Small business owners work hard to grow their companies. While focused on growth, however, it's easy to become over-fixated on new customer acquisition.

It might be counterintuitive, but customer retention is actually more important for growth than customer acquisition. Businesses that consistently lose customers waste money on customer acquisition, and fail to develop a loyal base of repeat customers.

Research helps us quantify the value of repeat customers:

Table of Contents

• What is Customer Retention?
• Why is Customer Retention Important?
• Research Summary: Learning from a Survey of 1000 Small Business Owners
• How You Can Measure Customer Retention
• Popular Retention Marketing Tactics

What is Customer Retention?

Customer retention refers to your business’ ability to keep customers active from one period into another. It is a metric that is commonly used to measure customer satisfaction and business health. In addition, customer retention often refers to a branch of marketing that focuses on the customer lifecycle after a customer has been acquired.

Why is Customer Retention Important?

Customer retention is important because it is a measure of your customer satisfaction and critical for the long-term viability of your business.

Customers decide to stick with companies that consistently meet their needs. Over time, this develops into meaningful relationships and customer loyalty. Having an above average churn rate is a signal that your customers are not satisfied with your product or service.

Economically, there is a strong correlation between customer retention and business health. Increasing customer retention increases customer lifetime value. Greater lifetime value leads to faster growth and more profit.

Research Summary: Learning from a Survey of 1000 Small Business Owners

In a joint study published by BIA/Kelsey and Manta, research provides tangible data on the value of existing customers. The study included the insights of nearly 1,000 small business owners, 61% of which reported that existing customers were the source of over half of their income.

For a small business owner, long term growth may be limited if revenue must constantly be reinvested to acquire new customers. However, this study suggests that time spent developing meaningful relationships with your existing customers can be an important source of new revenue. Although expansion is important, acquiring new customers can be less profitable because of the time and money used to market to new customers.

The study reported that sixty-two percent of small business owners spend the majority of their annual marketing budgets on retention. The data indicates that this is a wise business decision. In fact, an existing customer may spend up to 67% more than a new customer.

Existing Customers Drive Small Business Success

Understanding customer retention is one of the most important ways that you can grow your business. According to the study, the cost of acquiring new customers can be up to 10x more than satisfying loyal customers. However, it is possible that small businesses do not know how to measure customer retention. Below, you will find how customer retention can be calculated and suggestions to improve your business' customer retention.

How You Can Measure Customer Retention

Measuring your customer retention is relatively simple provided that you are tracking the necessary business metrics. After you measure your retention rate, you should compare it to benchmarks from your industry. For example, good SaaS software companies have an annual retention rate of over 85%.

Example Customer Retention Formula

The customer retention formula differs for different types of businesses. For example, restaurants and offline retailers should use a different formula than subscription software companies.

Here’s a formula that businesses that rely on one-time purchases can use to calculate annual customer retention:

Here’s a formula that businesses with subscriptions can use to calculate annual customer retention:

Popular Retention Marketing Tactics

As mentioned above, retention marketing is an entire branch of marketing within lifecycle marketing. There are individuals who specialize in retention marketing their entire careers. The tactics they use can be applied to your business to engage existing customers and reduce churn.

Leverage Customer Feedback

One of the best ways to improve customer satisfaction is to ask for and act on customer feedback. This can be done in a one-off manner, or at-scale through the use of Net Promoter Score (NPS) surveys.

If asked properly, customers will share insightful, actionable feedback. Your business can address their concerns directly, and work to ensure that no additional customers experience the same issues in the future.

Customer Loyalty Programs

Customer loyalty programs are built specifically to increase customer retention. Airlines, hotels, pharmacies, restaurants, and many other types of businesses have successfully used loyalty programs for years. In fact, even dentists offer customers a discount in exchange for continued business.

You can implement a loyalty program manually using punch cards and stamps. There are also many software companies that make it easy to design and launch digital loyalty programs.

Email Marketing

Email marketing is one of the most powerful and profitable channels that businesses have. It allows you to establish one-on-one relationships with each customer, and each message is nearly free.

There are many ways that email marketing can be leveraged to increase customer retention. Here are a few popular types of campaigns that you can test at your business:

Retargeting Ads

Retargeting ads are an effective way to increase your purchase conversion rate. Put simply, customers who were close to making a purchase, but decided not to might change their minds if they see an advertisement for your business.

You can run retargeting ads through Facebook, Google and Instagram. Below, you can see retargeting ads from Freshchat and Target:

VIP Campaigns

Everyone loves being treated like a VIP. Using your data, you can create specific segments of customers to target with VIP experiences. These customers are likely to appreciate the effort your business is making, decide to make a purchase, and remain loyal.

Here’s an example of a VIP campaign that you can run: