Customer retention is the process of holding onto for a period desired by businesses. It is one of the most critical aspects of business growth and development. Customer loyalty increases the revenues and the lifetime value of customers. Measuring customer retention rate helps the company to assess different aspects of the business process and to develop new policies and plans to achieve business goals and increase business revenue by retaining customers.
Many analysts and researchers have developed several methods for calculating customer retention rate, which can help companies quantify a strong bond and relationship with customers.
Definition of customer loyalty
According to crazyegg.com, the company co-founded by digital marketing guru Neil Patel , “Defining customer loyalty in marketing is the process of getting existing customers to continue purchasing products or services from your business.”
But, your criteria for retaining these customers will vary depending on the industry or vertical of your business. A travel agency will have to measure the loyalty of its customers over the long term because, on average, people only fly once a year. On the other hand, if a restaurant only measured its loyalty once a year, it would miss out on a number of important trends and opportunities . Some E-commerce even measure their loyalty rate daily in order to detect any fluctuations.
Why are customer loyalty metrics so important?
The more customers you retain, the more recurring revenue you can generate or the more upsells and cross-sells you can get afterward. Also, a customer who stays with you is happy with your products and services, which increases the likelihood that they will refer other customers to you . (The second “R” of the AARRR framework..😉 )
But you can’t improve your customer loyalty if you don’t track metrics such as lifetime value of customers and the churn rate. Businesses track their success in this area to see how well they are meeting the needs of their customers and whether they continue to gain their trust over time.
Marketing , sales , customer support , and even product management teams can all benefit from customer retention data. This insight helps each team refine their contribution to the customer journey and create more engaging experiences for your user base .
Before seeing the key performance indicators to follow to measure customer loyalty within your company, we recommend that you read our article on how to boost your customer retention .
The 10 customer loyalty indicators to measure
Numerous customer loyalty measures help the company to know its growth rate, customer retention rate and to discover new loyalty strategies to improve the sympathy capital of companies in the eyes of customers. Let’s see some of them.
1. Customer retention rate
The customer retention rate is the easiest indicator to understand the loyalty of your customers and the number of recurring customers you generate. There are several other metrics that can be tracked in parallel to help you better understand how your brand or business is performing.
Calculation :
The formula for calculating customer loyalty is expressed as a percentage and is calculated for a specific period, for example by week, month or year.
Customer retention rate = ((Number of customers at the end of the period – Number of new customers acquired during the period) / Number of customers at the start of the period)) x 100
2. Churn rate (We more commonly use the English term “Churn rate”)
The churn or churn rate measures the percentage of your customers who have stopped buying from you over a period of time. Some attrition rate is normal for any business, but if your attrition rate is above 5-7% , it’s time to take a look at what’s impacting your customer satisfaction.
Customer attrition rate
The churn rate measures the rate at which customers stop buying your products or services. This could be a customer who withdraws or terminates a subscription, or who stops engaging with your business.
Calculation :
Churn Rate = (Number of active customers at the start of the given period – Number of active customers at the end of the given period) / Number of active customers at the start of the given period
The calculation of the Churn rate is debated in the marketing world because there are a whole bunch of variants to calculate it, for example Hubspot proposes to remove from the calculation “all new customers acquired” in order not to distort the churn.
3. Customer acquisition rate
The customer acquisition rate shows the effectiveness of a sales & marketing policy and its impact on the acquisition and conversion of new prospects.
Calculation :
Customer acquisition rate = Marketing expenditure over a given period / Total number of new customers over a given period
This rate can be improved by multiplying the relevant promotional initiatives for your business. Paid search (SEA), free (SEO) campaigns, growth hacking and optimization of the AARRR structure, it’s up to you.
4. Growth rate of the average basket
Essentially, this metric is about the amount of revenue you generate from your customer success efforts. (Customer retention and loyalty) If your marketing team is able to up- sell , cross-sell , increase purchase frequency, and so on, that rate will continue to climb. Otherwise, your numbers will stagnate or decrease.
Calculation :
This measurement is generally monthly. To calculate it, you need to figure out your monthly recurring income (MRR) amount and then factor it into the formula. Again, since you are measuring customer retention, you should calculate the MRR for active customers only , and exclude any income generated by new customers.
Monthly income growth rate: (MRR at the beginning of the month for active clients -MRR at the end of the month from active clients) / MRR at the end of the month from active clients
5. The repurchase rate
The repurchase rate measures the percentage of your customers who return to make purchases during a given period . This metric can be a strong indicator of customer loyalty, but individual customer behaviors can also distort it. Take the example of a clothing retailer: some customers may only make one or two large purchases per year depending on the seasons or sales, while other customers may make smaller purchases each month in order to stay in the trend. Ideally, your marketing team should track the frequency of purchase for each individual consumer in addition to looking at the overall repeat buy rate.
Calculation :
This formula to be calculated per week, per month, per year or any other period defined in time.
Repurchase rate : Number of customers who bought at least twice during the given period / Total number of customers during the given period
6. Active user rate (Daily, weekly, monthly)
Disengagement is generally a key predictor of disaffection. So you need to make sure that your users stay engaged with your website and mobile app . This is where behavioral analysis comes in. Start by setting activity criteria for your users and check if they meet them. If they don’t, start re-engagement efforts immediately. (Think about the AARRR structure to create your ideal user journey)
To track your active users, we suggest using Metabase with your tool.
7. The customer lifetime value (Customer Lifetime Value: VVC)
Customer Lifetime Value (LCV) refers to the amount of revenue generated by a single customer . Marketers should track this metric consistently, although the time frame is based on your business’s offerings. Your business should aim for VVC which increases or remains stable. SIf the CVV is decreasing, it means your customers are low in value or you are losing customers at an increasing rate.
Calculation :
VVC = (Gross annual sales revenue / Total number of unique customers for the given year) x Average lifespan of a customer
By dividing your business’s gross annual sales by the total number of unique customers for the year, you get the average amount you can expect from a customer over the course of a year. Multiply this amount by the average lifespan of a customer based on data for the typical lifespan of a customer in your business, expressed in years.
8. Net Promoter Score (NPS) or Satisfaction Score
The NPS is a customer satisfaction indicator that measures the likelihood that your customers will recommend your business to others . This score indicates a customer’s overall satisfaction and loyalty to your brand.
A high NPS doesn’t guarantee customer retention and growth, but it can help identify brand “ambassadors” who are most likely to generate referrals. A low NPS indicates low customer satisfaction and may indicate that intervention is needed to reverse the situation.
Calculation :
NPS =% of promoters -% of detractors
To calculate this score, you need to ask your customers how likely they are to recommend your product or service to a friend or colleague on a scale of 0 to 10. Those who answer with a 9 or 10 are considered promoters; those who answer with a 6 or less are considered detractors.
A score close to +100 (all clients are promoters) will always be better than -100 (all clients are detractors).
From 50 the score is considered good.
9. Rate of loyal customers
The loyal customer rate is the number of customers who renewed their purchase from your business during a given time period. You should aim for a high rate of loyal customers because these are the most valuable customers for your business. Not only are they more likely to repeat their purchases, they’re also the most likely to recommend you.
To find this rate, you will first need to know your total number of customers over a given period (month, quarter, year, etc.). This number should include new customers and existing customers. To find the number of repeat customers, add the total number of existing customers who made additional purchases and the number of new customers who made multiple purchases. Enter this total as the number of repeat customers.
Calculation :
Loyal customer rate = Number of recurring customers / Total number of customers
10. Abandonment rate during the conversion funnel
A conversion funnel represents all of the steps necessary for a customer to complete a purchase on your website, platform or mobile app.
It is crucial to measure the loss throughout your sales funnel, and therefore the number of customers who abandon their “cart” before finalization and payment.
Within this article you will find some resources to effectively manage your sales pipeline.
Other customer loyalty indicators to take into account
Depending on your business goals and the interactions you expect from customers, other metrics can be useful to your customer success team.
For example, looking at the number of open tickets or the number of complaints made by a customer might motivate your success team to work on a solution. If the Regular communication and engagement with your customers is the norm for your business , it would be wise to measure the open and response rates of your emails. (Indicator measurable by each member of your team with a CRM as Twilead , allowing you to centralize all of your sales, marketing and customer relations actions.)
The important thing is to be able to quantify these values, to record them using the right technology, and to allow each department to access the data in real time if they need to resolve a problem with a customer.
It is imperative that your business devotes time and resources to improving customer retention . If setting up a comprehensive loyalty or success plan currently seems out of reach, start small. Start tracking the metrics mentioned here, your customer base will grow exponentially as well as your customer satisfaction rate.
