What Is Customer Retention and How Is it Measured to Improve Customer Loyalty

Written By:
Alyssa Lowery

When was the last time you thought about how satisfied your existing customer base is?


While it can be tempting as a business owner to focus on new customers and business growth, taking care of the customers you’ve already acquired is a huge piece of the puzzle to creating a sustainable and healthy business long-term.


Naturally, every business will lose customers. That’s part of owning a business. 


However, if you have a lower-than-desired customer retention rate, it’s time to dive deep into key metrics, do some analytical work to uncover the root cause, and implement customer service and marketing tactics to increase customer satisfaction.

What Is Customer Retention?

The phrase “customer retention” refers to repeat buyers. Specifically, it’s your company’s ability to not just acquire a customer who purchases once — but keep them coming back time and time again. Customer retention is critical for subscription-based services, whether you’re running a:



It’s the opposite of what we refer to as “customer churn,” or customer attrition. Customer churn refers to customers who quit buying from your company 1. by choice because of dissatisfaction or moving to a competitor product or 2. involuntarily due to failed payment.

What Is the Importance of Customer Retention?

Acquiring new customers requires resources, time, and money. That’s why customer retention is so important. Not only does keeping customers signify customer satisfaction, it also saves you precious time and money. 


Losing customers is just plain expensive. The average value of a lost customer is $243!


Here’s the lowdown on the benefits of customer retention:

Save on Acquisition Costs

Typically, acquiring new customers costs five times more money than keeping the ones you already have. This can be attributed to marketing spending and ad costs as well as employee pay needed to execute on those strategies.

Improve Your Bottom Line

Boosting your customer retention by as low as 5% can increase your profits by 25% to 95%. You may be wondering how this is actually possible. It almost seems too good to be true! But research shows that long-time customers spend more money with your company than new customers.

Create Raving Brand Ambassadors

Not only do loyal customers spend more money with your company, they’re also more likely to refer friends, family, and coworkers to your brand. This word-of-mouth marketing is invaluable to business, because it’s a no-cost form of marketing. By simply making one customer happy, you can attract several other like-minded, long-term customers.

Measuring Customer Retention

To get a basic understanding of customer retention, you can simply:


1. Subtract the total number of new customers you’ve acquired over a given time period (weekly, monthly, or yearly) from the total number of customers at the end of that time period. 

2. Divide that number by the number of customers you had at the beginning of the time period.

3. Multiply by 100.


This will give you your customer retention rate. However, if you want to dive deeper into understanding your customer retention, you can dive deeper into several other key business metrics.

Net revenue retention

Instead of learning about your customers specifically, your net revenue retention rate calculates your total revenue for the month (including new customers) minus any customer churn. 


To calculate your net revenue retention, simply:


  1. Take your monthly recurring revenue (MRR) at the beginning of the month and add expansions (new subscribers) and any upsells. 
  2. Then subtract any churn or downgrades.
  3. Divide that number by the Monthly Recurring Revenue at the beginning of the month. 


Your net revenue retention rate is one of the most commonly used metrics to measure the success of subscription-based businesses.

Cohort Retention

Your cohort retention rate is a lot like your customer retention rate; however, it segments your customers into specific groups. By looking at the retention rate between groups that have similar characteristics, you can analyze which customers are your higher value targets and put more energy and resources into replicating those cohorts. 


Often, cohorts are divided into two types: acquisition and behavior.


Acquisition cohorts are based on when or where a customer was acquired. For example, one cohort could be a group of customers who signed up for your subscription in September of this year on a mobile device. Or, customers who joined your subscription last week on desktop.


Behavior cohorts are groups based on actions the customer has taken. If you host a monthly subscription-based masterclass, for example, you can analyze the retention for students that only watch 50% to 75% of the class. Do they stay, or do they go? What’s the retention like for students that finish every months’ class? Probably pretty good — if you’re offering valuable content.

Customer Lifetime Value


Your customer lifetime value, also sometimes abbreviated CLV or LTV, measures the amount of profit a customer brings into your company throughout their customer lifecycle.


You’ll find several varying customer lifetime value formulas, but one of the easiest to use is: 


  1. Multiply the average order value by the repeat purchase rate.
  2. Subtract the customer acquisition cost.


If your CLV is low, that means customer retention is likely low. If your CLV is high, that means customers are sticking around for a while to make repeat purchases. 

Of course, you need to take into the account the average price of your products or services, as that will be your baseline for how large or small your CLV is. 

Improving your customer retention will improve your average CLV.

Customer Churn


If your customer retention rate is high, your customer churn rate will be low. As we mentioned earlier, customer churn occurs when a customer stops purchasing from your company — or ends their subscription in subscription-based businesses. 


You can calculate your rate of customer churn by:


  1. Dividing the number of lost customers over a period of time (weekly, monthly, quarterly, or yearly) by the total number of customers you had at the start of the time period
  2. Multiplying that number by 100.


Collectively, these metrics will give you powerful insights into customer retention, satisfaction, and behavior.

How to Improve Customer Loyalty and Retention

If your customer retention isn’t where you want it to be, don’t fret. Here are five action-oriented steps to improve customer satisfaction, boost customer loyalty, and skyrocket retention:

1. Provide Next-Level Customer Service

Worldwide, 96% of customers say customer service is a key factor in their choice of brand loyalty.


Reaching your customer service team should be easy and straight-forward. Offer an email address, instant chatbox, and phone line for your customers to reach your CS team at. 


By being available and ready to answer any customer questions and concerns that may arise throughout the customer journey, you’re building trust and therefore loyalty with your customers.


But of course, engaging well with your customers requires far more than just being available. That’s only the beginning. 


Be sure to hire customer support specialists who are empathetic and polite in all circumstances. Even one bad interaction with a customer support agent at your company can deter customers from continuing to do business with you.


For best success, adapt a customer-first mentality that aims to always end an interaction with a happy customer. Make it quick and efficient, yet polite and empathetic.


According to Ameyo, you can prevent 67% of customer churn if issues are resolved the first time they occur.


By nurturing your customers with next-level customer support throughout their journey, you’ll help keep your subscribers engaged.

2. Personalize Your Communication

When you’re doing business with a customer, you’re building a relationship with a person. That should be personal.


It’s important to frequently touch bases with your customers — but not in a way that feels automated or routine.


When thinking about email campaigns (because that’s likely the method you’ll use to communicate with customers most frequently), create personalized emails to send to customers based on:


  • Their stage in the customer journey: New customers will need more education and information surrounding your products/service and brand than customers later in their journey. 
  • Previously purchased products: When selling multiple products or services, knowing which product your customer is buying allows you to talk more directly to their pain points. You also have the ability to compound their purchase by recommending additional products or offering a BOGO deal. Because buy one, get one sales are bulk deals, they work best when a customer already trusts and enjoys the product. 
  • Special dates: Sending a quick note on your subscriber’s birthday or the anniversary of their subscription can be a fun and easy way to show you’re thinking of them. Bonus points if you add a promo code!


These are only a few of the vast number of ways you can personally engage with your subscribers to help make them feel seen and special.


Incorporate personalization into your marketing campaigns and watch it work wonders on your customer loyalty.

3. Implement a System for Failed Payments

Sometimes, customers don’t intentionally end their subscriptions. Failed payments account for 50% of all customer churn.

In fact, a billing failure occurs on 10–12% of credit card transactions. This can result from an expired card number, lost or stolen credit cards, a flagged transaction by the bank, and more.

To quickly and efficiently resolve these types of billing issues and reactivate your customer’s subscription, email each customer individually that fails to pay.

If you’re running a smaller company, you may be able to manually take care of this process. However, for larger organizations, you’ll want to invest in a solution that automatically sends failed payment email campaigns.

That’s what we do here at Gravy.

Communicating with customers to collect failed payments, a process known as “dunning,” requires empathy and tact. 

Many companies fall short in this area and fail to follow best practices when collecting missing payments.

The best way to win back lost revenue is to always think of the customer first. In every communication, be empathetic toward their billing issues. 

Don’t place blame or take failed payments personally. Politely explain why the payment didn't go through (as much as you can) and lay out the next steps for your customer to continue using your subscription service.

To ensure you recover the maximum amount of failed payment revenue as possible, consider hiring an expert third-party company like Gravy — for an empathetic person-to-person experience for your customer.

Gravy can recover up to 80% of failed payments.

4. Reward Loyal (or VIP) Customers

Who you deem a “VIP” customer will vary depending on your business. It may be the people who have been subscribed the longest, who have spent the most money with your business, etc. 


Regardless, these are your top-tier customers. They’re of high value to you… It’s important you treat them that way.


To treat your VIP customers like royalty, give them sneak peeks into new product launches, insider or behind-the-scenes details into the company, exclusive discounts, and/or VIP merch.


You want these customers to feel as important to you as they actually are. Get creative and have fun with this step! Maybe even ask your customers what they want to see from you.

5. Implement Customer Feedback

Receiving negative customer feedback either through a customer service communication or during the customer’s cancellation process is never fun. In fact, it can be hard on morale and draining of your energy. 


However, you have the opportunity to turn this negative customer feedback into a long-term positive for your business.


Whenever you receive feedback (especially when it’s negative), take note.


As you start to receive more and more comments, you’ll start to see common themes emerge. Use this data to improve your product or service. Do not — at any cost — let that valuable information go unused.


Analyzing customer feedback gives you the perfect opportunity to take your business to the next level while increasing customer satisfaction.


A dissatisfied customer today is an opportunity for you to improve and create happy customers tomorrow.

Conclusion

Keeping your current customers happy is vital to the overall success of your business. Without long-term customers, especially in a subscription-based business, you’ll be consistently spending money on new customer acquisition and never developing any raving brand ambassadors.


What customer service and marketing tactics will you start to implement to increase customer retention and satisfaction? How will you handle involuntary customer churn due to failed payments? When you need it, Get Your Free Proposal.


Start Recovering
Failed Payments Today.
Start Recovering
Failed Payments Today.