Net Revenue per Customer = Total Net Revenue ÷ Number of Customers This is calculated for test and control separately. NIR per Customer = Net Revenue per Customer from Test – Net Revenue per Customer from Control Total NIR = NIR per Customer x # Test Customers Efficiency = Total NIR ÷ Incentive Costs  5. Repeat Purchase RatioAlso known as Loyal Customer Rate, RPR measures what percentage of your customers return to make purchases in a given period of time. This metric can be a strong indicator of customer loyalty, but customers’ individual behaviors can also skew it. Take the example of a clothing retailer, where some customers may only make one or two large purchases a year based on seasons or sales, while other customers may make smaller purchases every month in an effort to stay on trend. Ideally, your digital team should be tracking purchasing frequency for each individual consumer in addition to looking at the overall rate of repeat purchases. How To Calculate Repeat Purchase RatioRepeat Purchase Ratio Formula: This simple formula can be calculated by week, month, year or any other time period you choose.
6. Daily, Weekly, and Monthly Active Users (DAU, WAU, MAU)Disengagement is usually a key predictor of churn, so you want to make sure your users stay engaged with your website and mobile app. This is where behavioral analytics comes into play. Start by setting activity benchmarks for your users, and monitor whether they meet them. If they don’t, begin immediate re-engagement efforts. 7. Customer Lifetime Value (CLV)Customer lifetime value (CLV) refers to the amount of revenue generated by a single customer. Marketers should consistently track this metric, though the period of time will be based on your individual company’s offerings. Your company should aim for a CLV that increases or remains steady; if the CLV is diminishing, this means your customers are low-value or that you are losing customers at an increasing rate. How To Calculate Customer Lifetime ValueCustomer Lifetime Value Formula: Customer Lifetime Value = [Gross Annual Sales/Total Number of Unique Customers for the Year] x [Average Lifespan of Customers] Dividing your company’s gross annual sales by the total number of unique customers for the year will provide you with the average amount you can expect from a customer over the course of a year. Multiply this amount by the average lifespan of a customer based on data
about how long a customer typically stays with your business in terms of years. 8. Product Return RateProduct return rate is the percentage of your total units sold that have been sent back to you. This metric is only applicable to your business if you sell a tangible product. If you do sell a product, you should aim to have a product return rate that is as close to zero as possible. However, rates are typically much higher: the average return rate for purchases made at brick-and-mortar retailers is 8-10%; it’s 20% for e-commerce purchases, 30% for e-commerce purchases made during the holidays and 50% for “expensive” products, according to data collected by Shopify. How To Calculate Product Return RateProduct Return Rate Formula: Your timeframe for calculating this rate will depend on your sales volume, but this general formula will apply. 9. Net Promoter ScoreNet Promoter Score (NPS) is a customer satisfaction metric that measures how likely your customers are to recommend your company to others. This score indicates a customer’s general satisfaction and loyalty to your brand. A high NPS can’t guarantee customer retention and growth, but it can help identify the brand evangelists that are most likely to drive referrals. A low NPS is indicative of low customer satisfaction and may indicate that some sort of intervention is necessary to turn things around. How To Calculate Net Promoter ScoreNet Promoter Score Formula: Net Promoter Score = % of Promoters - % of Detractors To calculate this score, you
will need to ask your customers how likely they are to recommend your product or service to a friend or colleague on a scale of 0 to 10. Those who respond with a 9 or 10 are considered to be promoters; those who respond with a 6 or below are considered detractors. 10. Loyal Customer RateLoyal customer rate refers to the number of customers who have made a repeat purchase with your company within a given time range. You should aim for a high loyal customer rate, as loyal customers are the most valuable customers to your business. Not only are they more likely to make repeat purchases, but they are also the most likely to drive referrals. How To Calculate Loyal Customer RateLoyal Customer Rate Formula: Loyal Customer Rate = Number of Repeat Customers / Total Customers To find this rate, you will need to first know your total number of customers over a given timeframe
(month, quarter, year, etc.). This number should include new and existing customers. To find the number of repeat customers, add the total number of existing customers who made additional purchases and the number of new customers who made multiple purchases. Plug this total in as the number of repeat customers. Loyalty Program Customer Retention MetricsLoyalty programs provide unique opportunities to utilize customer retention metrics to measure customer loyalty. A successful customer loyalty program retains customers through enticing incentives to make additional purchases. If your customer loyalty program is not performing well, this is an indicator of poor customer loyalty. It's necessary to keep in mind that in today's world, it takes more than a one-size-fits-all approach or mass offers to convert customers into loyal customers. With countless options at their fingertips, brands are fighting for their customers' share of wallet and headspace. To set your brand apart, it's necessary to provide customers with personalized, relevant, and emotional connections. Not only that, but your loyalty program must have the ability to deliver dynamic offers at scale, combined with the ability to be continuously optimized. Make sure your brand is set up to tackle, manage, and grow your loyalty program correctly with this Modernizing Loyalty Guide. But let's start by determining how well your loyalty program is working by considering the following metrics. Participation RateParticipation rate refers to the percentage of your customers who are actively enrolled in your loyalty program. To calculate the participation rate, simply divide the number of
customers enrolled in your loyalty program by your total number of customers. Redemption RateRedemption rate is a measurement of the percentage of your loyalty program participants that are redeeming the perks that are offered or earned through the program. The redemption rate is a strong indicator of the success of your loyalty program. To calculate the redemption rate, divide the number of perks redeemed by the number of perks issued. Active Engagement RateActive engagement rate refers to the percentage of your total customers who are engaging with your loyalty program (i.e. they are redeeming the perks earned or offered to them through the program). To calculate active engagement rate, divide the number of customers who are engaging with your loyalty program by your total number of customers. How to calculate customer retention rate (formula list)Most of the metrics in the section above have simple formulas for customer retention rate calculation. One of them is much more contested, with different formulas favored by different marketers and companies. Customer Retention Rate Formula: Customer Retention Rate = ((NCE - NEW) / NCS)) X 100. This formula is reflected as a percentage, and is calculated for a specific time period, such as by week, month or year. NCE = Number of Customers at End of Time Period NEW = Number of New Customers Acquired During Time Period NCS = Number of Customers at Start of Time Period Churn Rate = Number of Churned Customers / Number of Total Customers … Or is it? Churn is a hotly debated topic in marketing and data science, so it actually has several formulas, the simplest of which is the one shown above. But as many experts point out, this formula lets your growth, or new customer acquisitions, skew your churn rate. So several organizations have developed alternatives—for example, Hubspot recommends eliminating newly acquired customers before you calculate to avoid this issue: Churn Rate = (NCES - NCEE) / NCES
Monthly Revenue Churn Rate = [(MRR at Start of Month - MRR at End of Month) - MRR in Upgrades during Month] / MRR at Start of Month
This metric is typically measured monthly. To calculate it, you’ll need to find out your monthly recurring revenue amount (MRR), then plug it into the formula. Once again, because you’re measuring customer retention, you should calculate MRR numbers from existing customers only, and exclude any revenue generated by new customers.
Repeat Purchase Ratio Formula: Repeat Purchase Ratio = NRC / NTC This simple formula can be calculated by week, month, year or any other time period you choose.
Customer Lifetime Value Formula: Customer Lifetime Value = [Gross Annual Sales/Total Number of Unique Customers for the Year] x [Average Lifespan of Customers] Dividing your company’s gross annual sales by the total number of unique customers for the year will provide you with the average amount you can expect from a customer over the course of a year. Multiply this amount by the average lifespan of a customer based on data about how long a customer typically stays with your business in terms of years. Product Return Rate Formula: Product Return Rate = Number of Units Sold That Were Later Returned / Total Number of Units Sold Your timeframe for calculating this rate will depend on your sales volume, but this general formula will apply. Net Promoter Score Formula: Net Promoter Score = % of Promoters - % of Detractors To calculate this score, you will need to ask your customers how likely they are to recommend your product or service to a friend or colleague on a scale of 0 to 10. Those who respond with a 9 or 10 are
considered to be promoters; those who respond with a 6 or below are considered detractors.
To find this rate, you will need to first know your total number of customers over a given timeframe (month, quarter, year, etc.). This number should include new and existing customers. To find the number of repeat customers, add
the total number of existing customers who made additional purchases and the number of new customers who made multiple purchases. Plug this total in as the number of repeat customers. 3 most important ways to boost your customer retention rateAny quick Google search of “improve customer retention rate” will yield dozens of listicles with anywhere from 5-15 suggestions for increasing your retention. But the reality is, focusing on all those tasks at once will spread your team so thin that you may accomplish very little. Instead, try to concentrate your efforts where they are likely to make the most impact. If your brand is looking to increase its customer retention rates, consider focusing on the following three areas: 1. Understand your churn Now that you’ve calculated your retention and churn rates, you understand how many of your customers are coming back vs. leaving—but do you understand why? If not, consider sending feedback surveys to churned customers, and A/B test your questions to improve your response rate. A marketing solution that can analyze, and act on, customer behavior is also helpful in this regard, because it can catch early indicators of potential churn and act to re-engage the customer before it happens 2. Improve customer experience A positive customer experience goes a long way toward retaining customers. Detailed customer feedback should give you some good starting points for what to improve. But if you don’t have any yet, start taking steps to encourage brand loyalty:
3. Deepen customer relationships We’ve said it before, and we’ll say it again: today’s customers are looking for personal relevance and brand relationships they find valuable. One of the best pathways to delivering that value is a customer loyalty program. Loyalty programs build a continued relationship with your customers, with repeat purchases earning them repeat rewards. This helps to keep your customer retention rate steady, and can even increase it. According to Patel, a loyalty program can lead as much as 54% of your customer base to do more business with you. And if you can add 1:1 relevancy to your loyalty program, you’ll engage and improve customer experience even further. Discover the “why” behind your customer retention rateCustomer retention rate is an important metric for evaluating the success of your overall loyalty marketing strategy, but to get the full picture, you need visibility into why your customers are choosing to return—or not. By getting a deeper understanding of their motivations and preferences, you’ll be able to create customer relationships that last. To learn more about fostering customer loyalty, check out our white paper, “How to Uplevel Your Customer Loyalty Program.” You can also contact us to see how Formation can help improve your marketing results. Read more about customer retention: 7 Strategies for Customer Retention That Really Work Get the 5 steps to strengthen your customer loyalty program through experimentation and measuring offer success. Read The Ultimate Guide to Measuring Customer Loyalty Offers now. What is CLV used for?Customer lifetime value (CLV) is a business metric that measures how much a business can plan to earn from the average customer over the course of the relationship. Differences in products, costs, purchase frequencies and purchase volumes can make customer lifetime value calculations complex.
What is the CLV formula?Customer Lifetime Value is calculated by multiplying your customers' average purchase value, average purchase frequency, and average customer lifespan.
What is CLV in CRM?What is customer lifetime value (CLV)? Customer lifetime value is the total amount of money a customer is expected to spend with your business, or on your products, during the lifetime of an average business relationship.
What is a good CLV?It is a good range if you are able to achieve a CLV that falls between 3-5 times your cost of customer acquisition. So, for example, if you are spending an average of $150 in acquiring a new customer, you should aim for a CLV of at least $450!
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