The Guide to Customer Retention, Loyalty & Referrals

While surely everyone knows the famous quote that acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one, it’s strange why so many brands still focus so much on acquiring new customers instead of focusing on their existing ones. Because improving the experience for existing customers will not only increase customer retention and the bottom line, but also create satisfied customers that can become brand ambassadors to help acquire new ones.

Creating satisfied customers should be the priority of every business, because not only are they more likely to be repeat customers and leave positive reviews and provide useful content, they’re more likely to refer your brand to their friends and family. Whereas we’ve covered churn and winning back lost customers in a previous article, in this guide we look at how to stop customers from leaving in the first place and discuss the importance of having a customer retention strategy, how to measure and improve it, and how to gain additional value from the loyal customers you create.

What is a customer retention strategy

The basic purpose of a customer retention strategy is to increase repeat business from, and the profitability of, existing customers. Common tactics used as part of a customer retention strategy include:

  • loyalty programs, similar to those used by Starbucks;
  • special membership perks, like free two-day shipping with Amazon Prime;
  • referral programs that can earn successful referrers up to $500 with T-Mobile; or
  • any number of targeted strategies that build the relationship and loyalty between brands and customers.

The starting point for any good customer retention strategy is to deliver a world-class experience that provides outstanding value for existing customers, but anything that ensures that those existing customers stick around can be considered as part of that strategy. However, it’s important to emphasize that customer retention is much more than just offering X% off your next purchase, and it takes in every part of the customer lifecycle by building brand loyalty with the aim of maximizing Customer Lifetime Value (CLV).

Why is customer retention important?

Here’s why customer retention should be a top priority for your business:

Existing customers are cheaper to convert than new customers

As mentioned above, acquiring new customers is much more expensive than retaining existing ones. For a start, because your existing customers know your brand and your products and services well, you don’t need to spend time educating them about what you offer and how it works. And if they’re satisfied they tend to come back and purchase again directly, which means you won’t need to pay the GAFA tax to Google, Facebook and the other tech titans for each sale. This is particularly true if you’re a subscription business that charges each month or if you have an automated re-order facility, such as for new ink cartridges when your printer’s ink runs low.

If you are not investing in retention strategies, then you’re not only leaving opportunities for competitors to take away your existing customers, but you’re also needlessly spending more money on acquiring new customers to replace them.

Repeat customers are more profitable

Loyal customers tend to not just buy more often but also spend more with each purchase than newly acquired customers. Frederick Reichheld of Bain & Company — and the inventor of the net promoter score — found that increasing customer retention rates by 5% increases profits by 25%. And if that doesn’t convince you of the importance of customer retention, then I’d say you are very hard to please!

As your existing customers have already gone through the buyer’s journey, and assuming you’ve delivered the goods, both literally and in terms of a world-class customer experience, then they’re highly likely to come back for more, time after time driving higher CLVs. Also, when compared to new customers, repeat customers are also more likely to adopt new products that you launch.

Customer retention can help you acquire new customers via referrals

Customer retention isn’t just crucial for maximizing the value of existing customers, it can also help with customer acquisition. Research shows that 75% of consumers don’t trust advertisements, while 92% trust recommendations from friends and family. So customer retention strategies can turn your existing loyal customers into brand evangelists to acquire more new customers with significantly lower CPAs.

Obviously, the way to do this is by asking your satisfied customers to refer their friends, family and colleagues via a referral program. And, while the main aim of a referral program is customer acquisition, the act of referring a friend is something that is, in and of itself, likely to increase customer retention for both intrinsic and extrinsic reasons.

From an intrinsic perspective, when you ask a happy customer to refer you to friends, their first action is likely to be to consider their feelings towards your brand and whether they would be willing to risk their credibility with the friend by making the recommendation. Research by the Keller Institute explained why referrals work so well and highlighted the importance of active matching and social enrichment, where referrers know both your products and their friends very well and look among their network to find people who are likely to appreciate your offer. Research from Yale and UC Berkeley also found how referral rewards help overcome risks associated with making a referral. But even the simple act of confirming in the customer’s own mind that they would be happy to vouch for your brand to a friend is likely to reinforce positive feelings towards your brand and increase the likelihood of repeat purchase.

Another intrinsic factor is pattern reinforcement. If someone evangelizes Audi cars to all their friends and convinces them to buy an Audi, how would it look if the next day they pulled up in a BMW? In other words, the referrer has invested their personal credibility in the recommendation and this is likely to reinforce their commitment, and continued loyalty, to your brand.

From an extrinsic perspective, referral rewards can increase loyalty and lead to repeat purchases when the reward itself is redeemable on a future purchase, such as with store credit, a gift card, a discount on the next purchase or an award of loyalty points. Equally the offer of a complementary product or service can increase loyalty, such as where a streaming provider offers a month’s free upgrade to the Sports+ Package for each new customer referral, which means that the customer is likely to continue subscribing to the basic package.

Getting customers from referrals is especially important for brands that don’t have as many opportunities for repeat business from the same customer. For example, a company that manufactures and sells big-ticket items like fridges, dishwashers and dryers. So encouraging happy customers to refer the brand to their friends and family creates an additional opportunity to drive new business.

Winning customers from Organic Discovery

As well as by directly referring friends, happy customers can help you win new business by means of organic discovery. By adding user-generated content and reviews, people who don’t even know your current customers can find your business and evaluate your offering. This is, in part, how Airbnb managed to get 91% of its traffic last year from unpaid sources.

Improving your product or service via feedback loops

Satisfied customers can also provide a wellspring of valuable feedback that can help you optimize your business, augment your offering and strengthen competitiveness. Because your existing customers are familiar with your products and services, they can provide you with valuable tips and suggestions for improvements. And, if they intend to continue using your products or services, they have a vested interest in giving you genuine, credible and useful advice that will make their experience better.

How to measure customer retention

Peter Drucker famously said, “if you can’t measure it, you can’t improve it,” so the first stop on your customer retention journey is to understand how you can measure, analyze and optimize retention of your existing customers.

Now, there are a number of ancillary measures of customer retention, such as calculating customer lifetime value (CLV), customer churn rates, net promoter scores (NPS), existing customer revenue growth rate and others that you can use and the team at HubSpot have a convenient outline of these here. But how you measure customer retention will depend on your business model.

Here are two basic measures:

Customer retention rate (CRR):

If your model is built on monthly (or even annual) subscriptions and membership, such as a telecoms, utilities or streaming services business, then your primary retention metric is your customer churn rate, which refers to how many subscribers, members or clients of your business churn in a given period.

Your customer churn rate is calculated by taking the number of customers at the end of a given period, taking away the number of new customers acquired during that same period, and dividing that number by the number of customers at the start of that period.

Let’s look at a hypothetical example:  Say you’re an MVNO that offers no-frills price-competitive mobile plans to young, tech-savvy customers. You started off 2020 with 900K subscribers, you acquired 150,000 during the year but lost 50,000 and wrapped the year up with an even 1M total subscribers. Well done you, and here is how you would calculate your retention rate:

(1M-150K) / 900K) X 100

Customer retention rate: 94.44%

Now, that would be a stellar customer churn rate right there. In fact, the benchmark for customer retention, as reported by Salesforce, is around 85%. But that ignores the fact that you are in a market that typically has a high churn rate, as your customers are price-sensitive, often cash-strapped youths who don’t lack discounted opportunities to switch. So looking at the overall benchmark customer retention rates would be about as useful as comparing your website conversion rates to what Fireclick reports. What you need to understand is the typical CRR for your industry and measure your CRR over time.

If you see that your CRR is below your industry benchmark, or if it is dipping over time, then you will need to audit your product or services, customer support, website and customer journey and everything else that makes up your total customer experience. This will allow you to determine where you need to put your energies to reduce friction and improve customer satisfaction to avoid customers packing their bags and wandering into the arms of a competitor.

Of course, rather than actual customer numbers, you could do a similar calculation based on annual recurring revenue, to see how much revenue you churn each year.

Customer repeat rate (CRR):

Meanwhile, if you’re a business that sells individual products or services, such as a fashion retailer or an ecommerce brand, your main concern is likely to be repeat customer rate. That is, how often customers who have shopped with you come back to shop again.

This is calculated by looking at the number of customers that have shopped with you more than once and dividing that by the overall number of customers. This calculation is becoming easier as brands turn to digital and collect more information from tracking website behaviors, so it is easier to determine who is shopping for the first time and who is back for more.

Let’s take a look at another hypothetical. This time, you’re an online luxury fashion retailer that sells stylish clothing for both men and women. Now, during a 12 month period you had 120,000 happy folks come through your checkout and buy from you, 50,000 of whom shopped more than once.

(50,000 / 120,000) X 100

Customer repeat rate: 41.7%

This tells us that more than two out of every five shoppers to your store returned during the period. And before you go thinking that doesn’t sound all that great, it’s important to note that most successful ecommerce brands float around 25-30% for a repeat customer rate. And, when you factor in that repeat customers spend up to 31% more than new customers, you can understand why 65% of a company’s business can come from existing customers. But, as mentioned above, you need to understand the CRR applicable to your industry and map your performance over time to understand how you compare to your competitive set.

These are just two key ways to analyze your customer retention, but as mentioned above, there are other factors at play. Think about a business that sells household appliances. When a customer comes in to furnish their kitchen, that could make up a single, high-value order of goods, but it’s unlikely that the customer is going to discover a passion for collecting kitchen appliances and buy again soon. Unless, of course, they happen to be a property developer or are going to move every couple of years. As a result, the repeat customer rate is likely to be fairly low, but probably not out of line with the rest of your industry. Admittedly, previous customers may return later to purchase other appliances, like a microwave or a food processor, but this doesn’t necessarily make up for the time between those shops. So how do you make up for the difference?

Well, we’ll get into that later.

How to increase customer retention

This is the million-dollar question, isn’t it?

Unfortunately, like everything in marketing, there is no silver bullet. But, to get you started, here are some fundamental things that you should have in place to start improving brand loyalty, customer retention and acquisition, and, ultimately, revenue.

Improve the customer experience

First and foremost, the overall customer (or user) experience is the most important factor when it comes to customer retention and is a major reason that customers churn in the first place. You need to ensure you are delivering a world-class, friction-free and satisfying experience. It is important to recognize that the customer experience encapsulates the whole customer journey, from prospect to customer and from your website, app or store all the way to receiving the products and services themselves, as well as returns and refunds. So the first step in seeking to boost customer retention is to audit the customer experience by getting customer feedback with NPS surveys, point of sale or post-purchase feedback, from focus groups and from monitoring social media to identify customer pain points. Then once you have this feedback, work to improve and streamline the customer journey. Importantly, this should not be a one-and-done exercise but a continual process of feedback and product iteration, followed by more feedback and so on.

Invest in customer support

We’ve talked about this in the past but like customer experience, one of the most commonly cited reasons for customer churn is poor customer service. Reportedly, 33% of customers will consider switching companies immediately after a single instance of poor customer service and that number climbs up to 60% after just two or three. Increasingly, you need to have proactive and knowledgeable 24/7 customer support that is easily accessible at every customer touchpoint and offer self-service tools like tutorials, a knowledge base, and community forums for customers to resolve minor issues on their own and share tips and solutions, allowing you to minimize operational costs related to customer support.

Set up a loyalty program

This one is fairly obvious, but it nevertheless bears stating since loyal customers spend 67% more than new ones. The basic premise of a loyalty program is that the more that loyal customers shop and engage with your business, the more they’re rewarded. The rewards for loyalty can take many forms, such as special promotions and offers, exclusive or early access to new releases, loyalty points or tokens that can be redeemed in-store or online, and so forth.

The main aim is to make your customers feel that you value and listen to them, and that you are communicating with them personally rather than seeing them as just an anonymous wallet that needs emptying every now and again. Where customers can be convinced to share more personal information with you in return for rewards, you can use that information to provide an even better service more attuned to their needs. And where the rewards are linked to future purchases or provide additional value to existing use, you increase the switching costs of moving to a competitor, and increase the incentives to remain.

Launch a referral program connected to your loyalty program

As detailed above, customer retention strategies can dovetail very well with referral marketing programs. After all, all you are doing to improve customer retention should improve the customer experience, and happy customers are the basis of any good referral program. So our advice would not only be to launch a referral program to capitalize on customer satisfaction but to integrate it with your loyalty program.

There are many world-class loyalty programs available on the market, and perhaps you already have one, which is why instead of trying to build our own loyalty program and pass you off with a second rate experience, we would encourage you to go with a first-rate specialist loyalty program provider and then integrate that with a best-in-class referral platform, like Buyapowa.

Create a corporate social responsibility (CSR) program

Today, customers often expect brands to be more than just a product or service with a flashy logo or a catchy jingle and look for values that align with their own. But such customers are also quick to call out brands that deviate and fail to adhere to their stated values. By communicating genuinely and acting upon key social issues, you can create more of an emotional connection with your customers. This can have a direct impact on customer loyalty by creating a close relationship with your customers based on shared values.

Have a company newsletter

Email will always be a simple and cost-effective way of keeping your brand at the forefront of your customers’ minds to remind them that you exist when they’re ready to shop. A newsletter allows you to notify customers of new product launches, promotions and other noteworthy news about your business that they may not be aware of. And, naturally, this channel can (and should) be continuously used to promote both your loyalty program and your referral program.

Let’s talk all things customer retention, loyalty and referral

We hope you found this guide useful, in particular as to how all these elements fit together. If you have any questions about how this can work for you, we would love to talk, so don’t hesitate to get in touch.

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