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When you’re a small business owner, your customers are your most valuable asset. While you need to grow your customer base to increase sales, it’s even more critical to keep your existing customers coming back. By doing this, you can guarantee more revenue while using fewer resources.
To build a loyal customer base — and set your business up for success — here is a customer retention guide.
What is customer retention?
Customer retention is the ability of a company to keep its customers over a specified period of time. Retaining customers and focusing on customer success are fundamental to your business in the long term, for various reasons, including:
Affordability: Acquiring new customers can cost five times more than retaining customers. Since your existing customers are already familiar with your products and services, you can save money on marketing expenses and customer support.
Return on investment (ROI): The probability of selling to an existing customer is 60–70%, whereas the probability of selling to a new customer is 5–20%. Considering those statistics, it’s worthwhile to focus your efforts on existing customers.
Loyalty: Since you’ve already established your brand with existing customers, they’re more likely to choose your products and services over competitors’. And since they already value what you’re selling, they’re willing to pay more.
Referrals: One of the most effective (and cost-effective) ways to advertise your business is through word of mouth. Loyal customers are more likely to refer their family and friends to your business, and since they have close relationships with those prospective customers, they’re a trusted source.
The difference between customer retention and acquisition
Both retention and acquisition are essential business strategies to grow your sales, but it’s critical to know when you should focus on each of them. If you’re just starting out, you need to build your customer base. However, once you’ve established this base, focusing on customer retention is a more budget-friendly, reliable way to generate predictable revenue.
Customer retention formula
To figure out your customer retention rate (CRR), you need to define a set period of time (e.g., a quarter or a year), and you need the following information for that period:
- Number of customers at the start of that period (S)
- Number of customers at the end of that period (E)
- Number of customers acquired during that period (N)
Once you have those numbers, you can plug them into the customer retention rate formula, which is:
(E–N) / S x 100 = CRR
As an example, let’s say you start the quarter with 50 customers, gain 10 new customers, and lose five customers:
((55–10) / 50) x 100 = 90% retention rate
Important retention metrics
| Definition | Formula |
|---|---|
| Repeat customer rate measures the percentage of customers who come back for another purchase. | (Repeat customers / total customers) x 100 |
| Repeat purchase probability estimates the likelihood of customers making a repeat purchase. | (Number of customers that purchased your product X how many times) / total number of customers |
| Purchase frequency/rate calculates how often customers are making purchases over a set period of time. | Number of purchases / number of customers |
| Time between purchases shows you how long a typical customer goes before making a repeat purchase, and is typically calculated over a year-long period. | 365 days / purchase frequency |
| Average order value tracks the average dollar amount customers spent per order over a given period of time. | Total revenue / number of orders |
| Customer lifetime value (LTV) indicates the total revenue a business can expect from a single customer. | Average order value / purchase frequency |
| Customer churn rate is the number of customers you lose over a set period of time. | Number of customers lost / total number of customers |
Square’s POS system collects important information using individual buyer profiles, such as a customer’s first visit, last visit, frequency of visits, total visits, average spend, and total spend. You can gain valuable insights into key retention metrics through the analytics dashboard that comes with Square.
Customer retention strategies
As you track your retention metrics in your POS or through other avenues, consider implementing these customer retention programmes to help you improve your customer retention rates:
- Offer top-notch customer service. Good customer service never goes out of style. Be friendly and helpful so customers leave — and come back — happy.
- Set up a loyalty rewards programme. With a loyalty rewards programme, customers are incentivised to return. Reward customer loyalty with points for each purchase, so customers can earn “free” merchandise as they spend more.
- Incentivise referrals. Offer attractive store discounts to customers who successfully refer their friends and family to your business.
- Personalise the customer experience. Thanks to modern POS systems, you can use customer insights to make recommendations based on a customer’s purchase history, which makes their experience feel more personal. And, of course, drop their name and personalise communication whenever possible.
- Solicit customer feedback. Offer options such as website surveys or comment cards to find out what your customers want and adjust accordingly.
- Send coupons via email campaigns. Send out loyalty discounts via email coupons or discount codes to make your customers feel appreciated — and keep them coming back.
- Engage them on social media. Connect via social channels to build customer relationships and offer accessible customer service.
- Upsell. An effective upsell strategy shouldn’t be just a sales tactic – it should add value for the customer. Recommend relevant promotions based on customers’ past purchases.
