No matter how you refer it – churn, attrition, turnover, defection – losing customers is a painful reality of doing business. But some companies enjoy an extremely high customer retention rate while others always seem to struggle to keep their customers. What separates them? Considering that acquiring new customers is 6 times more expensive than retaining new ones, retaining customers is mission-critical for B2B industrial companies.
But first, it would be good to define exactly what a customer retention rate is and what constitutes a good or bad customer retention rate.
What is Customer Retention Rate and How Do You Calculate It?
First we need to define “retention”. The point at which a customer is considered to be “retained” is the point of “retention”, but this point can vary drastically depending on the business. Some businesses look at a monthly cycle of retention, while others look at a quarterly or annual cycles. Generally, the more expensive the product the longer the retention time frame.
Your Customer Retention Rate is the percentage of customers you keep relative to the amount you started with at the beginning of your designated time period (monthly, quarterly, or annually).
So, if your retention period is one month, and you start the month with 100 customers, the calculation would be as follows:
NUMBER OF CUSTOMERS AT THE END OF THE MONTH MINUS THE NUMBER OF CUSTOMERS ACQUIRED DURING THE MONTH DIVIDED BY THE NUMBER OF CUSTOMERS AT THE START OF THE MONTH, TIMES 100.
So if you started the month with 100 customers and you acquired 30 but lost 20 (meaning at the end of the month you had 110) the equation would be:
110-30/100 x 100 = 80%
Meaning your customer retention rate is 80%.
It’s important to distinguish customer retention rate from customer attrition rate. Your customer attrition rate, or churn rate, is the flipside of the retention rate, or the rate at which you lose your customers. So if your retention rate is 80%, your attrition rate is 20%.
There's another critical aspect to the churn rate, aside from customers that are a net-loss. Your customer churn should also be viewed in terms of purchase dips at the category level. Most companies don't lose customers all at once. Rather, competition starts by poaching one category and nipping away until the customer has completely defected.
Which leads to the next logical question:
What is a good retention rate?
In a perfect world your customer retention rate would be 100%, but obviously that’s not going to happen. Even if you play all your cards right and you provide perfect customer service and top-notch products with zero bugs, you are still going to experience churn.
But what amount of retention/churn should you expect?
This depends quite a lot on your industry and business model. Since most companies understandably don’t broadcast or report their churn rates, there isn’t much data available on what makes for a decent rate of retention. However, here are some reported retention rates for certain industries:
· Software-as-a-Service (SaaS): 93 to 95%
· Banking: 75 to 80%
· Credit cards: 80%
It depends on your industry, of course, but what you can probably deduce from the above stats is that if your retention starts dipping below 75%, you’re probably doing something wrong and need to course correct.
Which leads to the next logical question:
How do you improve your retention rate, or, if your retention rate is already high, how do you keep it there?
There are two key best practices you can follow to either keep your retention rate high or improve it:
1. Be proactive, not reactive
Most companies accept churn as a fact of doing business and wait until AFTER they’ve lost the customer to try to win the customer back via special offers. However, companies that excel at retention put programs in place to preempt churn. They do this by analyzing their customers’ activity and buying patterns, spotting negative trends as soon as they start happening and immediately taking corrective action. A big part of this is using predictive models to identify when sales dips are seasonal or due to a shift in preferences or buying patterns.
2. Get sales involved
Far too many companies see customer retention as a marketing or business development issue as opposed to a sales issue. The reality is that to maintain a high retention rate, you need to have sales involved every step of the way, and you need to see sales dips or lack of customer engagement as a chance to gain insight on retention and improve it.