HomeBlogCustomer RetentionWhy Is Customer Retention Important In Marketing?

Why Is Customer Retention Important In Marketing?

You’ve heard of the term “customer retention” but what exactly does it mean, and why should you as a business owner or marketer care so much about it?

Throughout this article I’m going to show you some of the different facets of customer retention, why it’s a game changer in marketing, the strategies involved, and real-world examples to learn from.

We’ll also look at some of the challenges, the future trends shaping the industry, and how to make sure it is a cornerstone of your marketing strategy.

Table of Contents

What Is Customer Retention?

Infographic on 'What is Customer Retention' in marketing, highlighting customer loyalty and engagement methods.

The simplest definition is it is the process by which a business retains its existing customers.

It involves any strategies you use to make sure customers who previously purchased your products or services continue to do so.

Think of it as nurturing a long-term relationship with your customers so their repeat business becomes a testament to your brand’s value and appeal.

“Customer retention is a company’s ability to keep its customers over a period of time.”

How Does It Differ From Customer Acquisition?

They key difference is:

  • Customer retention is about keeping customers you already have.
  • Meanwhile Customer acquisition focuses on attracting new ones.

It’s a common misconception that business growth solely depends on acquiring new customers. 

But statistics show that the amount of effort and resources it takes to convert someone new are significantly higher to what it takes to keep an existing customer.

So Why Is Customer Retention Important In Marketing?

The short answer is it helps maintain a consistent revenue stream, it builds brand loyalty, and is often more cost-effective than acquiring new customers.

Let’s assume you’re currently running a business and you’ve got a steady flow of customers.

That’s every business owner’s dream.

But what happens if you *don’t* focus on retaining those customers?

Competitors swoop in, take your customers, and there goes a huge chunk of your profits.

That means attracting new customers is only half the battle.

It’s equally, if not more important, to keep your existing customers and have them coming back. That is what customer retention is all about.

It’s the art and science of retaining customers so they continue to choose your products or services over competitors.

You want to build relationships, foster loyalty, and create a base of customers who become repeat buyers and advocates for your brand.

Why Does It Really Matter? (The Benefits of Customer Retention)

1 - Cost-Effectiveness

Getting a new customer can cost 6-7x more than retaining an existing one.

The huge disparity means even a small improvement in your customer retention can have a substantial impact on your business’s bottom line.

That’s a huge savings on marketing and acquisition costs.

2 - Increased Profitability:

Retained customers tend to buy more. And more often.

Research shows increasing your customer retention rates by just 5% can increase profits by 25% to 95%.

The increased profitability comes from:

  • Repeat Purchases: Satisfied customers are more likely to make repeat purchases, which increases their lifetime value.
  • Cross-Selling and Upselling Opportunities: Existing customers are more receptive to other products or services you offer.
  • Reduced Sensitivity to Price: Loyal customers often show less sensitivity to price changes compared to new customers.

3 - Loyalty and Free Marketing

Loyal customers often become brand advocates.

They are more likely to recommend your products or services to others and I’m sure you like free word-of-mouth marketing.

The biggest benefit here is your CLV (more on this later) because it comes with a level of trust and credibility that paid advertising can’t match.

4 - Better Feedback and Improvement

Customers who stick around tend to be a valuable source of feedback.

That can help with product development and improvement, leading to better offerings and more satisfied customers.

5 - Stable Revenue

Retained customers create a more predictable and stable source of revenue.

In fact, 65% of a company’s revenue often comes from repeat customers.

6 - Competitive Edge

Your ability to retain customers is often a strong indication of great customer relationships and a loyal customer base.

7 - Enhanced Customer Value

The longer a customer stays with a brand, the more they spend (up to 90% more frequently).

That can increase your Customer Lifetime Value by up to 30%.

Key Metrics to Measure Customer Retention

Infographic displaying key metrics for measuring customer retention in marketing, including retention rates and customer value.

In my opinion there are 3 important metrics that tell you how well you are retaining customers:

1- Customer Retention Rate

It measures the percentage of customers you retain over a specific period.

A high retention rate means your strategies are working very well.

2 - Repeat Purchase Ratio

Looks at the proportion of customers who made more than one purchase.

It’s a direct reflection of customer loyalty and satisfaction. So you want to keep this high as well.

3 - Customer Lifetime Value (CLV)

CLV predicts the net profit attributed to the entire future relationship with a customer.

In simpler words, it is how much you can reasonably expect from a single customer throughout their relationship with you.

The longer a customer stays, the higher their lifetime value.

A few other metrics worth mentioning are:

  • Churn Rate: This is the opposite of retention. It keeps track of the percentage of customers who stop buying from you within a given period. You want to keep your churn rate very low.

  • Net Promoter Score (NPS): Measures customer experience and predicts business growth. It is based on a single question: “How likely are you to recommend our company/product/service to a friend or colleague?”

  • Average Order Value (AOV): Keeping track of the changes in AOV can indicate how your retained customers’ spending habits evolve over time.

  • Customer Engagement Score: This score combines things such as purchase frequency, feedback, and social media engagement to indicate how engaged and loyal customers are to your brand.

  • Revenue from Repeat Customers: This metric tracks the percentage of your total revenue that comes from repeat customers.

How Do You Calculate Customer Retention?

Interestingly enough there is a formula you can use to calculate customer retention.

It is based primarily on your Customer Retention Rate (CRR).

Here’s how to calculate it:

  1. Choose a Time Period: Pick a time frame for which you want to calculate retention (monthly, quarterly, yearly, etc).
  2. Identify Three Key Numbers:
    • Number of Customers at the End of the Period (E)
    • Number of New Customers Acquired During the Period (N)
    • Number of Customers at the Start of the Period (S)
  3. Use the Formula:
    • CRR = ((E-N)/S)x100

Let’s use our business from earlier as an example.

  • You start with 100 customers (S), lose 20, gain 40 (N). That means you’ll have 120 customers at the end of the period (E).
  • 100 – 20 + 40 = 120

Your retention rate will be:

  • ((120−40) / 100) × 100 = 80%
  • A CRR between 35% to 84% is considered a good retention rate.

The Role of Customer Retention in Marketing

An infographic in a horizontal landscape format, inspired by early 20th-century comic art style, with bold lines depicting the importance of customer retention

By now I hope you’re already seeing why it is important to integrate customer retention strategies into your marketing plan.

You also need to be aware it’s not just about broadcasting your brand, it’s about engaging with your customers continuously.

You need to understand their needs, their preferences, and feedback, then tailor your marketing messages to resonate with them.

That’s how you create a personalized experience that encourages repeat business.

The Impact of Customer Retention on Brand Identity and Reputation

Repeat customers obviously play a vital role in shaping your brand identity.

Those are the folks who experience your products or services first-hand.

Their satisfaction, or lack thereof, influences how they perceive and talk about your brand

A strong retention strategy gives them positive experiences so they can associate your brand with reliability and quality.

That positive reputation in turn attracts new customers while retaining the existing ones.

The Relationship Between Customer Retention and Customer Loyalty

This is a great definition from Oracle that describes what Customer Loyalty is.

“An ongoing emotional relationship between you and your customer, manifesting itself by how willing a customer is to engage with and repeatedly purchase from you versus your competitors.”

It’s a mouthful but I love it because it shows you how deeply interconnected customer retention and customer loyalty are.

Loyal customers don’t just buy from you. They are the ones who choose your brand over and over, even if it means paying more.

When you prioritize customer retention, you’re killing 2 birds with one stone.

Repeat purchases and a loyal customer base.

You need both for your business to survive.

Factors That Influence Customer Retention

1 - Quality of Products/Services

The foundation of customer retention is the quality of your products or services.

Customers are more likely to remain loyal to a brand that consistently delivers quality. It is your job to meet and exceed their expectations.

High-quality products lead to customer satisfaction which is a crucial precursor to loyalty and retention.

2 - Excellent Customer Service

You know those times when you’ve had to wait on hold for hours or gotten a useless response from customer service?

Your customers don’t like that either.

Every moment from the first interaction to after the sale is an opportunity for you to create a positive impression.

You have to make your customers feel valued and understood and make sure their issues are resolved promptly and effectively.

3 - Pricing Strategies and Perceived Value

There’s a huge difference between the cheapest/most expensive option vs value for money. 

You need to make sure your customers understand they’re getting quality, functionality, and benefits that justify the cost – that goes beyond just price alone.

You need to be fair, transparent, and consistent in your pricing.

Those things help reinforce the perception of value.

4 - Emotional Connection and Brand Engagement

People who are emotionally attached to a brand tend to remain loyal.

You can help build that bond with consistent branding, storytelling, and engaging marketing campaigns.

You should always strive to create a brand identity that customers can relate to and feel a part of.

Strategies To Enhance Customer Retention and Business Growth

Graphic showcasing strategies for business growth and customer retention, with emphasis on marketing tactics and growth metrics.

Here are 7 effective strategies to enhance your customer retention:

  1. Personalized Customer Experience: Tailor the customer experience based on individual preferences and past interactions. Make use of the data you have to customize your communication, offers, and services accordingly.

  2. Robust Customer Loyalty Program: Discounts, exclusive offers, or early access are all great options. Just make sure they are attractive and relevant to whatever it is you’re offering.

  3. Exceptional Customer Service: Touched on this earlier but always try to be accessible, responsive, and effective in resolving issues.

  4. Consistent and Effective Communication: Ties into the previous point. Maintain regular communication through newsletters, updates, and personalized messages. It helps keep your brand top-of-mind.

  5. Community & Customer Feedback: You should regularly solicit feedback AND put it to good use. People like to feel listened to so value the time they take to engage with your brand. If you can, also try to build your own community because it allows for more sharing and helps build more emotional attachment.

  6. Tech is Your Best Friend: Take advantage of the tools at your disposal. All of those things are meant to help provide a seamless and efficient customer experience.

  7. Continuous Improvement: The whole point of any of this is to show your customers you care. Don’t be the next Blockbuster.

Dealing with Challenges

The main challenges to customer retention are:

  1. Customer churn.
  2. Balancing acquisition and retention.
  3. Adapting to customer expectations and market trends.

If your churn rate is high (greater than 5-7%) then you need to figure out why customers aren’t doing business with you.

Go back and look at the 7 strategies I mentioned above. It’s likely one of those things, or lack thereof, might be your problem.

The next issue is acquisition vs retention.

Many businesses are tempted to allocate more resources to acquisition because it is more visible and quantifiable.

The problem with that is it can lead to a leaky bucket scenario, where the influx of new customers is offset by the loss of existing ones.

You need to understand the value of both and find a strategy that supports the growth of new customers while keeping the current ones engaged and loyal.

Last but definitely not least is customer expectations and market trends.

What worked a few years ago may not be effective today.

Once again you need to keep up and adapt whenever there’s a significant change. Be flexible and be willing to innovate.

Let me show you some companies that nailed it.

Real-World Examples of Successful Customer Retention

1 - Retail Industry - REI's Co-op Membership Program:

  • Company: REI, an outdoor equipment retailer.
  • Strategy: REI’s Co-op membership program is a paid loyalty program that offers benefits like a percentage of spending back in store credit, access to exclusive gear, and discounts on services like bike and ski tuning.
  • Success Metrics: The program is successful because it provides meaningful benefits, lowers customer churn, and increases customer lifetime value. It incentivizes customers to choose REI over competitors for their outdoor needs​​.

2 - SaaS Industry - Slack and Dropbox:

  • Company: Slack, a business communication platform and Dropbox, a file-hosting service.
  • Strategy:
    • Slack: Enhanced the user onboarding process with tooltips to familiarize users with key features without overwhelming them.
    • Dropbox: Implemented a referral program offering extra storage space for referring others.
  • Success Metrics:
    • Slack: Considering 80% of customers delete an app because they don’t know how to use it and 74% switch to competitors if the onboarding is too complicated, Slack’s focus on simplifying user onboarding significantly impacts its ability to retain customers.
    • Dropbox: The referral program not only increased customer retention but also helped the company go viral in its early days​​​​.

3 - Automotive Industry - Porsche and Mercedes-Benz:

  • Strategy: The key strategies for both these companies are excellent customer experiences at every level, ease and convenience in service, and having a dedicated quick service department.
  • Success Metrics: There’s a reason why they rank first and second respectively among premium brand car owners.

What Those Companies Did Right

Each example highlights some of the key elements of successful customer retention:

  1. Personalization: Tailoring experiences and offers to individual customer preferences.
  2. Loyalty Incentives: Creating loyalty programs that offer real value to customers.
  3. Exceptional Customer Service: Going above and beyond in customer service to create memorable experiences.

Lessons Learned

  • Understand Your Customers: Deep insights into customer behavior and preferences can guide your retention strategies.
  • Offer Real Value: Loyalty programs and incentives should be of genuine value.
  • Consistency is Key: You need consistent high-quality service and product standards if you want to be successful.

The Future of Customer Retention in Marketing

Seth Godin

“In the future, customer retention will be more about relationships and less about transactions.”

There’s no better statement that covers the evolving nature of consumer-business interactions.

Things will change. But at the end of the day it’ll always come down to building a genuine connection with your customers.

That said, here are a few things that are revolutionizing the way businesses interact with and retain their customers.

1 - Empathetic Marketing

Empathetic marketing acknowledges people’s emotional needs, promotes inclusivity, diversity, and brings meaningful value to their lives.

The goal is to create content that resonates with consumers on an emotional level. Like putting yourself in the other person’s shoes.

Pay attention to the media and you’ll see why we’re all in need of some empathy.

Nobody likes to be treated as just another sale.

We all want to feel unique and valued. That’s why there’s a lot of emphasis on creating experiences that resonate on a personal level.

Brands that demonstrate genuine empathy in their marketing efforts will be more successful in building long-lasting relationships with their customers.

2 - Artificial Intelligence (AI) and Machine Learning

Infographic illustrating AI and machine learning roles in enhancing customer retention in marketing, with data analysis visuals.

Unless you’ve been living under some rock stuck in the 80s then you know AI is dominating everything – retention marketing is no exception.

You can use AI to personalize customer experiences, predict customer behavior, and automate your customer service.

Machine learning algorithms can analyze vast amounts of data to identify patterns and preferences which helps improve the overall customer experience.

I understand some people aren’t quite receptive to it but AI is here to stay and it certainly has its benefits.

3 - Data Analytics

Data in itself isn’t new, but what’s changing is the scale and sophistication with which businesses can analyze and use said data.

All the advances in technology allow us to collect and process data at unprecedented volumes and speeds.

This evolution allows for more granular and sophisticated analysis which leads to highly personalized customer experiences and predictive modeling.

Tie that in with AI and it gives businesses the ability to anticipate and respond to customer needs with a level of personalization that honestly was previously unattainable.

4 - Omnichannel Marketing

Omnichannel marketing means creating a seamless customer experience across multiple channels or platforms.

It could be a physical store, a website, social media, mobile app, etc.

What is interesting though is how quickly it’s changing.

The global omnichannel retail market is expected to grow to $21.86 billion by 2032.

That’s an estimated growth rate of about 307.84% from 2023. We’re talking less than 9 years. (yes, I did the math).

The takeaway is you need to work on growing your channels ASAP!

Final Thoughts on The Importance of Customer Retention

Customer retention isn’t just some component of your marketing strategy.

It’s a fundamental aspect that can significantly dictate the long-term success of your business.

We both know customer expectations are always changing and competition is fierce, so the ability to retain customers is more than just an advantage – it’s a necessity.

Take the time to understand your customers, personalize their experiences, and create value that goes beyond your products or services.

I guarantee if you focus on keeping your current customers happy you’ll see improvements in both customer loyalty and profitability.

Put everything you just learned into good use.

FAQs

Frequently asked questions and their answers.

Attracting and retaining customers is important for several reasons:

  1. Sustainable Business Growth.
  2. Cost Efficiency.
  3. Increased Profitability.
  4. Brand Advocacy.
  5. Feedback and Improvement.

The most important factor is customer satisfaction.

That is because satisfied customers are more likely to remain loyal, make repeat purchases, and recommend the business to others.

The different ways customer retention (positively) affects sales include:

  • Repeat Business.
  • Higher Transaction Values.
  • Referrals.
  • Predictable Revenue.

Retention is the strategies and actions taken to keep a customer engaged and loyal to a brand after their initial purchase.

It involves creating a positive customer experience, efficient communication, and making sure your customers are always satisfied.

The main goals of retention marketing include:

  • Enhancing Customer Loyalty: Building a strong, loyal customer base who will continue to purchase and support the brand.
  • Increasing Customer Lifetime Value (CLV): Maximizing the total revenue a business can expect from a single customer over the course of their relationship.
  • Reducing Churn Rate: Minimizing the number of customers who stop using a product or service.
  • Building Brand Advocates: Encouraging satisfied customers to promote the brand through word-of-mouth.
  • Gathering Customer Feedback: Using insights from existing customers to improve products, services, and customer experiences.

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