Did you know that just 18% of businesses focus on customer retention? A figure that seems absurd when the probability of selling to an existing customer is around 70% compared to just 5% – 20% for a new one.
So, stop obsessing over what you don’t have and start thinking about how you can optimise what you do. It will not only reduce costs and increase profits, but you are far more likely to see success, too. With that in mind, let’s take a look at some of the key metrics that you should be monitoring to help you to understand and improve your customer retention rates.
Customer churn rate
Arguably one of the most important customer retention metrics, your customer churn rate measures the rate at which your customers cease doing business with you. Generally, you’ll want to keep this number below 5% (7% at a push) – any higher and something isn’t right.
Put simply, the higher your customer churn rate, the lower your retention rate. So in other words, if this number is high, you need to take a look at whether your offerings are meeting customer expectations – the likelihood is, they won’t be.
To calculate your churn rate, you’ll need to subtract the number of customers you have remaining at the end of the year from the number of customers you had at the start of the year. Once you have this figure, you’ll then want to divide it by the number of customers you had at the start of the year: this will give you your annual churn rate. It’s also worth noting, if you are operating a larger company, you may want to consider tracking this on a monthly basis instead.
It’s also important to note that any new customers onboarded during the year (or month, depending on the period chosen) should not be included within your churn rate equation.
Repeat purchase ratio (RPR)
As the name suggests, your repeat purchase ratio (RPR) is the percentage of your existing customers that return to do business with your company. This is a great indicator of customer loyalty and is useful for identifying the most profitable demographic for your business. With the help of this data, you can make informed decisions about where best to focus your marketing and sales efforts.
To calculate your repeat purchase ratio, simply divide your number of returning customers by your total number of customers. And you can calculate this metric within any given time frame – it will all depend on your business: for example, if you offer a monthly subscription service, you’ll likely want to review your RPR on a monthly basis. So, say you began the month with 2,000 subscribers and at the end of the month 1,800 of those returned, your repeat purchase ratio would be 90%.
Existing customer revenue growth rate
If your existing customer revenue growth rate is increasing, you’re doing a good job. This figure essentially shows how well your sales and marketing teams are motivating your customers to increase their spending and provides reassurance that your clients trust and believe in your offering.
And with a recent study finding that loyal customers are up to seven times more likely to try a new offering and four times more likely to refer, knowing that your customers value what you do is critical to success.
Net promoter score (NPS)
Your net promoter score is a good indicator of customer satisfaction and loyalty. This metric will essentially tell you whether or not your customers are happy and how likely they are to recommend your business.
When compared with your customer churn rate and existing revenue growth rate, your NPS can help you to predict potential growth through customer retention and referrals. It can also allow you to identify brand evangelists and incentivise them to drive referrals and contribute social proof content, such as case studies and testimonials.
Calculating your NPS is pretty straightforward; you should ask questions like: “How likely are you to recommend us to a friend or colleague?”, with customers asked to give their response as a number between 0 – 10. Any score given below 6 should be considered a detractor, between 9 – 10 a promoter and 7 – 8 a passive. To get your final figure, minus your percentage of detractors from your percentage of promoters. It really is as simple as that.
And whilst the focus is on promoters and detractors, you should never overlook your passives. These are the people that can easily be stolen away by your competitors, so you should focus on offering that little extra to push them over the line – it can have a big impact on your growth. Increasing customer retention by just 5% can increase your profits anywhere from 25% to 95%. A worthy investment if you ask us!
Customer lifetime value (CLV)
Your customer lifetime value measures the revenue generated by each customer. Knowing your CLV will enable you to measure the financial impact of specific campaigns and initiatives, optimise your spending and increase profitability.
Ideally, your CLV should be increasing or remain steady; a decrease will signal either you are securing low-value customers or losing customers at a quicker rate than you have previously. To calculate this metric, you should start by dividing your gross annual sales by your number of customers in that year. Then, you’ll need to work out the average number of years a customer stays with your business. From here, you can then multiply the average revenue per customer by the average lifespan of each customer, and this will give you your CLV.
With acquiring new customers costing up to five times more than retaining existing ones, it’s time to focus your efforts on looking after what you’ve got. These five metrics can equip you with the information needed to understand and improve your retention rates and experience growth that some can only dream of.
