Your enterprise’s ability to retain it's existing customer base is one of the most vital components to sustaining growth and profitability year to year. Here are three key customer retention questions every business owner should be able to answer.
What percentage of your customers return each year?
The initial step to understanding retention is to know your customer retention rate. First, take your total customers from the end of a period and subtract the total customers you added during the period.
Then, take that number and divide it by the total customers from the start of the same period. The result is your retention rate for that period. That rate by itself doesn’t tell you much, so you need to compare it to the same time period last month and for prior years.
A rising rate means you're on the right track, while a shrinking rate means you need to make changes. According to the Harvard Business Review, a 5% increase in your retention rate can increase profits by 25-95%.
What percentage of your revenue comes from returning clients?
Core customers almost always contribute the most to your profitability. But how much? To figure out your returning customer revenue percentage, start with a list of revenue by customer for the last 12 months.
Identify the returning customers and add up revenue attributed to them. Divide that number by your total revenue.
Use this information to balance your spending between new customer acquisition and retaining your core customers. If you are like most businesses, you will realize there is tremendous value in spending more time and effort on retention, even when your business is full!
Do you know who your most valuable customers are?
Now identify which customers spend the most and return the most often. Odds are, many of your top customers have similar characteristics. In the end, your goal should be to keep these customers satisfied and get more just like them.
Don’t make the mistake of assuming business success comes mostly from constantly adding new customers. While marketing efforts typically focus on acquiring new customers, it's wise to first focus on keeping your current clients for sustained growth and profitability. The best place to start is to calculate and understand your base retention numbers.
Customer Retention Case Study
Let's look at a real-world small business scenario to see these 3 customer retention questions in action.
Fabulous Nails starts the year with 700 active clients. They add 300 new customers during the year, and their active client base is 800 at the end of the year. On the surface things look good, as an increase of 100 clients is 14.3% in growth.
But the retention rate is just 71.4% (800 clients - 300 new clients means 500 of last year’s clients still use Fabulous Nails. 500 divided by 700 = 71.4%). To determine if this is a good retention and growth rate, these figures should be compared to the last few years’ performance.
Fabulous Nails total annual revenue is $1 million, and the revenue from the 500 returning clients is $900,000. In this case, the core customers represent 90% of the revenue but only 62.5% (500 divided by 800) of the customers.
The average annual revenue generated by each client is $1,250 ($1 million divided by 800 clients). If the top 20 clients represent $100,000 in annual revenue or $5,000 per client yearly, you can quickly see how important they are!