Customer retention is the business practice of encouraging customers to continue doing business with you – and preventing them from leaving or switching to competitors. To succeed at customer retention, businesses must keep their existing customers happy and motivate them to keep using the business’s service or product. According to Zendesk’s 2022 CX Trends Report, more than 70% of businesses see a direct link between customer service and business performance, which further emphasises how important it is to give customers a positive purchase experience.

Below, we’ll cover the information you need to build a customer retention plan that works for your business.

What’s in this article?

• Why is customer retention so important?
  
• Customer retention metrics
  
• How to craft a retention strategy for your business
  
• Customer retention tools and tactics
  
• Real-life examples of successful customer retention
  

Why is customer retention so important?

• Acquisition costs: Retaining existing customers is often less expensive than acquiring new ones, an undertaking which can involve marketing, advertising, and incentives. Research shows that acquiring a new customer is six to seven times more expensive than retaining an existing one. Strong customer retention means businesses can allocate fewer resources to acquiring new ones.

• Profitability: Long-term customers tend to spend more money over time, as they become more familiar and comfortable with a product or service.

• Advocacy: Satisfied repeat customers can become brand advocates, recommending your products or services to others and potentially serving as a potent marketing channel.

• Feedback: Established, long-term customers can provide valuable feedback that helps businesses refine their products, services, and overall customer experience.

• Financial forecasting: A solid base of repeat customers can provide a business with more predictable revenue streams, contributing to better forecasting, planning, and investing.

• Competitive advantage: High customer retention can differentiate a business from its competitors. In industries where new customer acquisition is particularly competitive and expensive, having a loyal customer base can be a major advantage and signal overall financial health.

• Customer lifetime value: Customers who stay with a business longer have an increased customer lifetime value (CLTV), contributing more to the company’s revenue.

• Cross-selling and upselling: Established customers are often more receptive to additional products or services. Their trust in the brand can lead to more – and more successful – cross-selling and upselling opportunities.

• Marketing costs: Businesses with a strong base of loyal customers can spend less on broad-spectrum marketing and instead focus on more targeted, cost-effective strategies to maintain and deepen customer relationships.

• Resilience: During economic downturns or market fluctuations, businesses with strong customer retention can maintain more stable revenue flows compared to those that are overly reliant on new customer acquisition.

Customer retention metrics

Customer retention metrics provide valuable insights into the effectiveness of a business’s retention strategy. Here’s a quick look at some of the basic metrics you can use to gain a more complete picture of your retention efforts.

• Understanding customer behaviour: Retention metrics shed light on how customers interact with your business over time, revealing patterns and trends in purchasing behaviour, loyalty, and engagement. This information can help businesses tailor their communications, offers, and services to meet the specific needs and preferences of their customer base.

• Evaluating business health: High customer retention rates often indicate a healthy business with a sustainable model. Meanwhile, high churn rates might signal underlying issues with the product, service, or customer experience.

• Guiding strategic decisions: Data from retention metrics can inform strategic decisions, helping businesses focus on areas that encourage customer loyalty, improve satisfaction, and increase the likelihood of repeat purchases.

• Maximising profitability: Retained customers typically cost less to serve and tend to spend more over time. Retention metrics help maximise the value derived from existing customers, contributing to higher overall profitability.

• Improving customer experience: By analysing retention and churn, businesses can identify opportunities to improve the customer experience, address pain points, and implement changes that boost customer satisfaction and loyalty.

• Benchmarking performance: These metrics allow businesses to benchmark their performance against industry standards or competitors, providing context to their retention efforts and flagging areas for improvement.

• Predicting revenue: Customer retention metrics are closely tied to revenue forecasting. Knowing the likelihood that customers will return – and how much they will spend – helps predict future revenue streams.

How to craft a retention strategy for your business

No matter what industry you’re in, a superior customer experience is fundamental to retention. Your ultimate goal is ensuring that every touchpoint – from sales to support – delivers value and builds lasting customer relationships. Building the right customer retention strategy for your business requires a deep understanding of your industry, customer base, unique value proposition, and specific goals and resources.

Here’s a step-by-step guide to help you craft the right strategy for your business.

Evaluate your business type and customer base

Before building a retention strategy, do a deep dive on industry-specific considerations and get to know your customer base.

• Evaluate your business type and industry: Examine your type of business as well as your industry’s unique challenges and opportunities. For instance, a subscription-based SaaS company might focus on reducing churn, while a retail business may emphasise repeat purchases and loyalty schemes.

• Gather in-depth knowledge about your customers: Analyse their behaviour, preferences, needs, pain points, and what they value in your product or service. Use data analytics, customer surveys, and support interactions to build a comprehensive customer profile.

• Segment your customers: Segment customers based on demographics, purchase history, product preferences, and behaviour. This will help personalise your retention efforts.

Analyse your current retention performance

Before you can improve customer retention, you need to understand your current performance and areas in need of improvement.

• Evaluate relevant metrics: Analyse your retention rates, churn rates, and other relevant metrics to identify areas for improvement and assess your current customer retention health.

• Examine leakage points: Identify where customers are dropping off in the customer journey, otherwise known as leakage points. Are they churning after a trial period? Are they unhappy with a specific product or service?

Identify business goals and resources

Before reviewing potential retention strategies, outline your business’s capabilities and specific areas of interest.

• Ensure you have the necessary resources: This includes budget, technology, and personnel – which you should use to implement and sustain various retention strategies.

• Choose strategies that achieve specific business goals: For example, if increasing customer lifetime value is an objective, focus on strategies that enhance customer satisfaction and encourage upselling or cross-selling.

Test out retention strategies

Retention strategies can address different aspects of customer interaction. Some potential areas of focus are outlined below:

• Onboarding: Create a smooth onboarding experience for customers with clear instructions, tutorials, and proactive customer support.

• Personalised outreach: Personalise communication and recommendations based on customer preferences and purchase history. You can do this through targeted emails, loyalty schemes, or exclusive offers.

• Loyalty schemes: Implement loyalty schemes with rewards for repeat purchases and referrals, or exclusive benefits for high-value customers.

• Customer service: Provide prompt, helpful, and friendly customer support across all channels. Empower your team to go the extra mile to delight customers.

• Proactive communication: Regularly communicate with customers about new products, features, or special offers. Share valuable content and resources to keep them engaged.

• Community: Create a sense of community around your brand with online forums or user groups to encourage customer interaction and build relationships.

Track and measure results

As you implement new retention strategies, monitor the impact by tracking changes in CRR, churn rate, CLTV, and other relevant metrics.

• Gather customer feedback: You can do this through surveys, social media interactions, and support tickets.

• Use A/B testing: Implement this tracking method to compare different tactics and identify the most effective ones for your audience.

• Be prepared to adapt your strategy: Maintain flexibility in your strategy based on the data and customer feedback.

Customer retention tools and tactics

• Predictive analytics: Use machine learning models to predict customer behaviour and identify customers at risk of churning. Tailor interventions to retain them proactively.

• Advanced segmentation: Employ recency, frequency, monetary (RFM) analysis and psychographic segmentation to tailor your engagement strategies – addressing the specific needs and behaviours of different customer groups.

• Customised retention campaigns: Use data insights to create highly personalised retention campaigns that resonate with individual customer preferences and past interactions.

• Dynamic pricing strategies: Implement dynamic pricing models that adjust offers and incentives based on customer purchase history, loyalty, and engagement level.

• Behavioural triggers: Use behavioural triggers to send automated, contextually relevant emails to customers based on their actions or inactions – creating timely and relevant engagement.

• Customer success schemes: Develop comprehensive customer success schemes that actively work to ensure customers achieve their desired outcomes, increasing perceived value and loyalty.

• Value-added services: Introduce exclusive or complementary services that add value to the customer experience, encouraging loyalty and repeat business.

• Advanced loyalty schemes: Design loyalty schemes that go beyond basic point systems and incorporate tiers, exclusive benefits, and personalised rewards that acknowledge customer longevity and value.

• Community building: Create an engaged community around your brand, allowing customers to connect, share experiences, and provide feedback – thereby increasing emotional investment and loyalty.

• Strategic account management: For business-to-business (B2B) or high-value customers, implement strategic account management that focuses on building consultative relationships, evaluating business needs, and delivering customised solutions.

• Friction reduction: Continuously analyse the customer journey to identify and eliminate points of friction, proactively preventing churn.

• Product evolution: Regularly update and evolve your product or services based on customer feedback and emerging needs.

• Customer education: Develop comprehensive education programmes that help customers get the most value from your products or services.

• Advanced customer support: Implement a multi-tiered, responsive customer support system that leverages artificial intelligence (AI) and machine learning to provide immediate, effective assistance while escalating complex issues to human agents.

• Churn post-mortem analysis: Conduct detailed analyses of churned customers to identify underlying causes and trends. Adjust your retention strategy to mitigate similar losses in the future.

Real-life examples of successful customer retention

REI

• Strategy: Recreational Equipment, Inc. (REI), an outdoor equipment and apparel retailer, offers a co-op membership scheme. For a one-time fee, members get access to exclusive discounts, dividend payouts based on their purchases, and equipment rentals.

• Why it works: The co-op membership transforms customers into invested stakeholders. They feel a sense of ownership and are rewarded for their loyalty, which creates a long-term connection with the brand.

Amazon Prime

• Strategy: Amazon Prime has a subscription service with benefits such as free one- or two-day shipping and access to exclusive deals and streaming services.

• Why it works: Prime creates a cycle of convenience. Free shipping incentivises members to make more purchases, while other perks enhance the overall value proposition. Customers are more likely to stick with Amazon because of the bundled benefits.

Starbucks Rewards

• Strategy: Starbucks Rewards awards points for purchases, which customers can redeem for free drinks, food items, and exclusive merchandise. The scheme also has tiers with increasing benefits for high-spending customers.

• Why it works: Gamification through points and tiered rewards keeps customers engaged and motivated to make repeat purchases. The scheme personalises the experience and caters to different spending habits.

Dollar Shave Club

• Strategy: Dollar Shave Club delivers razors and other grooming products directly to customers’ doorsteps through a subscription model.

• Why it works: Convenience is key. Customers never run out of razors, and the subscription ensures a predictable revenue stream for the company. The low initial cost creates a minimal barrier to entry, encouraging customers to try the service.

Zappos

• Strategy: Zappos is renowned for its exceptional customer service. It has a generous return policy, offers free shipping both ways, and empowers its service reps to go the extra mile to resolve customer issues.

• Why it works: Exceptional customer service builds trust and creates brand loyalty. Customers feel valued and appreciated, leading to repeat business and positive word-of-mouth promotion.