Customer retention rate: -- The customer retention rate refers to the number of customers lost over a period of time. It is normally calculated by the percentage of lost customers versus existing customers over a quarterly or annual period, without tallying new customer acquisitions.
While there are obvious benefits to keeping customers loyal and maintaining high customer retention rates, it can be extremely challenging for management to keep retention rates up. This guide will explore some of the best customer retention strategies, important topics and common challenges related to customer retention:
- Understanding customer retention
- Build a customer retention strategy
- Implementation of a customer retention program
- How to calculate retention rate
Understanding customer retention
Those getting started with a customer retention strategy might initially assume that retention rate is based on customer satisfaction. However, several studies have indicated that there is little correlation between customer satisfaction and retention or future purchases, according to customer experience expert Lior Arussy, founder of Strativity Group Inc. In one case, only 17% of satisfied customers of financial institutions claimed that they would not entertain a competing offer.
The real indication for customer retention is not customer satisfaction, but customers' actions, Arussy said. Repeat business, purchasing ancillary services, recommendations to others, willingness to pay premium price and frequency of purchasing are the indicators of customer retention. These factors can be easily quantified and measured by the dollar value of each action.
Sometimes organizations need to understand that the closest touch point to the customer can help improve customer retention. For example, Arussy received a question from a SearchCRM.com reader who manages a fleet of truck drivers, who was wondering about ways to improve the customer experience. Arussy advised this fleet manager to embrace the role of his drivers as the "delivery on the promise" professionals, meaning they are the action behind the promises and commitments made by the sales force. As Arussy said, "They are experience creators in every way that they conduct themselves: clothing, appearance, language, etc. They are the face of the company and they can help customer retention rates."
Arussy's advice to this reader was to put in place a retention strategy that supports the customer experience. The infrastructure should include training drivers (or any other employees that are interacting with customers) about their role and how they are being perceived by the customers. Arussy encouraged the reader to create incentives and motivation programs to encourage desired behavior as well as performance evaluations that measure how customers rank behavior.
A 2007 study on customer experience management by the Strativity Group surveyed 309 global executives and found a number of negative trends. One of the major issues? Only 54% of respondents said their company deserves their loyalty.
"Which is a very dangerous trend," Arussy said. "If your employees don't believe in the value of a product or owe you any type of loyalty, trying to win the battle for customers' hearts, wallets and relationships is impaired."
Customer retention expert Michael Lowenstein, vice president and senior consultant for customer loyalty management at Harris Interactive, agrees that employee loyalty and engagement has a direct relationship to customer marketplace behavior. He explored employee retention strategies, in an article called, Cowboys and Saloons. Chickens and Eggs. Customers or Employees. Which Came First? Here's an excerpt:
"Researchers—including James Oakley of Purdue University, Northwestern University's Forum for People Performance Measurement and Management and relationship experts Dwayne D. Gremler of Bowling Green State University and Kevin P. Gwinner of Kansas State University—have found that employee behavior and advocacy—regardless of the employee's level of satisfaction—have a direct and profound relationship to the behavior of customers, and also to corporate sales and profitability.
Employees are capable of directly contributing to both customer disappointment and customer delight. It is essential that companies have a research and analysis method that links staff performance engagement directly to customer behavior, so they can hire, train, recognize and reward employees for how they contribute to customer value."
Build a customer retention strategy
As Lowenstein points out, customer loyalty is all about driving perceived value, whether that is rational (functional, quality, cost, etc.), emotional (trust, service, communication, information, brand equity, etc.) or a combination of these two dimensions. His advice for building a customer retention strategy? First, identify what leverages top-end customer commitment and advocacy behavior, and then build customer experience around it. According to Lowenstein's research on customer retention, there is no standard schedule for how often to communicate with customers to build loyalty. In his research, customers reported an interest in receiving communication from suppliers as long as they could see personal value in each message. The excerpt below is from an article Lowenstein wrote called Balancing Messaging and Experience: The CRM 'Lasagna' Recipe for Creating Customer Advocacy:
"In CRM, like lasagna, it's layers of messaging and experience over an extended period; but it has to begin with messaging, i.e., how the brand promise is initially communicated and sustained, and grown, with each succeeding customer engagement and contact. Companies tend to believe that customers gain experience with their enterprises entirely through people, products and services. Largely true, as far as this thinking goes; but organizations often don't have enough awareness that what is said to customers, and how, where, and when it is said has an equal, if not greater, behavioral impact. Communication is about relevance and trust, two essential elements in the way customers see suppliers. Customers have grown increasingly skeptical of supplier messaging. When considering alternative suppliers or making final purchase decisions, it is now becoming well understood that the principal, previously neglected criteria are intangible, emotional, relationship benefits, with much of what is tangible seen as one-dimensional and expected. This absolutely requires that the meld between messaging and experience is as seamless as possible."
When it comes to getting started with building a customer loyalty strategy, CRM expert Jim Berkowitz advises businesses to use these six questions as a guide:
1. What are the expectations of our customers and what it will take to exceed them?
2. What differentiates our company in the eyes of our customers?
3. To what extent can we grow our business with our existing customers?
4. How do our interactions with our customers affect their satisfaction and buying behavior?
5. Do we have any customer segments that require different treatment?
6. How loyal is our customer base and how can we improve it?
Implementation of a customer retention program
A road map for implementing a customer loyalty program should include the following, according to Lowenstein:
- Appropriate research for identifying the benefits.
- Testing them for prospective customer interest and effectiveness.
- Following up with further research once implemented to make certain that the loyalty program's benefits are working.
CRM software can help support customer retention programs if the system captures all customer interactions in a database. According to Lowenstein, CRM software alone can't guarantee the creation of value -- customer centricity, and a single view of the customer across the enterprise, will do that.
To be successful with a customer loyalty program, rely on both tangible and intangible (service, convenience, information, etc.) components, experts say. In most programs, a high percentage of customers do not take advantage of loyalty rewards. Consulting firms can help by researching the effectiveness of each element of the loyalty or retention program, based on its correlation, or contribution, to desired loyalty behavior. For those that don't have access to this kind of quantitative evaluation, Lowenstein recommends debriefing the redeemers and non-redeemers of a loyalty program to find out why they are/are not redeeming and also to determine what else the company can do to build value.
When evaluating the benefits of a customer loyalty program, companies need to consider whether they will buy an off-the-shelf vendor program or develop a homegrown program. Lowenstein pointed to two resources for off-the-shelf loyalty programs:
- The Loyalty Guide: An encyclopedia of loyalty program information published by The Wise Marketer.
- Epsilon (formerly Frequency Marketing Inc.): Responsible for the loyalty programs for many large corporations.
How to calculate retention rate
According to ROI expert Tom Pisello, CEO and President of Alinean, the customer retention rate is calculated by determining the number of customers lost over a period of time compared to repeat customers over the same amount of time. Pisello said, "A customer is one who continues to make purchases, and a lost customer is one who has made purchases, but does not repeat these purchases for some time. The key is to analyze the repeats over a long enough horizon." The calculation is:
(Total number of customers minus the number of repeat customers) divided by total number of customers
In environments where users purchase a subscription, the calculation is easier, and can be represented as:
Number of subscribers who cancelled or did not renew during the period divided by the total number of subscribers for the period
As Pisello advised, "The difficult part in this equation is determining the right total number of subscribers to use: the ones at beginning of period, the ones at the end, a peak, or an average over the period."
Some companies can measure retention rate using their CRM system, since any of the vendors with solid sales modules should offer this capability. Customer service expert Lori Bocklund, founder and president of Strategic Contact, Inc., recommends that companies look for this functionality when evaluating CRM solutions, even though it is unlikely to be the differentiating factor.
"You can also consider performance optimization tools if you want to combine things like save rate with other key performance indicators for an overall scorecard," Bocklund said. Companies like Witness, Performix, AIM, and Merced offer these types of tools. To measure this, some companies combine data from the CRM system and data from other systems, such as your quality monitoring system, ACD or CTI solution handling contact routing and reporting.
There are no hard and fast rules on calculating customer defection and customer retention, according to Lowenstein. It can depend on the industry or the type of business, since some companies have long-term arrangements with customers.
B2B customer deflection models may be somewhat more challenging, Lowenstein said, because of the greater likelihood to have missing or incomplete 'firmographic' variables. However, several consulting and database management companies have succeeded in creating them.
More resources for developing customer retention strategies
Customer loyalty case studies and industry-specific strategies
This section of the Customer Loyalty Learning Guide provides a look at successful businesses that have implemented customer loyalty programs and examines innovative strategies and industry-specific challenges.
What is customer life cycle?
Customer life cycle is a term used to describe the progression of steps a customer goes through when considering, purchasing, using, and maintaining loyalty to a product or service. In this article, read the full definition for customer lifecycle and find out about a matrix developed by marketing analysts Jim Sterne and Matt Cutler that breaks the customer life cycle into five distinct steps.
Ask the Expert: Customer loyalty
Ask SearchCRM.com's customer loyalty expert Michael Lowenstein a personalized question on measuring, managing or understanding customer loyalty in your organization.
- Customer loyalty
- This quiz covers common customer loyalty terms, related technology and best practices for retaining customers. Find out how much you know -- and learn new things -- about building customer loyalty.
This was first published in May 2008