What is Customer Retention?

Customer Retention is the ability of an organization to retain its existing customers. A high retention rate shows how valuable your product or service is to your customers.

Why is Customer Retention important?

For a subscription business, customer retention is a crucial factor. Let's face it; your business is built on recurring revenue and repeat customers. So, if you have your customer base canceling their subscriptions, pretty soon, your business will be on shaky ground. No, pouring in more money into customer acquisition is not a healthy sign for a subscription business––you'll be spending five times more! Which is sure to take a toll on your bottom line. Plus, an investor will look more kindly on higher customer retention rate versus a higher spend on customer acquisition.

Benefits of Customer Retention

  • Additional Revenue: The probability of converting a prospect into a customer is only about 5-20%, while the likelihood of getting additional revenue through an existing customer (expansion MRR) is about 60-70%.

  • Brand Ambassadors: Customer retention not only increases the customers’ lifetime value, but loyal customers often turn into your brand ambassadors who recommend your product or services to their friends, colleagues, and other prospective customers.

  • Customer Upgrades: Around 50% of your loyal customers are likely to snap your new product up when it releases

How to calculate Customer Retention rate?

Each SaaS business needs to keep a close watch on this metric, as it is an excellent proxy for customer satisfaction. If there's a constant dip in your customer retention rates, you can be sure there's an underlying problem in the product or service.

Customer Retention rate formula

Customer Retention rate = [(number of customers at the end of the period - number of new customers during this period) / Total customers at the start of the period] x 100

Let's take an example. Say you had 100 customers at the start of 2020. And through 2020, you added 20 more customers, but you also lost 10. You have the original 100 customers, plus 10 (20-10), equalling 110.

Your customer retention rate for 2020 is, (110-20)/100 = 0.9 or 90%

Customer Retention strategies that make loyal customers

Here are some retention tactics you could use to increase customer lifetime value and boost customer loyalty.

  • Better onboarding experience: You have this incredible new product that provides value to your customers. But an onboarding process that doesn't point out these values will result in the customer leaving the platform. Hubspot 'Aha moment' is when new customers use five key features within the first 30 days of onboarding. Prioritize the entire customer journey.

  • Metrics can help you retain customers: We're living in the age of data and automation. These numbers can tell you a story before it's too late for your business to react. Investing in a subscription analytics platform will help you keep a close watch on your key metrics. Having accurate and real time tracking for your key metrics is like having radar that'll keep you course-corrected and help avoid icebergs. With real time metrics and access to 100% accurate data, ScreenCloud was able to reduce their customer churn with the help of RevenueStory.

  • Talk to your customers: Customer experience is a no-brainer. The only way you'll have loyal customers is to offer customer support and accommodate customer feedback. It would be best if you weren't waiting for them to reach you; keep engaging with your customers. There will always be problems to solve––be proactive and set up outreach and follow up processes. This will also help spread word-of-mouth about your service.

    Also, here's a suggested reading on six ways your billing system can improve customer retention.