You can only claim to be truly customer-centric if you’re materialising value for your customers, and systematically tracking the results and costs of those efforts.
The value you provide is essential to building retention, and tracking allows you to optimise those efforts further. But, without tracking the costs along with all other customer retention metrics, your growth may not be sustainable.
Below, we cover how to calculate customer retention cost, and how to decrease and optimise retention costs.
How To Calculate Customer Retention Costs (CRC)
There’s a basic formula for calculating customer retention costs (Average CRC per customer = Total CRC of all customers / Number of active customers in that period), but it’s not always so straight forward for every business.
A better formula for B2C retail, eCommerce, and subscription companies might be:
Customer Retention Cost (CRC) = (Retention Marketing Costs + Customer Support Costs + CRM Costs) / Number of Customers Retained
Retention Marketing Costs: These costs include expenses related to marketing campaigns and promotions specifically targeted at existing customers to keep them engaged and maintain their loyalty. Examples include email marketing, loyalty programs, and targeted offers.
Customer Support Costs: These costs encompass the expenses associated with supporting and assisting existing customers. This can include customer service staff salaries, training, and the costs of operating customer support channels (e.g., phone, chat, email).
CRM Costs: Customer Relationship Management (CRM) costs involve the expenses associated with managing and maintaining customer data, relationships, and communications. This includes the cost of CRM software, data analytics, and any other tools used to manage customer relationships.
To calculate the CRC for a specific period (e.g. a quarter or a year), you will need to gather data on these cost components and the number of customers retained during that period. Once you have this information, plug the values into the formula to determine your Customer Retention Cost.
Customer Retention Cost (CRC) vs. Customer Acquisition Cost (CAC)
Customer acquisition costs (CAC) gets a lot of attention, just as acquisition does. But, we’ve all heard the reality that it costs far more to acquire new customers than it does to retain existing customers.
In other words, don’t overlook CRC.
When calculated accurately, CRC includes costs for:
- Loyalty programs
- Discounts and promotions
- Customer service efforts
- Retention marketing campaigns
CAC accounts for many of the same items– any software or tools in your tech stack, employee costs – but focuses more on the marketing side of the operation, including:
- Design (UX, and for any marketing materials)
- Advertising spend
- Reporting tools
Far too many companies focus on customer acquisition, and let retention sit by the wayside. You want to strike a balance between the two, where it’s worth the effort without letting the costs of either run away from you.
Customer retention statistics
One statistic that’s consistently used in arguments for customer retention, is that it costs 5x more to acquire new customers than to retain existing customers. But it’s an old statistic, and spread around so much that it’s challenging to even find an origin.
Even in 2019, Forbes was questioning whether that stat is still relevant. It’s not that it isn’t still true – that it costs less to retain. But the way customers buy has changed. The way they view brands has changed. They are less likely to stay loyal today, and their expectations are much higher and are always shifting.
It’s made that old statistic far less relevant. In that same Forbes article, they quote Peter Fader, a Wharton marketing professor:
"Here’s my take on that old belief: who cares? Decisions about customer acquisition, retention and development shouldn’t be driven by cost considerations—they should be based on future value.”
It makes statistics such as, ‘80% of future profits come from just 20% of your existing customer base’, and ‘increasing customer retention by 5% can increase profits from 25-95%’ far more pertinent.
But they still aren’t getting to the heart of the issue. Sure, they tell you to pay more attention to retention, but they don’t tell you which aspects to focus on.
If we stick to what Peter Fader mentions should be the driver of cost considerations – a customer’s future value – we have to pay more attention to the customer experience. Personalisation is now one of the driving forces of customer loyalty and retention.
In fact, 33% of customers say they’ll abandon a brand that doesn’t offer any personalisation (or that personalisation isn’t sufficient enough).
Brands are getting better at adding layers of personalisation to their sites UX, but CX is not given the same consideration. Yet, ‘77% of brands believe CX is a key competitive differentiator’.
We’ve certainly found that to be true, as a brand is likely to retain 94% of the customers that rate their brand’s CX as ‘very good’.
What we can pull from all this is that CX (and by extension personalisation), is a far greater factor in retention than we often give it credit for. It just needs to be weighed against its costs for your own business.
How to Decrease Your Customer Retention Costs
If your LTV: CAC ratio is above five, increase your retention investment, you have a big opportunity to grow, and quickly.
On the other hand, if it’s three or lower, you need to monitor your costs more closely because it’s increasingly likely you’re losing revenue on every customer.
There are other reasons to consider decreasing your customer retention costs, of course. Depending on your business, it may not be worth a large investment. For others, their costs simply aren’t sustainable.
In any case, there are a few ways to go about decreasing your costs.
Listen to Your Customers
“If your teams don't anticipate and listen to your customer's needs, if your organisation doesn't invest in protecting your partners and if you don't continuously work to add value to your business proposition, you will soon have no business.”
Customer-driven decisions drive revenue. Essentially, if you listen to your customers and meet their needs, show that you listen and understand them deeply, you get better advocates, more customers that fit your right-fit persona, and longer LTV.
If you implement feedback loops, and actually act on the feedback, your processes mature and efforts and costs decrease.
Where can you actively listen to your customers? There are dozens of places, but here are the most accessible for most CX teams:
- Transactional feedback surveys
- Relationship feedback surveys
- Social media interactions
- Online reviews (Trustpilot, Tripadvisor, Yelp, etc.)
- Customer service data (emails, webforms, live chat, etc.)
- App and Play store reviews
Act on the Voice of the Customer (VOC)
The Voice of the Customer (VOC) is how you understand your customers – their wants, preferences, expectations, and most importantly their needs – during their interactions with your business.
Listening to your customers is the first step but it’s crucial to then act upon the insights that you uncover. These customer feedback insights will define your retention strategies from then on. But by acting on VOC, you’re focusing on efforts that will actually drive retention rather than spending money on efforts that won’t have any effect.
Increase CLV and Decrease CAC
By focusing on increasing engagement and customer loyalty you should naturally increase the customer lifetime value as well as opening up opportunities for cross selling or upselling to your happy customers
By decreasing your acquisition costs, whether it be by focusing more on ideal fit customers, reducing marketing and sales expenses, and so on, you effectively drive more revenue.
Ways to optimise customer retention costs
Repeat purchase rate differs between brands. It’s about what’s most relevant to you. So, a key part of reducing and optimising retention costs comes down to understanding the customers and how they engage.
If you sell electricity, customers are likely engaging with your just once a year to renew. A grocery store, on the other hand, may see the same customers every week.
A subscription service might deliver once a month, but customers may not engage with you unless they’re renewing or cancelling their subscription (or unless you’ve built community and engage with them regularly through it).
It's important to start with understanding what looks normal for you and your business. You may see that you lose 20% of customers after the first purchase, and 50% of customers purchase at least twice. This is the starting point that you are trying to improve and optimise.
If you’re optimising, you start with finding deviations from your normal. This becomes your maintenance. Once you can optimise the processes for this maintenance, you can start to move the needle to match other KPIs. There are a few ways you can do this:
Great product can in some rare cases make up for a terrible customer experience, but not for everyone. In fact, not for most people.
Consider a customer waiting 18 months for their custom product.
During those 18 months, they were told his product had been built, but it wasn’t true. A few months later, they were told it was waiting to be picked up by the dealer and he would see it soon. Only this was also untrue. When they finally received the product, they couldn’t offer the price protection they did during the initial transaction because of poor paperwork management.
The saving grace is that this customer doesn’t have to interact with the company again.
Will they purchase another product again in several years? It depends, given the experience they had first time around they are likely to go elsewhere. But it shouldn’t. When a great product matches a great experience, you create lifetime buyers.
For the company above, they had to spend a lot of time and money interacting with the customer, dealing with logistical issues, and continually offering support. That’s not efficient by any means.
If you want to reduce your costs, optimise the customer experience.
A great way to do this is to have your team go through the entire customer journey to find friction areas. It’s a great way to start making improvements.
Say you find that most of your customers contact you because they’re unable to change their address details for delivery. Your product team makes a change to allow customers to alter their details easily.
Listening to your customers helps you identify areas of your product that make customers turn to your competitors.
The best, and perhaps the most obvious, way to reduce CRC with customer support is to reduce anything that might cause a customer problems.
If a customer runs into an issue, they have to speak to the support team to fix this issue, thus increasing your costs while also decreasing customer satisfaction.
For example, if a customer can’t change their account details, they have to call support to make the change.
If you know that changing account details is a major driver of contact to support and you know people aren’t happy with this, change it. This dissatisfaction decreases the likelihood of retention.
If you have a shipping problem, you’re going to spend a lot of time and money on customer experience and operations just to figure out the issue, let alone resolve it. But resolving common issues is the way to optimise operations.
Analysing customer feedback in real-time can help you uncover insights into which delivery providers are delivering better experiences for your customers. And it’s these insights that can help you make quick changes that have a real impact on your customer retention.
Use the Right Tools to Get a Unified View of Your Customers
Retention depends on all touch points your customers interact with – CX, product, UX, support.
For each team to do their job well, and contribute to that retention effort, they need the right insights.
We’re not talking segmented data from singular tools used by just one department, which leads to different departments having different versions of 'the truth. Each team needs a unified view of all data points, across all tools.
Unified Customer Intelligence unifies all of your customer data, from sources such as direct customer feedback, social media, conversations, reviews, support, and more. This unified view of your data points helps you make data-driven decisions that your customers actually want.