Look around you and you’ll probably find at least one product from a well-recognized brand.
Maybe it’s your iPhone. Or a pair of Nike shoes. Or a bag of Kirkland chocolate-covered almonds.
These brands all have one thing in common—they have a lot of repeat customers. Evidently, you’re one of them.
These brands didn’t reach this status by solely focusing on customer acquisition. As important as it is to acquire new customers, it’s equally important to keep existing customers coming back for more.
There are a lot of metrics you can use to track customer retention—customer lifetime value, net promoter score, etc. Of all of them, one reigns supreme: Customer Retention Cost (CRC).
We’ve put together this blog post to help you understand what customer retention cost is, why it’s such a crucial metric to track, and how to calculate it. We’ll even share a few proven tips to help you increase your customer retention rate.
Excited?
Let’s dive in.
What is Customer Retention Cost?
Customer retention cost refers to the average cost of retaining a customer over a set time period.
To determine CRC accurately, businesses need to first calculate the total amount they’re spending on customer retention. And we’re not just talking about obvious costs. One big mistake most businesses make is considering their customer service costs as their total customer retention spending.
Maybe the reason a majority of consumers purchase from you repeatedly is that you send heartfelt thank-you notes along with your products. Or maybe it’s because your staff is extremely polite with your consumers. Maybe, it’s because your team sends regular updates to your customers related to the issues they face with your product or service.
You see, the amount you spent on printing these heartfelt thank-you notes or employee training should be taken into consideration while calculating total customer retention costs.
Every single thing you do, every system or process you have in place to retain customers needs to be factored into the costs you’re spending on customer retention.
That being said, allow us to show you how to calculate customer retention.
How to Calculate CRC
The real challenge isn’t calculating your CRC; calculating how much you’re actually spending on customer retention is the tricky part.
If you onboarded five employees last year and spent $1,000 per employee on their training (teaching them how to greet your customers and politely interact with them), that’s $1,000 x 5 = $5,000 you spent on customer retention.
Running a customer loyalty program? Spending $100,000 each year on customer success? Investing money in customer engagement tools like chatbots? All of those costs need to be factored in as well.
The next part is simple. You divide your total retention costs over a specific period of time by the number of customers you retained during that period.
For example, if your business spent $100,000 on customer retention last year which led to repeated purchases from 1,000 customers, then your last year’s CRC is $100,000/1,000 = $100.
Why Should Local Businesses Calculate Customer Retention Cost?
So now you know what CRC is and how to calculate it, but you may still be wondering: Why should I calculate CRC in the first place?
As mentioned by Jeff Wright, former VP of Customer Retention & Engagement at Autodesk, in Totango’s Customer Retention Cost report, “It makes so much sense to pay attention to how much you are investing in the success of your customers. At Autodesk, we know that helping our customers succeed, from early in the relationship, greatly increases the likelihood that they’ll remain customers for a long time. Tracking a metric like CRC will help companies allocate investments more effectively.”
Imagine this: You spent $100,000 last year on your customer retention efforts yet were only able to retain 100 customers. That’s a $1,000 CRC.
Unless your average customer spends more than $1000 on your products and services consistently, you’re spending too much trying to retain them. At the end of the day, you need to make sure that your total gross profit from repeated purchases is less than your total customer retention costs.
Calculating your CRC will not only help you understand how much you’re spending per customer, on average, towards retention, but you can also use it as an indicator of growth and customer satisfaction. If your CRC is too high, then you can conduct an audit to identify the reason(s) behind it and find better ways to cut down the costs without reducing the impact of your customer retention efforts.
Customer Acquisition Cost vs. Customer Retention Cost—What’s the Difference?
The internet is flooded with metrics—it’s hard to keep them all straight.
Customer Acquisition Cost (CAC), is the average cost of acquiring one customer over a specific time period. You can calculate CAC using this formula:
So for example, if you spent $500,000 on customer acquisition last year which resulted in 5,000 first-time purchases, then your CAC stands at $500,000/5,000 = $100.
To acquire new customers, you need to put in a lot of time, effort, and money. But ideally, retaining a customer will be a bit easier. So, if your CRC is greater than your CAC, you might want to investigate and see what’s going on there.
Want to dive deeper into customer retention metrics? Check out this article to learn more.
