customer loyalty

04.22.2019

growth  |  6 min read

How to calculate customer loyalty

The age of personalized customer service is upon us, and for small businesses, it’s critical to super-serve existing customers. For many small businesses, 20% of their best customers will drive 80% of their revenue and according to a Temkin Group study, existing customers are:

  • Seven times more likely to accept an offer;
  • Four times more likely to refer customers; and
  • Five times more likely to purchase.

With these metrics in mind, why do so many small businesses spend their time and energy on acquisition, which can cost resource-strapped small businesses up to 5 times more than customer retention?

Part of the reason may be unfamiliarity with how to track and analyze basic customer retention markers like customer retention rates, customer churn rates, and customer lifetime value. Understanding these metrics can help small businesses achieve growth and sales goals or indicate that it’s time to change course if headed in the wrong direction.

This article will help small businesses measure data needed to keep their existing customers and offer suggestions on how to keep them. While not an inclusive list of data points, it’s a good start to understanding how customer retention and loyalty play a big part in keeping your small business sustainable.

Customer retention rate

The standard for measuring customer loyalty is the customer retention rate (CRR). The customer retention rate tells you how many customers you’ve kept over a specific time period.

The CRR formula is ((E-N)/S)) x 100.

E represents the number of customers at the end of a week/month/quarter or another time period.

N is the number of new customers you sold to or acquired during this time period.

S equals the number of customers you had at the start of the time period.

This number can tell you important things about your business, like how likely you are tokeep new customers and how long you can keep existing customers. CRR can also potentially predict company growth. Once you understand your customer retention rate, you can strategize ways to retain your best customers. Some ideas include:

Email personalization, which may be achieved through a CRM with special tips, how-tos or tools; * Providing self-service opportunities;* Offering special webinars for existing customers; or * Creating exclusive content.

Customer churn rates

Customer churn rate, or attrition, is an important metric to help understand why once-loyal customers have stopped using your product or service. Examples of customer churn include customers closing accounts, canceling subscriptions, not renewing a service agreement or contract, or a client’s decision to move to another service provider.

As painful as it might be, tracking the number of customers you’ve lost over a given time period is important to business success. In order to calculate churn, you’ll need to designate a time period for the total number of customers you acquired. That formula looks like this:

Customers churned in period/Customers at the start of the period.

You can also use this number to see how you measure up against industry averages. For example, financial services churn is around 25%, according to a Statista report, and the churn rate for travel is at 18%.

In addition to running pure quantitative analysis, you’ll also want to understand churn from a qualitative perspective. Tactics to understand churn include social media listening, surveys or quizzes, and monitoring your sales data.

Tips for reducing churn rates include: Identifying customers early, which may be detected in use patterns from more frequent to less frequent; Providing more customer support for known issues; andImproving your onboarding process.

Lifetime customer value

Another important metric is monitoring the customer lifetime value, which is determining how much money each client can generate for your business. Although this metric is important, it’s not always the most straightforward metric to calculate.

Generally, the formula looks like this:

LTV=(APV-F) x T

In other words, customer lifetime value can be calculated by multiplying the average customer spend by the average customer lifespan. The longer a client buys from you company, the greater their lifetime value. According to an article in the Harvard Business Review, relentlessly prioritizing segmentation, retention, and monetization, assures future client profitability is a top priority.

Ideas to boost customer retention

Now that you’ve calculated and analyzed your retention data, what should you do to get those numbers where you want them to be? While making your customers happy by addressing their needs is a great place to start, consider what else you can be doing in terms of innovation, services, or upsells. Think of unique opportunities to drive customer loyalty and retention. For example, many airlines, such as American, British Air, and Delta, along with retail shops and restaurants, offer loyalty programs. Determine if such a program is right for your business.

Even a smaller, but still meaningful, gesture could make a difference. Businesses like Zappos and Nordstrom are known for handwritten thank you notes. In a world of texts and emails, these retail giants stand tall. At the local level, servers at four-star restaurants are also known for penning hand-written notes to their customers which are placed in the customer vehicle during valet checkout, for example.

If handwriting notes is still too much, make your customers feel extra special by listening to them and engaging them in your business processes.

Are they making recommendations on services you could provide in the future?Are they willing to try new products or services and share feedback?Do they advocate for your business on social media?

Implementing recommendations from your clients shows you value them beyond the revenue they bring to your business.

Customer retention is a powerful strategy for keeping your business thriving. Understanding just a few metrics can help improve your business and, according to one study, increasing customer retention by just 5% means can increase profits by 25% to 95%.


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