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Customer Retention and Churn

With this post, we’re launching our 4 part blog series covering some most essential KPIs (key performance indicators) that provide a quantitative measurements of your business performance. These include customer retention and churn rates, customer lifetime value, leads indicators, and cost per acquisition.

Depending on the industry a company dwells in as well as on its business model, organizations are usually gauging own success by measuring and analyzing various metrics. Since there is no one-size-fits-all KPI, B2B marketers should track a few core metrics that are most significant specifically to their business.

We suggest starting with a brief reminder of what KPIs actually are, why they are worth mentioning at all and then proceed to the importance of customer retention and churn metrics.

Performance Measurement and Success Indicators: How to Approach Them?

Tracking KPIs only works when business objectives are clear to the entire company, that is why understanding goals to be tracked is a prerequisite of performance measurement. As mentioned earlier, there is no one-size-fits-all KPI which is why even companies that share the same industry and target the same clientele may end up with different KPIs showcasing how their business is doing. Therefore, it is important for all business owners to thoroughly select the metrics that are really relevant to their specific business. In this regard, it doesn’t make much sense for business owners to measure their own KPIs against the same indicators of, say, niche leaders, or an average industry KPIs. It is much more reasonable to monitor how your own business’ performance indicators have been dynamically changing over time. The same relates to using KPIs in order to detect how current performance should be improved so that a company meets its future goals.

Customer retention and churn (the rate at which consumers abandon products and services) are often two essential KPIs that any eCommerce business should track. Minimizing churn is an obvious goal that is also essential to establishing and developing a sustainable and scalable business, but measuring customer retention should be the first step. If you’re an emerging B2B company with only a few customers, these KPIs as pure statistic figures might not be as informative; however, having a benchmark is important as you scale your business and the customer base.

Customer Retention Rate

The importance of customer retention cannot be understated, as it can give better insights into customer segments as well as help your company launch targeted customer marketing campaigns. 82% of companies have confirmed that the cost of retaining customers is much less than the cost of acquiring new ones while repeat clients generate around 43% of an online shop’s revenue but that number can reach up to 80% for leading  companies. What’s more, a customer retention increase of just 5% may result in a 25% boost to company profit. And even more so for B2B eCommerce companies, as each of their clients usually accounts for a tangible part of the overall revenue.

One of the recent surveys revealed a curious fact: many eCommerce businesses, regardless of their size, don’t track their retention rates. Despite this, customer retention rate remains one of the most important KPIs, since it displays the number of customers who demonstrate long-term loyalty.

Retention periods can be set monthly, quarterly, or annually, depending on a business’s particular goals and types of products they sell. Naturally, the metrics reflecting different periods of time (e.g. monthly or annual) significantly differ and provide different acceptance criteria. Usually, for a B2B company, though, annual retention rate measurement makes the most sense.

The rate can be calculated through the general customer retention formula found below:

Customer Retention Rate = [(# of Customers at End of Period – # of Customer Lost during the Period) / # of Customers at the Start of the Period]

Analyzing customer retention rate can also reveal other data, such as:

  • Percentage of customers who return as visitors week after week
  • Percentage of customers purchasing month after month
  • Whether a newly released product resulted in an increase or decrease of customer retention

Despite the importance of measuring customer retention, many companies still do not pay enough attention to it.  Instead, they are likely  making decisions based on other KPIs less crucial for long-term success.

Customer Churn Rate

Churn, also referred to as attrition or turnover, is another important KPI for businesses. This key metric indicates the percentage of clients during a certain timeframe who no longer purchase goods.

When expressed in a very general  formula, the customer churn rate equals the total number of customers lost divided by the total number of customers.

Customer Churn Rate = # of Customers Lost (Overall) / # of Customers since the Beginning

Although churn is something most eCommerce companies cannot totally avoid, it is a metric they should track and minimize as much as possible. High churn rates can prevent businesses from developing and often result in higher customer acquisition costs. Analyzing your churn rate effectively shows how your business manages to retain its customers.

Customer retention rate and churn rate can often be seen as two-sides of the same coin. While retention rate calculates the percentage of retained customers, churn rate demonstrates the percentage of customers who have dropped. Both metrics reflect the state of customer loyalty towards your goods or services and are excellent performance indicators you can use to improve your business.

Should you observe a decreased customer retention or a growing churn rate, it is a clear signal that your B2B clients are not fully satisfied. Consider revisiting your customer loyalty strategies, product and service quality. As customer satisfaction depends on multitude of factors, you should refine the customer approach across the entire business and align your departments in doing so.

B2B marketers, for example, can try resolving the issue of the customer loyalty by keeping in touch with both inactive customers and existing clients, reaching out to the customers via modern communication channels such as client-focused social media accounts; design customer satisfaction surveys to receive feedback, and always maintain a clear vision of your pricing. The customer service team within your B2B company can in turn work on a better operational efficiencies, ensure easy customer access to the support reps, minimize response time, etc.

Start off by measuring these KPIs each period that makes sense for your business – monthly, quarterly, or yearly. As you make any changes to your products or services, these metrics can provide great benchmarks along the way. Hopefully, as you start keeping a closer track of these metrics, you will be able to increase your customer retention rates,decrease your churn, and boost your bottom line.

Stay tuned for our blog series highlighting most important key performance indicators you may need tracking to keep an eye on your business progress. In the upcoming parts, there’s still much to discuss: we’re going to explore such B2B-related metrics as the customer lifetime value, leads, and cost per acquisition as well as how you can leverage this data. Check out our blog updates soon!