Updated: 14 March 2024
Contributers: Eda Kavlakoglu, Keith O'Brien, Amanda Downie
Customer retention refers to an organization’s ability to keep customers buying their products and from switching to other providers.
It is increasingly important in a world where consumers are more likely to switch products than ever before. The business case for customer retention is obvious. McKinsey states1(link resides outside ibm.com) that companies need to acquire three new customers to make up the business value of losing one existing customer.
Customer retention is a key component of the overall customer journey. Organizations that succeed at customer retention will benefit by encouraging customer loyalty. Organizations that invest in customer experience management understand the importance of customer retention.
Retention is best achieved by overcoming barriers to switching, maximizing the value of products and services, meeting customer expectations and enriching the customer experience (CX).
Learn about barriers to AI adoptions, AI governance and risk management solutions.
Register for the IDC report
Customer retention requires a series of initiatives and processes designed to build trust and enhance customer loyalty. It helps structure the fulfillment of brand promises through the consistent delivery of value.
Organizations should design initiatives that are either company-led (e.g. onboarding and customer loyalty programs) or customer-led (e.g. app download and beta testing) to encourage brand loyalty. The goal is to activate first-time buyers and then keep customers from switching to a competitor. An effective customer retention program can include the following features:
Collect, analyze and distribute customer reviews and surveys. Detect customer behaviors and trends that enhance the user experience (UX) and leverage them toward retention development.
Organizations should develop separate marketing campaigns for repeat customers who have bought recently and absentee customers. Tools they can use include personalized email marketing powered by automation to announce special promotions and updates to keep your brand fresh in the minds of customers. Additionally, they should encourage and incentivize their customers to follow them on social media so they can send them updates and offers. Organizations can also use a communications calendar to chronicle interaction and enrichment (e.g., upsells and cross-sells) and to schedule special promotions and announcements.
Invest in customer success with self-service tools (e.g. knowledge bases and community forums) that educate users and provide solutions without requiring assistance from customer care teams. Organizations can also work with influencers to demonstrate how to best use their products or services.
As part of your ecommerce strategy, offer a new product or service that solves customer dilemmas and is superior to that of your competitors. This adds incentive for customers to commit themselves to your brand.
Organizations have several ways to meet customer expectations and keep them buying products or services from that provider.
Simply put, an organization that makes a high-quality product or provides excellent services is likely to receive customer loyalty in response. Customers are unlikely to switch if they are happy with what they currently use.
These can be things like customer loyalty programs or exclusives to repeat customers. If customers are rewarded for their patronage, it will make it harder for them to switch to another provider.
In scenarios where something goes wrong with a product or service, organizations can keep customers happy by responding to their complaints immediately. Prioritizing customer support is a must-have for organizations that want to retain their customers.
Providing cost-effective products and services is an important component of customer retention. An organization that offers high-quality products or services at a lower price point than the competition will likely find extremely high customer retention figures.
There are several ways an organization can track the health of its customer retention initiatives. Here are five key metrics that help organizations improve their customer retention.
- Customer churn rate (CCR): This is the percentage of customers lost over a period of time. Companies with a low customer churn rate tend to have a higher CRR, so the closer the CCR is to 0%, the better.
- Customer lifetime value (CLV): This is the projected revenue from a customer throughout the purchasing lifecycle. It helps businesses measure customer loyalty. LTV also identifies ways to maximize the return on investment (ROI) for product marketing and support team development.
- Customer retention rate (CRR): The percentage of customers retained over a given period of time. It is achieved by measuring how many customers remain at the end of period and subtracting the number of new customers acquired during that period of time, divided by customers at the beginning of the period. Though a 100% CRR is ideal, it varies across industries. Increasing an organization’s CRR can increase profits by over 90%.2
- Net Dollar Retention (NDR): This is a churn metric that calculates the percentage of recurring revenue retained from existing customers over a period of time. Since NDR considers multiple factors (e.g. downgrades, cancellations, pause requests) that impact recurring revenue, it is the best indicator of customer retention success (versus Monthly Recurring Revenue (MRR) and Annual Run Rate (ARR)).
There are several tools organizations can use to increase customer retention.
Customer relationship management (CRM) system: A CRM system unites multiple functions (e.g. project management, contact management, digital marketing) into a single data-driven platform. A “unified” CRM system automates communications and streamlines internal processes to enhance the overall CX. It may include personalization features (e.g. targeted content, offers, alerts) that silo customer engagement within a specific context. Overall, a unified CRM provides procedural consistency and reliable data that help increase customer retention and company revenue.
Chatbots: A chatbot is an artificial intelligence-powered computer program that uses natural language processing (NLP) to decipher customer inquiries and provide automated responses. This stimulates informational exchange, which personalizes the online CX while collecting user data. AI chatbots also suggest or prompt customer actions that lead them to their desired resources. These processes help customers achieve their site visitation and purchasing goals, and build brand reliability, trust and loyalty, which increases CRR.
Loyalty programs: Many organizations have established robust loyalty programs that reward customers for their purchases. Chipotle and Starbucks, for example, have long-established loyalty programs that encourage repeat purchases through free items based on points accrued.
While every organization needs a customer retention strategy customized to their needs, there are some common best practices they should keep in mind.
- Accelerate time to value: Assess customers’ needs throughout the onboarding process to sharpen resolutions. Synchronize their requirements with product and service features so customers can make swift purchasing decisions and quickly allocate resources.
- Align with customer needs: Use a roadmap to synchronize products and services with customer needs. Include customer research to gain insights and guide efforts toward providing customer satisfaction, which builds brand trust.
- Drive product adoption and expansion: A positive product experience (PX) helps drive a successful CX. Adoption and expansion are the fruit of resolving customer needs, challenges or pain points. This increases brand trust and sentiment as well as customer loyalty.
- Embrace value-based selling: This is a consultative approach that prioritizes customer value during the purchasing process. It prioritizes needs and enables customers to make well-informed purchasing decisions. This establishes a positive initial experience, which can establish brand loyalty and increase brand sentiment.
- Manage customer engagement: Use a high-touch engagement model to optimize live interactions and build customer rapport. This creates high-level engagement that drives customer success, which builds brand sentiment and trust.
Customer retention helps facilitate the growth and stabilization of your customer base and company revenue. By consistently delivering value, companies fulfill their brand promises which elevate credibility, trust and brand sentiment, appealing to the average customer.
Here are the four major benefits of customer retention:
- Customer loyalty: Current customers already trust your brand, so it is easier to make them repeat customers.
- Brand ambassadorship: Loyal customers act as brand ambassadors, which can help increase customer acquisition via word-of-mouth marketing (e.g. testimonials and referrals).
- Cost savings: Repeat customers trust the brand, so there is no need for an extensive retention marketing strategy or advertising spend (versus new customers that require extensive spend to create brand sentiment and trust).
- Improved profitability: Satisfying new and repeat customers sustains loyalty and increases the bottom line. In fact, happy customers are prone to make repeat purchases over a longer period of time. According to McKinsey (link resides outside ibm.com), “80 percent of the value creation achieved by successful growth companies comes from their core business—namely, generating new revenue from existing customers.”
Deliver consistent and intelligent customer care across all channels and touchpoints with conversational AI.
With AI for customer service, IBM Consulting helps organizations develop a data and AI strategy to transform the customer service experience, empower their employees, delight customers and improve profitability.
Meet a natural language AI chatbot that understands human conversation and improves the customer experience.
Companies today are modernizing customer care, using advanced AI to ensure a positive customer experience from the first interaction through the buyer's journey.
Learn about the benefits and challenges of omnichannel operations in customer service, as well as strategies to ensure your approach is successful.
More than ever, organizations must stay on top of changes in the customer service experience to improve customer satisfaction and meet increased customer needs.
Customer-centric organizations have many tools, examples, and use cases at their disposal to meet the growing needs of today’s customers.
Organizations must combine customization with organization-wide rules for how to respond to customer issues, creating the best mix of personalization and scalability.
Customer experience creates an emotional bond that helps companies capture more customers, deepen customer loyalty and increase customer lifetime value.
Sources
1 Focusing on existing customers to unlock growth (link resides outside ibm.com), McKinsey, 16, August, 2023
2 Customer Recommendations Have Only A Small Business Impact For Big Brands (link resides outside ibm.com), Forrester, 18, November, 2020