Customer retention is crucial for any business. Not only are successful businesses built upon strong relationships, but it’s also good for your bottom line. In fact, the probability of selling a product or service to an existing customer is around 70%, while the probability of selling to new customers is between 5% and 20%.
As with any other part of your business, the best way to evaluate customer retention is by looking at key performance indicators (KPIs).
Customer retention KPIs or customer retention metrics measure how well your business retains clients over time. There are numerous metrics to pay attention to as part of your customer retention analytics. Here are 9 KPIs small businesses need to know.
1. Customer Retention Rate
The most important customer retention metric is the customer retention rate. As the name implies, this metric evaluates repeat business. This gives you a general impression of customer loyalty. Ideally, you will track multiple KPIs for customer retention, but if you’re looking to start with just one, this is it.
You’ll calculate this metric using data from a chosen period of time. To start, you will need data on the number of new users gained during that time and how many customers you had at the end.
You can discover your active users by taking the number of customers you have at the end of the period and subtracting the number of new users you gained during that time. Multiply it by 100 to turn it into a percentage.
2. Customer Churn Rat
Another crucial customer retention KPI is the customer churn rate. It’s worth noting that not everyone agrees on the ideal way to calculate this metric. As such, you will have to think about your goals and choose the formula that gives you the most actionable insights based on those goals.
A common approach to calculating this customer retention metric is not to consider new clients. After all, churn is only important for existing clients. If you take this route, you will look at how many existing customers you have at the beginning of your time frame and then again at the end. If you keep tracking customer churn rate in this way over time, new clients will eventually become existing clients included in your metric calculations.
3. Customer Lifetime Value
Another KPI for customer retention to consider is customer lifetime value. Customer lifetime value measures how much customers spend throughout their whole customer relationship with your business.
You want your customer lifetime value to be greater than the cost of acquiring customers—otherwise, you’re probably losing money. Ideally, you want your lifetime value of customers to be at least three times as much as the customer acquisition cost. This will lead to growth and help you bring in more customers. Pro tip: You can increase this customer retention metric by cross-selling and upselling.
4. Time Between Purchases
The time between purchases is another customer retention metric related to lifetime customer value. It can give you insights into the shopping habits of your repeat customers. This lets you know when to expect sales or where there are additional opportunities.
But you also want to look at the time between purchases together with other parts of customer retention analysis. For example, there may be a few explanations for long gaps between purchases. Maybe your product is very long-lasting. Or perhaps your product isn’t any better than those of competitors, so customers grab whichever product they see. You may want to look at changes to the time between purchases over time, as this can show changes to customer satisfaction.
5. Customer Acquisition Cost
We already mentioned how the customer acquisition cost relates to the customer lifetime value, but what else do you need to know about this customer retention KPI? This figure includes every expense you make while attracting a new client. It includes tools, bids, campaigns, and salaries for members of your team. Because of all the factors that go into this KPI, it can be challenging to track—but data is power, and the effort is well worth it.
6. Product Return Rate
When considering your customer retention metrics, don’t forget about the product return rate. Keep in mind, you need to look at this rate in the context of your industry. For example, if you sell clothes, maybe returns are more common, especially if people don’t try clothes on in the store.
If you notice a high rate of product returns, be sure to investigate it. It may indicate that you aren’t meeting your customers’ needs or expectations. Maybe your product is low-quality, or maybe customers don’t understand it. You may need to do some market research to figure out why your return rate is so high.
7. Net Promoter Score
Net promoter score (NPS) measures how satisfied your customers are. It relies on surveying customers to see what they think of your brand and products. This is important as more satisfied customers are likely to become loyal customers—they’re also more likely to recommend you.
When you look at your net promoter score in combination with other KPIs for customer retention, you will get a feel for potential referrals and retention. That, in turn, helps you predict future business growth.
As a bonus, if you notice your net promoter score is less-than-stellar early, you are better able to resolve the problem. You may still have a chance to improve the customer experience and turn your current clients into repeat or lifelong clients.
8. Rate of Referrals
While it doesn’t directly affect your customer retention metrics, the rate of referrals is closely related. After all, both indicate that your customers are satisfied with your product or service. To calculate the rate of referrals, divide the number of referrals within a chosen period by the number of customers in that time. Then multiply it by 100 to get a percentage.
9. Customer Engagement
Customer engagement should also be part of your customer retention measurement strategy. When used correctly, engagement can help you discover how frequently your brand is at the front of the mind of your customers. Customer engagement tends to correlate with a positive customer experience. And that strong customer experience usually correlates with retention.
You will want to look at this KPI for customer retention on various social media channels as well as your website. The calculation will vary slightly based on the type of engagement you are measuring. For example, on social media, you could add the number of likes and comments you get on a post. Then divide this by your total number of followers on that platform. Finally, multiply it by 100 to get a percentage. With this calculation, you should ideally have a customer engagement rate of about four to five percent.
Start Measuring Customer Retention
With the above customer retention KPIs, you should be better prepared to track your company’s customer retention rate and overall satisfaction levels. Remember to consider your customer retention analysis in context, as many factors can affect your KPIs. You need to know what influences the given metric to do anything valuable with the information.
Data is power, and by using the above metrics, you’ll be able to retain more customers and grow your business more effectively.
Ready to take your customer experience to the next level? Check out our Guide to Customer Service.
