Customer retention is an area no organization can afford to overlook. While so many businesses focus on bringing in new clients, it’s costly to let those who have already purchased from you churn. In order to tackle customer turnover issues, companies must ascertain exactly where they stand through retention metrics before putting a plan in place to improve loyalty to their brand.
What is a retention KPI?
A customer retention key performance indicator (KPI) is a measurement of how well your business retains clients over time. It demonstrates how your company can generate recurring revenue from its customer base for steady growth and an optimized business model.
Here are the seven most important retention KPIs to be tracking:
1. Customer retention rate
If you were only to track one KPI it would be the customer retention rate, although you can gain deeper insight by combining it with several others. This metric quantifies your repeat business and demonstrates your customer loyalty in a general sense. To calculate your customer retention rate, you must collect the relevant data over a set period of time.
First of all, work out the number of active users by subtracting the volume of new users gained over the period from the number of customers at the end. Then multiply it by 100 so it’s presented as a percentage and you’ll have your customer retention rate. Plot this metric on a graph to see your retention curve and how efforts within the business have made an impact.
2. Customer churn rate
Churn is an important KPI to measure, but there’s some debate as to the best way to calculate an organization’s churn rate. Always keep in mind your end goals and use a formula that will give you the most useful information and actionable insights. One approach is to discount new customers as churn really only relates to existing clients.
If you use this method you measure the number of existing customers at the beginning of a period compared with those at the end. Your new clients will eventually feed into this system, as they’ll no longer be your latest acquisitions.
3. Customer lifetime value
When you consider the customer lifetime value (LTV) KPI carefully, you’ll suddenly realize just how vital it is for understanding the health of your business. It refers to the amount of money a customer spends during their entire relationship with your company. If your LTV isn’t higher than the cost of acquiring them then you’re going to be losing money.
A healthy business model is your LTV outstripping acquisition costs by three times. This will ensure growth and give your firm the resources to bring in more customers, whose LTVs you can maximize once again. Techniques including upselling and cross-selling can help to boost your LTV.
4. Customer acquisition cost
Customer acquisition cost is the opposite of churn and needs to be tracked so it can be measured against customer lifetime value. By establishing how much it’s costing to bring in new leads and convert them, you’ll be better able to understand why you need to retain them in the long run.
All of the marketing and sales expenditure that has gone into attracting a new client is included in the acquisition cost. That includes campaigns, bids and tools, as well as the salaries you pay to team members, making it a less straightforward figure to calculate.
5. Net promoter score
Not only do you want to sell to customers, but you also want them to be satisfied and likely to refer your brand to other potential clients. When combined with other metrics, your net promoter score can help to predict future growth through retention and referrals.
It’s a good indication of areas where initiatives to incentivize referrals could be particularly effective. Marketers that identify poor to middling net promoter scores have an opportunity to deal with satisfaction issues early on and turn the situation around to the company’s benefit.
6. Time between purchases
Satisfied customers should make repeat purchases from your business, so measuring the time between these transactions can offer useful insight. This information should be brought into context with other factors, as it’s not always the case that you can expect short intervals between purchases.
For example, a long gap can mean your product or service isn’t being differentiated enough within the industry and subsequent purchases are being made with your competitors. Alternatively, your product could be so well made that customers don’t need to replace it for a long time.
7. Product return rate
Don’t overlook the product return rate, as doing so could skew other metrics. While items going back to the warehouse within the given trial or return period is a common feature of some industries, such as fashion, it can indicate something more serious elsewhere.
A high product return rate is worth investigating, as it may mean customers’ expectations aren’t being met in reality. It could be due to the quality of the product falling short or that key marketing messaging is misrepresenting what is delivered.
Further Reading
- Don’t Spend Five Times More on Customer Acquisition, Focus on Customer Retention
- 12 Customer Retention Strategies Used by Big Brands
- Customer retention today: What you need to be doing
- Modern Customer Retention: What You Need to Know
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