Measuring Customer Retention – What a 91% Retention Rate Really Means
A business’ retention measures the percentage of customers that purchased within the last 12 months that also purchased within the prior 12 months. It is one of the most critical metrics to measure for any company. If you don’t have a solid business retention, then customers aren’t committed to working with you over the long term, and you must consistently devote time, money, and resources to find new customers.
Why long term business retention is so important
Long term retention is critical for the profitability of your business. As an example, for heavy equipment dealers, the revenue that each customer generates skyrockets when they move from year two to year three as a customer for a dealer. Customers purchase 2.9X more equipment, 9.1X more rentals, 4.1X more service, and 5.6X more parts in the third year as a customer, compared to the second year.
What that means is the longer a customer works with you, the more valuable they become for your business. Plus, losing the income from an existing customer is >10 times the value of a new customer. It will take 3 to 5 years to replace the income produced from an existing customer with income from a new customer. That makes it extremely important to hold on to your current customers.
This metric is crucial for profitability in both the short and long term. The question is, how do you go about measuring customer retention?
Measuring customer retention for your business
Measuring customer retention means looking at how many of your purchases came from existing and new customers over the past 12 months. Here’s how it is calculated:
Measuring customer retention using the above numbers would give you a rate of 91.7%.
What a 91.7% business retention rate really means
Although a customer retention rate of 91.7% may sound great, what it actually indicates is that you’re losing 8.3% of your customers each and every month. Losing 8.3% every month equals a turnover in customers of nearly 100% in one year. That’s your entire existing customer base!
How to improve your business retention
The simplest method for improving retention is to find out why customers are leaving. The best way to do that is through customer satisfaction surveys conducted by an outside third party. Using a third party will elicit candid comments that customers may not want to share with an employee of your company, and the surveys will provide specific feedback, so you can solve any issues quickly.
We recommend using Winsby to handle your customer satisfaction surveys. When they conduct surveys, we see an average increase in retention rates of 20% or more. They will work with you to develop an effective script, call your customers, find out any details related to negative responses, and share the survey results with you in real time. You’ll be able to solve issues fast, and your business will grow without any impediments!
Click here for more details on Winsby customer satisfaction surveys.
If you have any questions about measuring customer retention or conducting customer satisfaction surveys to improve it, contact our team today!