Customer Retention Definition: Everything You Wanted to Know But Were Too Embarrassed to Ask

Posted by Alexandra Gehringer on Apr 21, 2017 3:21:26 PM

customer retention definition

It seems everyone has an opinion about what makes an effective retention strategy (we certainly do), and you’ll trip over people weighing in on how to improve a retention rate. While these are certainly compelling and worth-while questions, they’re not going to mean much to you if you’re not sure what customer retention is to begin with. 

For anyone in need of some Customer Retention 101, consider this your official primer. 

Let’s start at the beginning: what’s a good, simple customer retention definition? I like Shopify’s straight-forward definition when they say “it is both a measure of customer loyalty and the capacity of the business to keep customers satisfied by good service and quality of the product sold.” 

Loyalty. Satisfaction. Service. Quality. I’d argue that those are the four most important words to keep in mind when discussing customer retention. Make decisions with those factors in mind, and you’ll do alright. 

But why is customer retention important? 

Another fair question, and one that people often assume everyone knows the answer to. We can boil it down to three very important aspects of developing a thriving business, all of which are made or broken by retention: profits, growth and word-of-mouth marketing. 

Profits: It’s cheaper to retain a customer than it is to acquire a new one. (Tattoo that sentence on the inside of your arm and look at it often.) Specifically, acquisition costs 7X more than retention

What’s more, repeat customers are more valuable to your business because they spend 60% more money per transaction, and their transactions occur 90% more frequent. Repeat shoppers also indicate that they’re 5X more likely to become exclusively loyal customers. And for every 1% increase in customer loyalty, overall revenue increases by approximately 10%

Simply put, you can’t have customer loyalty – and all the impressive profits that go with it - without first mastering customer retention. 

Net Growth Rate: Guess what else you can’t enjoy if your retention rate is low and your churn is high? Growth. And growth is a pretty crucial thing if you plan on still being in business this time next year.

Some people make the mistake of focusing on a high acquisition rate. They’ll think that because they have so many new customers, their business is healthy and growing and they’re doing everything right. And they might be! But there’s no way of knowing for sure unless you also heavily factor in the retention rate of those new customers – how many of your first-time customers are actually coming back?

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Inc.com breaks it all down pretty clearly in this simple example:

“A company that increases its number of new customers by 20 percent in a year but retains only 85 percent of its existing customers will have a net growth rate of only 5 percent (20 percent increase less 15 percent decrease). But the company could triple that rate by retaining 95 percent of its clients.”

By weighing acquisition against retention, your Net Growth Rate will reveal how successful you really are with your customers, and what the road ahead looks like for your company. And, you guessed it, customer retention is the key to healthy growth.

Word-of-mouth marketing: Marketing costs a lot of money, but that’s not news to anyone who’s managed (or requested) a marketing budget before. What may be news, however, is the fact that the most valuable type of marketing can’t be bought. At least not directly.

Word-of-mouth marketing, that is, the marketing that happens when loyal customers endorse your brand to their connections, is an incredibly powerful purchase motivator. After all, it’s not what you say about your company, it’s what your customers say. And people are 4X more likely to buy from a brand when they’ve been referred by a friend who has spoken positively about their experience.

Additionally, 81% of consumers say their purchase decisions are influenced by feedback from friends or family, and 30% say they’re more likely to respond to brand offers when they’ve come from a personal acquaintance.

So when you look at the value of customer retention, also account for the new customers you’ll organically acquire when your existing loyal customers share positive experiences on social media, in online reviews and through conversational interactions.

What are the basic requirements for a good retention rate?

We’ve set you up with a customer retention definition, and we explained the basics of why retention is so important. But what do you do to ensure you have a strong retention rate? And where should you focus your efforts if you’re looking to increase customer retention?

Offer a quality product: It should go without saying, but it’s hard to satisfy customers when you’re selling complete junk. Minimize problems from the outset by offering a product or service that isn’t going to make some’s life more difficult.

Be in the business of offering solutions, not creating problems.

Provide clear and relevant communication: Communication should be simple to engage with. To that end, keep it clear and to the point so that the most relevant information can be quickly identified, learned and retained.

Personalization can help with a bit of the heavy lifting here, in that it uses customer data (like name, location, purchase/search history, etc) to deliver the right messaging to the right person as and when needed. 78% of consumers say they trust brands more after receiving personalized content; 75% are more likely to buy from a brand that recognizes them by name, makes recommendations based on purchase history and is aware of their past purchases; and 77% of consumers have chosen, recommended or paid more for personalized brand services and experiences.

We take a deeper look at the best, most effective ways to communicate with customers in another blog post here.

 

Have efficient and solution-driven customer service: Sh*t happens. When it does, make sure your team is equipped to handle matters quickly and can present a fix that leaves the customer happy. Empires can be built on good customer service, because people prefer to deal with brands they know they can rely on to provide a seamless, solution-oriented and efficient sales process.

Are you interested in optimizing your customer retention strategy? Find tips for driving customer engagement (especially within the much-coveted millennial market), reducing churn at critical lifecycle junctures and more in our eBook, "The Insider's Guide to Customer Retention", available for download here!

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Have more questions?

Here at Idomoo, we believe in creating marketing communication that resonates with audiences. Whether you’re working on building a community of loyal customers or maintaining a family of tried-and-true brand enthusiasts, we’d love to talk to you more about how you can deliver the most engaging content possible. Reach out here.

Alexandra Gehringer

Alex is Senior Creative Marketing Writer at Idomoo. Her goal is to give brands and marketers the information they need to achieve peak customer engagement. Through compelling, highly-relevant marketing initiatives built around Idomoo's Personalized Video Technology, she believes every brand can create an emotional, one-to-one connection with their customers.

Topics: customer retention

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