The Importance of Customer Retention for Small Businesses

Businesses are constantly scrambling to engage and convert new customers, and successful companies need efficient marketing, customer outreach and sales in order to bring in new business. Unfortunately, far too many businesses focus entirely on attracting new customers, and they fail to nurture and retain the customer relationships they already have.

business customer retention

An effective business strategy begins with analyzing your current customer base. These are people who have already bought your product or used your services, and they provide the clearest information on the type of people who should be targeted for future business. But this information is not only useful for statistical data – the people who have used your business in the past are the most likely to use it again in the future.

Understanding Customer Retention

Customer retention is the ability of a brand or business to retain customers through a set of activities, strategies and actions geared towards customer satisfaction and repeated business. It is an essential part of good business, and it begins at the very first contact between a company and a customer.

Retention has been shown to have a direct correlation with the profitability of a business. Since retaining current customers is often simpler and cheaper than acquiring new ones, most successful businesses put a premium on customer retention.

It is also important not to get caught up in traditional, inside-the-box concepts of customer retention and realize that it is important for any kind of business. For these purposes, you may exchange “customer” for “client,” “patron” or any other term for a person who engages in the services you provide. Every business and entrepreneur, from hair stylists to divorce attorneys to web designers, can benefit from the strategies of effective customer retention.

Customer Retention Formula

Since successful customer retention is a key determiner in the overall success of a business, it is important to be able to quantify it and track it. While there are multiple methods of measuring customer retention, the following formula is used as the standard:

Customer Retention = (CE – CN)/CS

CS: Number of customers at the start of the measured period

CE: Number of customers at the end of the measured period

CN: Number of new customers acquired during the measured period

As an example, let’s say you want to measure your company’s customer retention rate for the first quarter of last year. You began the quarter with 100 customers (CS). Within that period you gained 20 new customers (CN) and lost 10, so you finished the quarter with 110 customers (CE). Using those statistics, your retention rate formula would look like:

(110 – 20)/100 = .90

That means the customer retention rate for that period was 90%. Customer retention rate is the key indicator of the success of most businesses, and it is important to regularly measure retention and make adjustments to your strategy if rates begin to slip.

How to Retain Customers

There are many factors that are directly related to successful customer retention, and it is not only dependent on the specific product or service provided. Customer satisfaction is the measurement that is most closely related to retention, and a high level of satisfaction can be achieved with a quality product/service, exceptional customer service, a focus on customer relationships and several other factors.

keep customer happy

Some of the most effective strategies for keeping happy customers and earning repeat business include:

  • Constant Contact: Simply staying in touch can be the most efficient way of maintaining a good relationship. You should try to stay in contact with your customer base through email, phone, newsletters, social media and any other means that are necessary and appropriate.
  • Inside Access: Your current customers should be offered the best deals, rates and specials. They should feel as though being your customer makes them part of a special club with inside access to the best parts of the business.
  • Professional Integrity: As in any aspect of a business, professional integrity can be the most important element of customer retention. Do what you say; say what you mean; and always uphold any promises and guarantees made to customers. Simple honesty and integrity will do more for your customer relationships than clever marketing or special deals ever could.
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