“If you don’t appreciate your customers, someone else will.”
Keeping your customers happy at all cost isn’t just some meaningless business advice, but should be at the core of any business operation. In fact, research shows that a 5 percent increase in customer retention can raise profits anywhere between 25 to 95 percent.
Moreover, the likelihood of successfully selling to existing customers is somewhere between 60 to 70 percent. On the flipside, new customers are only buying at a rate of 5 to 10 percent.
Nowadays, user data is generated at each step of the transaction. This information can help your customer service, marketing, and product management teams to assess how happy your customers are, how many of them abandon your product, and what you can do to combat this.
But first, let’s set the stage and implement a common understanding of what retention incorporates.
What Is Customer Retention?
Customer retention refers to the continued usage of a product or service. It is measured by taking the percentage of customers a company keeps at the end of a given period alongside the number of customers that got acquired and left the service respectively.
When it comes to retention, businesses have to define their own criteria for what counts as product usage. Examples include logging into an application, visiting a website, or using a feature.
Consequently, the goal is to maximize retention and as such the amount of times a customer interacts with the product. That, in turn, increases the likeliness of a successful transaction.
Customer Retention & Loyalty Metrics
Now that we know what customer retention means, let’s start to look at the most essential KPIs to measure it.
Whether you’re an ecommerce, SaaS, or any other type of business, tracking the following metrics should give you a comprehensive insights into how happy and loyal your customers are.
Customer Retention Rate (CRR)
Your customer retention rate (CRR) is the key metric in determining how loyal and happy your users are.
It shows the percentage of customers that remained using your product over a given period of time. Usually it is calculated on either a weekly, monthly, or yearly basis.
CRR is calculated by subtracting the number of acquired customers during a period from the number of customer at the end of a period. That result is then divided by the number of customers at the start of a period.
CRR = (CustomersEnd – CustomersAcquired) ÷ CustomersStart
For instance, you start the month with 500 customers. You go on to lose 30, but gain 50. That leaves you with 520 customers at the end of the month.
This would yield a Monthly CRR of (520 – 50) ÷ 500 = 0.94 = 94 percent.
Whether this is good or bad is dependent upon your industry rates. Generally speaking, B2B businesses tend to have higher CRR as switching from one product to another is often tied to underlying processes and various management decisions.
Your best bet is to a) compare yourself to industry standards and b) try and improve CRR from the previous period of consideration.
Customer Churn Rate (CCR)
Next to knowing how loyal your customers are, it is important to assess at which rate they leave your business. Your customer churn rate (CRR) tells you just that.
CCR is calculated by subtracting the number of customers at the end of a period from the amount of customers at the beginning. This result is then divided by the number of customers at the beginning of a period.
CCR = (CustomersStart – CustomersEnd) ÷ CustomersStart
Again, if you had 500 customers at the start of the month and 480 at the end, it would yield a Monthly CCR of = (500 – 480) ÷ 500 = 0.04 = 4 percent. This would mean that 4 percent of your customers left your business over the course of a month.
Customer churn can be caused by a multitude of factors, including:
- Better products from competitors
- Costly product
- Lack of features
- A bad user experience
- Poor customer service
Luckily, there is a multitude of options to decrease and minimize your churn. They range from making your product easier to use to a greater level of personalization.
Recommended Read: Five Factors That Influence Customer Retention
Above all, you need to start talking to your customers on a frequent basis to find out what they appreciate and dislike about your product. Whether that’s through the telephone, customers surveys, or usage data solely depends on the type of your offering.
Repeat Purchase Rate (RPR)
To put it in simple terms, the repeat purchase rate (RPR) gives you the proportion of customers that have transacted with you more than once.
It is calculated by dividing your total number of customers by the amount of customers who bought from you more than once.
RPR = Customer > 1 Transaction ÷ Total Number Of Customers
So if you have 10,000 customers in total of which 1,500 bought from you more than once, then your RPR is equal to 1,500 ÷ 10,000 = 0.15 = 15 percent.
RPR can range anywhere from 0 to 100 percent. Consequently, your goal is to maximize it as much as possible.
Tactics to increase RPR can range from emailing customers about new offers to sending push notifications on the user’s phone. Again, possible strategies are dependent on the type of product offered and hence may vary greatly.
Participation & Redemption Rate
Participation and redemption rates are measured when a company offers loyalty programs to its users.
Loyalty programs are a type of marketing strategy designed to encourage continuous shopping. Customers are then rewarded when completing a transaction. Oftentimes, loyalty programs are designed in conjunction with other merchants, which offer their goods and service as shopping reward. Examples include mile collection programs from taking airline flights or cashback programs, which reward credit card usage at a chosen merchant.
Hence, participation and redemption rates measure how engaged customers are with your loyalty programs. Participation rates refer to the proportion of customers that actively used your loyalty program. Active members can be classified based on a multitude of criteria, but most companies base it on whether or not the customer earned a reward or signed up to the loyalty program.
It is calculated by dividing the total number of customers you have by the ones who actively used the program.
Participation Rate = Loyalty Members ÷ Total Number Of Customers
So if you have 10,000 customers and 2,000 of them signed up for your program, then your participation rate is equal to 2,000 ÷ 10,000 = 0.2 = 20 percent.
Conversely, redemption rates refer to the proportion of customers that have used the points earned in your loyalty program. It is calculated by dividing the total amount of coupons or points issued by the points or coupons used.
Redemption Rate = Total Points Used ÷ Total Points Issued
To encourage users signing up and spending points, various tactics exist:
- Make customers aware that the program exists, i.e. by advertising on your platform or sending notifications
- Include attractive merchant partners and rewards
- Allow customers to earn rewards at various merchants and parts of their life (i.e. from supermarket to online purchases)
- Offer different ways of earning points (not just from purchases), for instance by referring others or sharing on social media
- Providing frequent updates on how much points your customers have and how far they are away from redeeming them on their desired reward
Net Promoter Score (NPS)
The Net Promoter Score (NPS) indicates how likely a customer is to recommend your product or service to someone else. After all, the more a customer is satisfied with your product/service, the higher the probability of him/her being loyal.
To determine NPS, ask your customers how likely they are to recommend your product on a scale from 0 to 10. In this case, 0 is equal to no recommendation while 10 means they’d absolutely endorse your product.
NPS scores are then separated into three distinctive categories:
- Detractors (customers giving a score of 0 – 6)
- Passives (customers giving a score of 7 or 8)
- Promoters (customers giving a score of 9 or 10)
To calculate NPS, subtract the percentage of detractors from the percentage of promoters.
NPS = % Promoters – % Detractors
The calculation should result in a score between -100 and +100. For instance, if you have 80 percent promoters, 10 percent passives and detractors respectively, then your NPS would be equal to 80% – 10% = 70.
Measuring NPS consistently can give you an indication of how happy your customers are over a given period of time.
Furthermore, it is essential to provide survey respondents with an option to elaborate on their score (i.e. through a commentary box in the survey). This allows you to assess the reason for why your customers are potentially unhappy and combat it as soon as issues arise.
Pitfalls To Avoid When Measuring Retention
Focusing on a few key metrics. It can be very tempting to go ahead and measure any type of movement and interaction you observe. What the great data driven companies do is to first understand the key essence of their feature or product and build a few key metrics around it. Being selective with your KPIs allows you to be more aligned internally within your organization (as everybody is aware of the key metrics) and externally with your customers (by measuring exactly what is needed).
Choosing a wrong time period. The time frame you choose for measuring retention and loyalty is solely dependent upon the type of your business. If you’re selling vacations, an annual time frame is more feasible to look at whereas a social media app would assess daily usage. Choosing the wrong time frame might thus be very misleading. If you’d look at retention on flight bookings on a weekly basis, the result would look financially unhealthy. Annual retention, on the other hand, would possibly look a lot healthier.
Measuring wrong events. Whether it’s logins, repeat purchases, or posting a comment – you have to clearly define what counts as a retained user. For instance, Amazon would define a retained user not on logins or website visits, but on repeat purchases. On the other hand, Netflix would probably look at video consumption.