Customer retention is defined as the act of keeping existing customers that your company has already spent money to acquire. Attracting and acquiring new customers costs about 5 times more than keeping a current customer (in some industries, it may cost up to 30 times as much). Many enterprises assume customer retention is the most important performance indicator, so they focus more on customer acquisition, leaving their existing customers unsatisfied. In fact, customer retention is probably the most underutilized strategy in the business world, despite being powerful and leading to many opportunities that newly-acquired customers cannot give you. This is especially true for recurring revenue businesses that operate on a monthly subscription model.
Recurring Revenue Business Model
A company can make a profit in many different ways. It can get money through banking or private equity/venture capital investment, selling goods and services for cash, renting assets for a limited time, etc. For example, selling goods and services is a one-time transaction that can bring you a lot of money, but not as much as it could if you were to sell them over a longer period of time. When you rent an asset, you are responsible for the wear and tear, and you don’t have access to that asset while it’s rented.
With the advancement of technology, a model has grown to become one of the dominant forms of doing business: the subscription economy and recurring revenue businesses. In the past, people used to subscribe to things like magazines or utilities, but today, this business model has become ubiquitous. Just a few years ago, this business model was thought to be impossible, and the opportunities it brings can bring tremendous benefits for everyone involved.
Types of Recurring Revenue
There are three common types of recurring revenue in business:
1. Long-term contracts
When a company sells products or services on a contractual basis, its customers are bound for the previously-agreed-upon length of the contract to pay month-to-month. Typically, contracts don’t renew automatically, so once the contract expires, the parties can decide to revise, extend, or decline the terms of the business.
2. Subscription revenue
Businesses that follow the subscription revenue model charge their customers a recurring fee that’s processed every month, quarter, or year. Subscription revenue is powerful because of how growth compounds over time – revenue accumulates with each new customer instead of remaining flat month to month. The longer customers use your product or service, the more valuable they become. Since customer retention is cheaper than acquisition, businesses focused on retention will save on customer acquisition costs.
3. Supplementary purchases
For example, if you buy a quality shaving razor, you will have to keep buying replacement blades. After a significant initial purchase, regular purchases of supplementary accessories are sold at a discounted price. Despite being an old business model, it is a growing category of recurring revenue.
Why is Customer Retention Critical?
One of the most important metrics for a growing company to evaluate is customer churn because it accurately quantifies its customer retention. Customer churn is the percentage of clients that stopped using your business’ product or service during a specific time frame. Churn rate is calculated by dividing the number of customers lost during a certain period by the number of existing customers at the beginning of that period. The lower the churn rates, the higher the customer retention rate.
The reasons why your customers leave can be many, and they range from personal to preventable. However, the most common reason customers leave is that they don’t believe that a company actually cares about them – 9 out of 10 customers abandon a business due to poor customer experiences. But the good thing is that customer churn is within your control. All you need to do is find out how to improve your customer service and project management practices to make your clients feel valued.
However, customer retention is undervalued, while customer acquisition gets all the attention. The truth is that retaining existing customers is a much easier way to generate recurring revenue and is critical for the long-term success of your business. Customer acquisition does generate the initial sale, but retention brings in additional recurring revenue. The main reasons why customer retention needs to be the foundation of your company growth include:
- Affordability. Money spent on marketing means money spent on attracting new customers to your business. However, marketing changes once you add customer retention to the mix. When you focus on retention, you won’t need to spend as much money on marketing. This doesn’t mean that you should abandon marketing; you should supplement certain marketing methods with ones that cater to retention. It can cost you five times more (in some industries, up to 25 times more) money to acquire new customers than to retain existing ones.
- Better ROI. A mere 5% increase in customer retention can increase your revenue by 25-95%. In other words, even the smallest improvement in customer retention can translate into a substantial positive impact on your ROI.
- More referrals and word-of-mouth marketing. People loyal to a brand often become brand ambassadors and are more likely to refer their contacts to your company. When it comes to acquisition strategies, good word-of-mouth is one of the best strategies out there, and it’s completely free. Customer acquisition can happen naturally when you make retention a priority.
- More sales stemming from customer loyalty. You know that your existing customers already love your product or service, which is why it’s much easier to sell more to them than to newly-acquired customers. According to research by Bain & Company, retained customers spend more money and purchase more often than newer customers because they have learned the value of your product or service. Better customer retention will, therefore, convert more sales with a focus on upselling – offer your current customers upgrades or additional features to make more profitable sales.
- Increased customer lifetime value (CLV). Customer lifetime value is the expected profit that you get from each customer in your business. The better your customer retention, the higher your customer LTV. The aim is to spend as little money as possible on customer acquisition and gain more money through customer lifetime values.
- Getting more valuable feedback. Loyal customers always love to feel like brand collaborators. If given the opportunity, they will provide suggestions and opinions on your products/services or customer service. Having such an influx of ideas can help you see your business from another perspective and determine ways to improve your business. Also, it will have a positive effect on your retention rates because customers are more loyal to businesses that listen to and implement their customers’ feedback.
In the center of every great customer retention strategy is customer satisfaction, and you should measure it through data-driven analysis. If your customer churn rate is going up, the best way to reduce it is to stop gathering new leads and double down on your customer retention efforts. Unfortunately, many companies out there focus on new revenue, which can turn out to be an expensive mistake, once you understand the benefits that customer retention provides.
Some of the best and easy-to-implement customer retention strategies for a subscription business include:
- Understanding your KPIs. Engagement and usage rates are the best indicators of customer value and satisfaction. Also, customer feedback and support requests are vital metrics. Make sure that you keep accurate reports on such data.
- Making data available to everyone. Customer data should be available to all your employees so everyone knows where customers are within their journey. That will lead to more proactive engagement, and your customers will be at the center of everything you do (customer-centricity), which is much easier to achieve when everyone has the same understanding of the customer.
- Building momentum. Keep talking about tomorrow in order to foster excitement within your customer base and inspire interest in your company.
- Using the right communication platforms. To listen to your customers the right way, you need to use the communication platforms that they prefer. That way, you’ll always be available to help or answer questions.
- Improve your customer service operations.
Creating a loyal base of customers is the most desirable outcome for any business. Pursuing and acquiring new customers is thrilling, but the real value for recurring revenue businesses is in customer retention. The subscription economy has empowered modern consumers to think short-term – they can opt-in, cancel, and leave freely at any time. But as for your retention strategies, they should be based on long-term thinking.
For a recurring revenue business, customer retention is king, so find ways to focus your business efforts on creating and maintaining a dedicated and loyal fan base. In the long run, you will achieve revenue growth, but you’ll also find that these strategies are more effective and easier than any customer acquisition strategy.
When it comes to improving customer retention rates and developing the right strategies for making it happen, you need to rely on detailed business analysis and know which metrics you need to follow and how to calculate them. Consero offers a financial solution (including expert support and intuitive systems) that can help you better understand your business from every angle.
