Measuring and encouraging customer retention is important for businesses in many industries. There are a few great measures to see how you are doing in this area. Your Favorite Orange County Bookkeeper is here to provide some tactical tips for keeping customers coming back!
Measuring Customer Retention
The most common metric to measure customer retention is the customer retention ratio. The best report to run to gather the data for this is a Revenue by Customer Summary Report. Each customer should be listed in a row of your spreadsheet, and each year’s sales for that customer should be listed in the column next to the customer’s name.
From this report, you can get several helpful numbers. For this example, let’s use 2020-2021 as our measurement period.
A = How many customers you had with sales in 2020
B = How many customers you had with sales in both 2020 and 2021
The formula B divided by A will give you the retention ratio. The formula A – B will give you a count of how many repeat customers you lost.
C = How many customers you had with sales in 2021, but not 2020
C will tell you how many new customers you gained in 2021. This doesn’t inform customer retention metrics, but it does help to know how many lost customers you replaced with new ones.
We can also measure increase and decrease in sales from repeat customers using dollar sales figures from each year.
D = 2020 total sales of customers you had with sales in both 2020 and 2021
E = 2021 total sales of customers you had with sales in both 2020 and 2021
The formula E divided by D measures the percentage increase or decrease in sales of your repeat customers, so that you can see as a trend whether they are buying more or less from you. A lot of factors go into being able to influence this number, including upsell and cross-sell opportunities over time, sales communications, your business model, and products offered to repeat customers.
An additional measure is customer lifetime value, which is easy to calculate. Run your Sales by Customer Summary Report for all of the years that you have in your accounting system, then sort by highest revenue. Your most valuable customer over the years included will be listed at the top of the report. This is helpful in finding your Average Revenue Per Customer and variation in different customers’ spending habits.
Want to compare how you’re doing with other businesses? Industry-standard value ranges for each of these metrics vary greatly. However, your best competitor is yourself and learning how you can improve your own results year after year can be time very well spent.
Encouraging Customer Retention
No matter what industry you’re in, the best thing you can do to improve customer retention is to maintain an email list of customers, so that you can communicate with them on an ongoing basis. Letting them know when you have sales, new products and services, and even new staff members can go a long way toward building long-term relationships.
Other ways to promote customer retention include:
- Your business model – a VIP membership or subscription model with perks and special access and bonuses can work for numerous businesses to maintain customers
- Rewards programs
- Special events
- Special gifts
- Thank you notes
- Special discounts or exclusive offers
- Social media presence, especially groups and active engagement where questions are encouraged and answered
Anything to make your customers feel special will work to increase retention. Think about what you can do to increase customer retention and make a plan to execute your ideas. If you’d like to find out more about calculating these metrics, please reach out to your Favorite Orange County Bookkeeper at Team One Accounting.