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How to calculate customer retention rate and implement retention strategies?

Most of the evolving SaaS companies think that having a new customer is the end of the game of success. But this is not quite true. Acquiring a new customer is no doubt necessary for your business but once the customer has entered your territory, a new game starts. You need to retain the customer for your continued growth. Hence, in this article we are going to talk about customer retention rate.

Customer churn is one of the most common problems SaaS companies face. For an ambitious goal a zero churn rate should be your aspiration. And if we look at quite the opposite of it, it means a 100% retention rate is the highest goal for any successful SaaS business. A 100% retention rate means that you are able to retain all your customers. Now, the foremost question comes to the mind is how do we achieve that?

Customer retention rate formulae

Before aspiring for the highest goal let us look at a basic formulae you can apply to your business to calculate your customer retention rate. This is calculated based on the number of customers you are able to retain at the end of the review period in comparison with the number of customers that were there at the beginning of the period. We don’t consider the new customers that were acquired during that period. In fact, we subtract that number from the total number of customers at the end of the review period.

So, the formulae goes like this: 

Customer Retention rate = (Ce – Ca) / Cb x 100

Where, 

Ce = Customers at the end of period

Ca = New customers acquired

Cb = Customers at the beginning of period

So, for example, in a year, if there were 100 customers at the beginning and you acquired 50 new customers and at the end of period, there are 120 customers then your retention rate is: (120 – 50)/100 x 100 = 70%.

This means you were able to retain 70% of your customers. Inversely, it also shows that 30% of them got churned. 

Implementing Retention Strategies

Retention rate is the north star metric of your business. This means it is the most important metric that shows the health of your business. Because only based on your retention rate you would be in a position to calculate your customer lifetime value (CLV). The higher the retention, the higher the CLV. And only when you have a high CLV measure from every customer, would you be able to expand your business by maximizing profit.

To achieve the above mentioned goals, you must have a customer retention program in place. This is basically an implementation of retention strategies at a holistic level to prevent churn and grow your business. 

In this article, I am going to talk about three pillars of customer retention at a conceptual level rather than giving direct instructions of implementing them. If you grasp these concepts then you can improvise your own ways to come up with specific steps to practice in your organization.

Flawless onboarding

As soon as the customer is ready to onboard, the customer success function should take over the customer retention program. Give a comprehensive orientation of your product to the customer so that both the parties should come on the same page. 

Customers should clearly know what to expect from your product right from the beginning. A Customer Success Manager (CSM) should demonstrate the value that the customer can derive from your product. If possible, they should formulate the business use cases in the customer’s context so that a realistic measure of expected value becomes apparent. This will make sure that the customer is all set for their onward journey and nothing comes to them as a surprise as they proceed.

Build Trust

Most of the customers who prefer to stay for long term with your business are because of the quality of relationship you have formed with them. Remember that while interacting with them, you represent a brand. It takes months or years for the customers to start trusting your company and realize your brand value. And that is based on the customer experience they have while using your product. 

Every interaction, every touchpoint should add some value to them. For example, the customer support team should be able to trace history of customer usage to give them personalized experience and avoid repetition in collecting information. A CSM can give bespoke recommendations for enhancing their product experience. Slowly, all these small value additions build up eventually to form trust in your relationship with your customer.

Customer Engagement

Customers who are fully engaged with your business are most likely to stay longer and continue to renew their subscriptions. Research shows that engaged customers represent an average of 23% premium in terms of share of wallet and profitability. Now, how to engage with your customers is most important while implementing a customer retention program

You have to keep the engagement frequency to the exact point where you neither exceed their available time so that you stop adding value to them, nor do you keep it so low that they completely forget about you. For those who need extra care you can deploy a high touch engagement strategy. While for those who are low in revenue and form a large group, you can use a tech touch engagement model. 

A combination of these two models is necessary to maintain all forms of communication along with justifying the cost of your employees. Making use of real-time usage data will help you recommend more personalized tips and suggestions to enhance their customer experience on your product. 

In the end

Raising your Customer retention rate is not an overnight process. It takes a lot of patience and consistency in your approach towards your customers that eventually leads them to stay with your company. Your product performance is no doubt the precursor to any strategy you can think of. Nevertheless, the quality of your interactions, the level of commitment you have towards your customers is reflected every time you have a touchpoint with them. 

The more personalized experience you give to them, the more connected they would feel to your brand. Initially, they see your company as no different from any other vendor and that’s quite fair too. Why should they? It is only the brand representatives they interact with regularly who get slowly integrated with their business ecosystem. And once that integration has taken place, once you have made your place in the customer’s day-to-day work life, their retention becomes a natural and effortless phenomenon for your business.

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