Why is customer retention important for ROI, customer loyalty & growth.

Many businesses chase customer acquisition, the shiny asset. However, the key to sustainable business growth isn't flashy ad campaigns or viral social media stunts. It's something far more fundamental, yet often overlooked – building loyal customers.

Customer loyalty is the ultimate growth engine, and neglecting it is like pouring water into a basket. If you’re wondering why a customer retention strategy is important, you’ve come to the right place. We break down customer retention strategies and their effect on growth and loyalty.

What is customer retention management?

This focuses on a company’s ability to keep its existing customers while acquiring new ones. It's focused on building loyalty among current customers and encouraging them to stick with your business for a long period of time. It’s a close look at the entire customer journey, from initial purchase to ongoing use of your product or service. You increase customer satisfaction and make them less likely to leave, by providing a positive experience at every touchpoint.

An acquisition's Return on Investment (ROI) can simply be calculated by comparing how much you spent on marketing versus how many customers made a purchase. Effective retention relies on customer data to understand their needs and preferences. This data can be used to personalize their experience, target them with relevant marketing messages, and identify potential problems before they arise.

While reducing customer churn is a major goal, retention management is also about growing the value of your customers. Loyal customers spend more and become brand advocates, referring your business to others. Businesses can build stronger relationships with their existing customers, boost customer lifetime value, and achieve sustainable growth, by investing in customer retention management.

Why is customer retention so important to growth and profitability?

Customer retention is crucial for growth and profitability for two key reasons – marketing costs and customer value.

It's simply cheaper to hold onto existing customers than acquire new ones. Studies suggest it can cost 5-7 times more to attract a new customer than to retain a current one.  Think about all the marketing and sales team efforts that go into finding new customers. Retaining existing customers means you don't have to constantly repeat those efforts.

Loyal customers are more valuable over time. They tend to make repeat purchases, often spending more with each transaction.  They're also more likely to try new products or services you offer, further increasing their value.  A happy customer might become a brand advocate, recommending your business to friends and family, which brings in new customers at little to no cost.

Let’s use a clothing store as an example. A new customer might buy a single item for $50. But a loyal customer might buy several outfits a year, spending hundreds of dollars over time.  They're also more likely to tell their friends about the store, bringing in even more customers.

Businesses can build a stable and predictable revenue stream, fueled by repeat customers, by focusing on customer retention. This allows them to invest in growth initiatives without worrying about constantly replacing lost customers.  It's a win-win for both the business and the customer.

Who handles customer retention processes?

Customer retention refers to a collaborative effort across an organisation, it isn't the sole responsibility of one team. However, there are a few key players:

• Customer success team: This team is often at the forefront of customer retention. They proactively work with customers to ensure they're getting the most value out of your product or service. This can involve onboarding new customers, providing ongoing support, and identifying potential churn risks.
• Customer retention specialists:  These specialists are dedicated to preventing customer churn. They use data analysis and customer feedback to identify at-risk customers and develop strategies to win them back. They might also manage loyalty programs or other initiatives designed to keep customers engaged.
• Other departments:  Marketing, sales, and even product development all play a role in customer retention. Marketing should tailor messaging to existing customers, sales should ensure a smooth renewal process, and product development should focus on features that meet customer needs.

Successful customer retention requires a company-wide commitment to providing a positive customer experience at every touchpoint.

Customer retention rate in the SaaS industry.

The SaaS industry generally enjoys high customer retention rates, with an average of around 90% being a good benchmark to aim for. This makes sense because the subscription-based model relies on keeping customers for long-term recurring revenue.

However, it can vary depending on factors like the size and maturity of the company. Some companies achieve a customer retention rate as high as 97%, but this is not typical. While 90% is a good target, some SaaS sectors might have slightly lower averages. It's important to compare yourself to similar companies in your space.

The median rate of net revenue retention (NRR) across all SaaS firms stood at 102%. It's important to note that NRR includes successful cross-selling and upselling, which can make churn rates unclear, thereby allowing the benchmark to surpass 100%.

This benchmark varied depending on the Annual Contract Value (ACV). For instance, companies with lower ACVs, defined as $12,000 or less, had a median NRR of 100%. Also, companies with higher ACVs, exceeding $250,000, demonstrated a median NRR of 110%.

Customer retention management: How to improve retention rates.

Here are 15 ways to improve customer retention rates;

Implement effective onboarding and orientation.

An effective customer onboarding and orientation program is crucial for setting the stage for long-term success and reducing churn. 

Start by outlining what you want to achieve with onboarding. Is it familiarizing users with core features, increasing product adoption, or driving early activation? Tailor the program to specific customer segments. New users will need different information than experienced users who might be looking for advanced features.

Pre-boarding is where you anticipate customer needs and provide resources even before they officially sign up. This could be a welcome email with helpful resources or access to a knowledge base. Onboarding is where you guide users through the initial product setup and core functionalities. Post-boarding is where you continue to engage users after the initial setup with targeted content, tutorials, and success stories.

Offer exceptional customer service.

Equip your team with a thorough understanding of your product or service. Be prepared to answer customer questions, troubleshoot problems, and offer informed recommendations. This includes staying updated on the latest features, pricing plans, and company policies.

Maintain a friendly, helpful, and enthusiastic attitude during interactions. A positive approach can put customers at ease and build a trusting relationship. Show empathy and acknowledge customer frustrations. Let them know you understand their situation and are there to help. Be willing to put in the extra effort to resolve customer issues in a timely manner. Sometimes, going beyond the bare minimum can truly impress a customer.

Personalize the customer experience.

Personalization is about making your customers feel like they're more than just a number. Gather information about your customers from various touchpoints, including website behaviour, purchase history, and support interactions. Use this data to segment your customers based on demographics, interests, and needs.

Don't blast everyone with generic messages. Use customer data to personalize your marketing emails, website content, and product recommendations. Personalization isn't just about marketing messages, extend it to customer service interactions.

A small touch can go a long way. Send personalized birthday greetings or anniversary discounts to show you care. Remember to always respect privacy boundaries – be transparent about how you collect and use customer data. Gathering feedback from customers enables an organization to further personalize experiences. 

Provide regular communication.

You can establish a regular communication strategy that keeps your customers informed, engaged, and loyal to your brand.

Start by understanding your audience and their preferred communication channels. Some customers might prefer email newsletters, while others might be more active on social media. Offer a variety of channels for customers to choose from, and allow them to manage their communication preferences.

Don't bombard customers with irrelevant emails or messages. Focus on providing high-quality, valuable content that resonates with their interests. This could include industry trends, product updates, educational resources, or even customer success stories. Also, experiment with different content formats like videos, infographics, or interactive content to keep your audience engaged.

Automation tools can help you streamline communication tasks and personalize content at scale. For example, you can use automation to send birthday greetings or abandoned cart reminders. Always track the performance of your communication efforts. Monitor metrics like open rates, click-through rates, and engagement on social media. This data helps you understand what resonates with your audience and adapt your strategy accordingly.

Gather customer feedback.

Customer feedback is a goldmine for businesses. It helps you understand what your customers like and dislike, identify areas for improvement, and create a product or service that resonates better with your target audience. Here are some methods to gather valuable customer feedback:

• Surveys: You can create online surveys using various tools and distribute them via email, social media, or even embed them within your product. Keep surveys concise and easy to complete, with a mix of question formats like multiple choice, open-ended, and rating scales. With feedback surveys, you can get direct inputs on what customers like about your brand, and what customers expect from your brand.
• Emails: Personalized emails can be a great way to gather feedback on specific interactions or experiences.  For instance, you could send a follow-up email after a customer support interaction or a product purchase, asking for their feedback.
• Interviews: In-depth interviews allow you to gather rich and detailed feedback from a smaller group of customers.  You can conduct interviews in person, over the phone, or even using video conferencing tools.  Prepare insightful questions beforehand and actively listen to customer responses.
• Social media monitoring: Pay attention to what your customers say about your brand on social media platforms. Respond to comments and messages, and use social listening tools to track brand mentions and sentiment analysis.
• Customer support interactions: Analyze customer support interactions to identify common pain points and areas for improvement. Look for trends in the issues customers are facing and use that information to improve your product or service.
• Website analytics: Website analytics tools can provide valuable insights into customer behaviour. Track metrics like click-through rates, time spent on certain pages, and user journeys to understand how customers interact with your website and identify any potential frustrations.
• Product reviews: Encourage customers to leave reviews on your website, app store listings, or other review platforms. Analyze both positive and negative reviews to understand customer sentiment and identify areas for improvement.

Regularly solicit feedback and use it to constantly improve your offerings and build stronger customer relationships.

Develop a loyalty program.

A well-designed customer loyalty program can be a powerful tool to incentivize repeat business, boost customer lifetime value, and a competitive advantage. 

What do you want to achieve with your program? Increase customer retention, drive repeat purchases, or encourage trial of new products or services? There are several loyalty program structures to consider:

• Points-based programs: Customers earn points for purchases and redeem them for rewards like discounts, free products, or exclusive experiences.
• Tiered programs: Customers progress through tiers based on purchase history or engagement, unlocking increasing benefits at each level.
• Value-based programs: Rewards are based on customer lifetime value, offering personalized benefits to high-value customers.
• Cashback programs: Customers earn a percentage of their purchases back as redeemable cash.

The key is to offer rewards that are valuable and relevant to your target audience. Consider a mix of rewards, including discounts, exclusive product access, early bird purchase opportunities, personalized experiences, or charitable donations on the customer's behalf.

Use customer data to personalize the program experience.  For example, offer targeted rewards based on purchase history or recommend products customers might be interested in. Promote your loyalty program across all customer touchpoints, including your website, email marketing, social media, and in-store signage.

Key metrics that can be tracked are program participation, customer engagement, redemption rates, and most importantly, the impact on customer retention and revenue growth.

Offer flexible subscription plans.

Give your customers the flexibility to choose a subscription plan that meets their needs and budget.  This can help to reduce churn among customers who might outgrow your starter plan or find a more valuable plan. Here are some ways to offer flexible subscription plans:

• Tiered subscription plans: This is a popular approach where you offer multiple subscription levels with varying features and pricing. For example, a basic plan might offer core features, a standard plan might include additional features, and a premium plan might offer all features with premium support.
• Feature-based add-ons: Allow customers to build their subscriptions by selecting the features they need and paying accordingly. This gives them more control over their spending and ensures they only pay for what they use.
• Usage-based billing: This model charges customers based on their actual usage of the product or service. It can be ideal for products with variable usage patterns, like cloud storage or software-as-a-service (SaaS) with pay-per-user options.
• Freemium model: Offer a free tier with limited features to attract new customers. Paid tiers with additional features and functionality incentivize users to upgrade for a richer customer experience.
• Hybrid subscription plans: Combine elements from different models. For example, you could offer a base subscription with core features, and then allow users to add on features or higher usage limits for an additional fee.
• Trial periods and money-back guarantees: Offer free trials or money-back guarantees to allow customers to try your product or service before committing to a paid plan. This can help reduce signup friction and build trust.

Make it easy for customers to upgrade or downgrade their subscription plans as their needs evolve. A smooth process reduces friction and encourages customers to adjust their plans as needed. The key is to understand your customers and provide options that cater to their diverse needs and preferences.

Build a community.

Community building is a powerful tool to boost customer engagement, and brand loyalty, and improve customer retention. Clearly outline what you want your community to achieve. Is it a space for peer-to-peer support, product feedback, industry discussions, or a combination? Knowing the purpose will guide your platform choice, content strategy, and community management approach.

Encourage your community members to create and share content. This can include blog posts, tutorials, success stories, or product reviews. Offer exclusive content, early access to new features, or special discounts to incentivize customer participation in the community. Facilitate discussions and encourage members to connect. Host live Q&A sessions, AMAs (Ask Me Anything) with industry experts, or online events to spark interaction.

Acknowledge and appreciate members who actively participate in discussions, help others, or create valuable content. This can be done through badges, shoutouts, or even exclusive rewards programs within the community.

Integrate your customer support system with the community platform. Allow users to submit support tickets or get help from community experts directly. It creates a one-stop shop for customer needs and eases responsiveness.

Building a strong customer community takes time and effort, but the rewards are significant. Gradually, you can create a powerful tool for driving customer retention and building long-term brand loyalty with satisfied customers.‍

Invest in product development.

Customer retention hinges on understanding what keeps customers happy and what frustrates them. Conduct user research through surveys, interviews, and analyzing customer support interactions to identify common pain points and unmet needs. Don't chase the latest trends; focus on improvements that directly address customer needs and frustrations. This could involve improving product usability, fixing bugs, or adding features that enhance core functionalities.

Leverage product analytics to track user behaviour and identify underutilised features that lead to churn. Use A/B testing to experiment with different design elements and functionalities to see what resonates best with your customer base.

Retention isn't just about fixing problems; it's about exceeding expectations. Improve usability and user experience (UX) and focus on product reliability and performance. Ensure your product functions flawlessly and consistently. Bugs and glitches can quickly frustrate customers and lead to churn.

Empower your customer service team.

Providing an exceptional customer service team is a key asset in driving customer retention. Equip your team with a thorough understanding of your product or service, including its functionalities, troubleshooting steps, and best practices. When you incorporate a customer-centric approach into your company culture, you make it clear that customer satisfaction is the top priority and empower your team to go the extra mile to resolve issues and exceed customer expectations.

Also, move beyond just measuring the number of tickets resolved. Include customer satisfaction metrics like Net Promoter Score (NPS) and Customer Satisfaction Scores (CSAT) to evaluate the quality of interactions and their impact to help retain customers.

Recognize and reward your excellent customer service team members for their achievements. Offer opportunities for professional development through training programs, conferences, or mentorship programs. Encourage your team to provide feedback on product issues, customer pain points, and potential service improvements. You can create a system where their insights are heard and valued. This valuable customer-facing perspective can inform product development and retention strategies.

A well-equipped, motivated, and empowered team can play a significant role in building stronger customer relationships, reducing churn, and driving long-term business success.

Use a customer relationship management system.

A Customer Relationship Management (CRM) system is a powerful tool to improve customer retention. A CRM acts as a central repository for all your customer data, including purchase history, communication records, support interactions, and preferences. This unified view allows you to understand your customers better, personalize interactions, and anticipate their needs. Providing excellent customer service can be time-consuming and costly, which is why every business needs a CRM system. 

With a CRM, you can analyze customer purchase history and identify potential upsell or cross-sell opportunities. CRM systems help automate repetitive tasks like sending birthday greetings, abandoned cart reminders, or follow-up emails after purchases. This frees up your team's time to focus on more complex customer interactions and personalized outreach.

It’s best if your CRM integrates with other business tools like marketing automation platforms, email marketing software, or analytics tools. This creates a seamless flow of data and allows for a more unified customer experience across all touchpoints.

Proactive outreach.

A proactive approach is a game-changer in customer retention.  It helps to identify customer needs and potential issues. A smooth onboarding experience sets the stage for long-term satisfaction. Provide clear instructions, tutorials, and educational resources to help customers get the most out of your product or service.

Not all customers are the same. Segment your base demographics, behaviour, and purchase history – proactive outreach to address the specific needs and challenges of each segment.

By addressing customer issues before they escalate, you can prevent unnecessary support tickets and calls. Proactive customer care helps to retain customers and build trust and loyalty, leading to a positive brand image.

Why it is important to improve your customer retention rate?

Customer retention is critical because the cost of acquiring new customers is much higher than retaining existing customers. With these retention strategies we’ve discussed, you can save money, increase revenue, and build loyal customers. Here's a breakdown of some key benefits and why improving customer retention rate is important for business success:

• Cost-effectiveness: Acquiring new customers is much more expensive than retaining existing ones. Estimates suggest it can cost 5-7 times more to acquire a new customer than to retain an existing one. With a focus on retention, you save money on marketing and sales team efforts.
• Increased customer lifetime value (CLTV): Loyal customers tend to spend more over a long period of time. They're familiar with your brand, trust your products or services, and are more likely to make repeat purchases or upgrade to higher-tier plans.  Improving retention increases the overall value you get from each customer.
• Predictable revenue streams: A stable customer growth translates to more predictable revenue streams. While focusing on increasing customer retention, loyal customers make it easier to forecast future income and plan for growth.
• Reduced churn: Customer churn refers to the percentage of customers who stop doing business with you within a given period.  A high customer churn rate can significantly impact your revenue.  Focusing on retention helps prevent customer churn and ensures steady customer growth.
• Brand advocacy and referrals: Happy customers are more likely to recommend your brand to others.  Positive word-of-mouth marketing is powerful and cost-effective.  Retention efforts that cultivate customer satisfaction can lead to organic brand promotion through referrals. Customers acquired through word-of-mouth spend 200% more than the average customer and make 2x as many referrals themselves.
• Improved brand reputation: When customers have positive experiences, they're more likely to leave good reviews and share positive feedback online.  Make customers feel valued and important.  A strong reputation attracts new customers and builds trust within your target market.
• Boosted employee morale: Engaged and satisfied customers are easier to deal with for your customer service team.  Retention efforts that lead to happier customers can contribute to a more positive work environment for your employees.
• Valuable customer insights: Loyal customers are more likely to provide feedback and participate in surveys.  Retained customers help you gain access to valuable insights into their preferences and needs, which can inform product development and future marketing strategies.

Customer retention is now a necessity.  We've explored the reasons why: retaining existing customers is simply more cost-effective than acquiring new ones. Loyal customers translate to higher lifetime value, predictable revenue streams, and a reduced churn rate. But the benefits go beyond just the bottom line.  Happy customers become brand advocates, spreading positive word-of-mouth and boosting your reputation.  

Create a loyal customer base that keeps your business thriving. Your customers are your most valuable asset. Invest in them, prioritize their needs, and watch your ROI, customer loyalty, and business growth soar.