• Business Tips

Why is Retention the Most Effective Way to Grow Your Business?

  • Felix Rose-Collins
  • 6 min read
Why is Retention the Most Effective Way to Grow Your Business?

Intro

Many business owners believe that the key to success and profitability is consistently acquiring new customers.

But that’s not entirely true.

While bringing in new business is obviously necessary, the key to profitability is eliminating customer churn and improving retention. In other words, it’s not about how many people you bring in each month; it’s about how many existing customers return for another purchase.

You may be asking yourself why this is. It flies in the face of common sense, but it’s still true nonetheless. If you want to grow your business, you have to retain your existing customers.

But what is customer retention? How does one measure it? And why is it so important to your business's overall success or failure? In this article, we’re going to answer all of these questions, laying out four reasons retention is so effective in business growth.

What is Customer Retention?

Customer retention is a key metric for business owners that showcases customers' loyalty level and how much business they’ve managed to hold onto over a prolonged period.

Retained customers are repeat customers. So, these would be individuals who have made a purchase from you in the past, decided that they liked what you were selling, and came back for additional purchases in the future. Your retention rate is crucial because it can provide insight into the user experience.

What is Customer Retention? (Image Source)

By analyzing your retention rate, you can determine how satisfied your target audience is with your products and services. A high retention rate means you’re doing a lot right and creating an atmosphere that encourages customers to return repeatedly.

A low retention rate is a serious alarm bell, which shows that a glaring issue is present somewhere in your organization. It could be that your product is lackluster, your website is not user-friendly, or your customer service team is dropping the ball and driving people away. This shows you whether you need to focus on redesigning your website, improving your products, a web audit of your SEO efforts, or hiring customer support specialists.

It could also mean that your pricing is too high, and competitors are pulling your once-loyal customers away with promises of a similar experience for less money. To counteract this, you’ll have to create new initiatives to draw people back.

Take the Revvi Credit Card as an example. This card offers a cash-back program where you can earn 1% when you spend and pay back your card. You start earning cash back after having the Revvi visa card for six months, and it can be redeemed for statement credits in increments of 500 points or $5. Those redemptions can be processed through the Revvi app, MyCCPay.com, or by calling Revvi’s customer service. This added value offered by a financial product works perfectly as a customer retention tool.

Although customer retention helps any business grow, a lot depends on the specifics of the business. For example, in the financial field, the long-term cooperation of customers plays an important role in the interests of both the company and the customers. A good example of this is Crypto IRAs, which only manage to maximize benefits for both parties in the long run.

While new sales are still important, they become much more critical when retention levels are low. All businesses experience some churn, and new business allows you to replace those you’ve lost while building up your customer base to create a steady stream of recurring revenue over time.

Your retention rate will dictate the importance of digital marketing initiatives based on whether you’re looking to grow your existing base or replace a large chunk of your churned audience.

How is Customer Retention Measured?

The customer retention rate metric should be constantly measured. This isn’t something to look at once every quarter and then forget. You should be taking an ongoing look at your audience to determine where they’re going and what you must do to get them to stay.

How is Customer Retention Measured? (Image Source)

When calculating your retention rate, you must first pick a period you want to measure. For this example, let’s say we’re measuring one month.

The first step is determining how many customers you started with at the beginning of the month. To make this easier, let’s go with a nice round number like 1,000.

Next, you’ll need to determine the number of customers you had at the end of the month. For this example, we can say 800 customers remained. But that doesn’t mean you lost 200 customers. There’s one other factor to consider.

How many new customers did you bring in over that period? We need to know this if we’re going to determine our retention rate properly. In this example, you generated 400 new customers.

To calculate the retention rate, let’s subtract our new customers from those we ended the month with.

That would be 800-400, which gives us 400. Now, we divide that number by the number of customers we started with and multiply the result by 100.

So, that would be 400/1,000 = 0.4 x 100 = 40.

Our customer retention rate is 40% for the month in question.

To review, the formula for retention tracking is as follows:

[(Ending Number - New Customers)/Starting number] x 100

Why is Customer Retention So Effective?

1. Customer Loyalty

Customer loyalty is one of the ultimate goals of any business. Creating a loyal audience of satisfied customers makes your continued operations easier.

Why is this?

Loyal customers are far more forgiving. A single poor customer support experience won’t be enough to push them away forever. Loyal customers tend to give you the benefit of the doubt and allow you to make it right when things go wrong.

Customer Loyalty (Image Source)

Those same loyal customers also can become brand advocates, spreading the word about your products and services, writing positive reviews, and posting about what you have to offer on social media.

But loyalty and trust are built slowly over time. That means to create an army of loyal customers, you must first retain them and keep them coming back for more. That’s why it’s important to put effort into various gifts and rewards that inspire loyalty. However, when developing these kinds of strategies, make sure to keep personalization in mind. Get to know your customers and gift them items they would like. You can also use templates or an AI-powered collage maker to create original designs and messages for customers to keep them loyal.

2. Affordability

New customers are expensive. That’s because customer acquisition marketing is costly. You’ll need to run targeted ads, identify keywords, perform prospecting outreach, and nurture leads through your sales funnel.

All of this is essential, but it also takes a lot of time and money.

Customer retention marketing, on the other hand, is far easier and more cost effective. You‘re marketing to people who already know you, have already purchased from you, and have consented to receive further communications.

Outreach typically involves email blasts, company newsletters, and phone calls. This carries a much lower price tag than marketing to someone who has no idea your company exists.

How much lower?

It has been reported that marketing to existing customers can be up to seven times cheaper than marketing for new business.

3. Customer Referrals

One beautiful thing about loyal recurring customers is that they bring referrals with them. This occurs when one of your loyal customers recommends you to a friend or family member, and that person makes a purchase.

Customer Referrals (Image Source)

Regarding customer referrals, some products are more easily promoted through word of mouth and direct communication. Typically, those are products with easily perceivable results like weight loss products, self-care products, Minoxidil, and other hair growth products.

Your loyal customers become walking billboards for the effectiveness of your business, bringing in more customers who can then be retained and make their own referrals over time.

4. Probability of Sales

Retained customers also have a higher probability of buying from you. Your retained customers are likely to buy and spend more than someone coming through the door for the first time. That’s why retention increases of just 5% can improve a company’s revenue by up to 95%.

Of course, this is easier for some businesses than others. Those that provide more than one product or service are more likely to grow with happy customers. These are people who will want to continue using your services while also adding on new ones. For example, HelloRache is a business that provides virtual assistants in the healthcare industry. Among its services are virtual receptionists. If clients already have this service and are satisfied with what they’re receiving, they might want to incorporate virtual scribes and virtual assistants, returning to generate more revenue for this growing company.

Conclusion

Your existing customers represent a growth opportunity for your business, allowing you to improve your bottom line without breaking the bank on new customer acquisition.

Of course, that’s not to say that you can ignore new customer acquisition. That will always be a vital piece of the business marketing puzzle. But with improved retention, you can save money, improve customer loyalty, gain referrals, and market with increased sales probability.

Monitor your retention rates closely and use them to determine how your retention efforts are going and what needs to be done to make them even better.

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