When companies think about CRM software (customer relationship management) they tend to consider it a sales tool.
While a CRM platform is certainly great for helping sales teams close more deals, a customer relationship really only begins at the sale.
Continued engagement and support can turn one-time buyers or short-term contracts into repeat customers and lifelong partners.
The same tools you use to reduce cycle times and target your marketing campaigns can be used to pitch new products and expanded services.
The same data that helps you uncover new and emerging markets can help you identify areas of growth within your existing accounts.
It’s important to also maximize the value of every account in your catalog.
The value of customer retention
Companies spend a considerable amount of resources on customer acquisition. Yet, for some reason, customer retention is often given less priority.
While retaining customers requires less effort than acquiring them, you still need a great deal of planning and focus.
The value of customer retention can’t be overstated. Consider the following:
- Retaining a customer costs significantly less than acquiring a new one: According to research by Harvard Business Review, retaining an existing customer costs between 5x and 25x less than acquiring a new one — and that doesn’t factor in the cost of acquiring that customer in the first place.
- Upsell potential: It is far easier to sell to existing customers. A Mailchimp article reports that existing customers are 50% more likely to buy new products than prospects. In addition, the probability of making a sale to an existing customer is between 60-70%, whereas making a sale to a prospect is only 13%.
- Increased profits: The high cost of customer acquisition can offset profitability in the short term. Research by Bain & Company showed that increasing customer retention by as little as 5% can increase profitability by up to 95%.
- Customer referrals: Whether through direct referrals, positive reviews, or other social proof such as case studies and social media engagement, happy customers are advocates for your brand. This can drive down customer acquisition costs and increase profitability.
Key customer retention and expand metrics
The following metrics are important to understanding and assessing customer retention and expansion potential.
- ACV (annual customer value): This is the committed monetary value of a specific account over a given year. It includes the total of monthly and annual subscriptions and contracts as well as any other recurring spending. It generally excludes one-time purchases and fees.
This metric is used to measure the monetary value of a specific account and can be used to evaluate growth and expand potential.
- CLV (customer lifetime value): This is a measure of the average monetary value of your customers over the lifetime of their account. In other words, it’s how much money you can expect the average customer to spend on your products or services once acquired.
This metric can be used to help you determine how much money to spend on customer acquisition and success. You can also use this number to determine how effective new customer success initiatives are over time.
- Customer retention rate: This is the percentage of your customers who remain customers after a given period of time.
To calculate your customer retention rate, determine the number of customers you have at the beginning of a given period.
Then, compare that to the number of customers you have at the end of a given period (subtracting any new customers that joined during that time period).
(# of customers at the end of the given time period — # of new customers added during the given period of time) ÷ # of customers at the beginning of the given time period
For example, let’s say at the start of Q2 you had 100 customers and you added 12 new customers that quarter. If at the end of Q2 you had 102 customers, your customer retention rate would be: (102 – 12) ÷ 100 = 90%.
Average customer retention rates vary by industry. While knowing your industry benchmark can help you assess how you measure up, it is far more important to know your own customer retention rate and focus on improving that.
- Churn rate: This is the percentage of your customers who unsubscribe from your services over a given period of time.
To calculate your churn rate, first determine the given period of time you want to measure (a previous month, quarter, year).
Next, determine how many subscribers you had at the beginning of that given period. Then determine how many subscribers unsubscribed during that time.
Lastly, divide the number of lost subscribers by the total number of subscribers at the beginning of the given period and multiply the result by 100.
(lost subscribers during a given time period ÷ # of subscribers at the start of a given time period) x 100
For example, if you had 160 customers at the beginning of a given time period and 8 subscribers unsubscribed during that time your churn rate would be: (8 ÷ 160) x 100 = 5%
It is best to evaluate your churn over time to identify areas for improvement or closer examination.
For example, if you notice you lose a high number of subscribers after 3 months, you may want to evaluate your implementation support process.
There can be several reasons for customer churn and not all of them are related to your products or services.
For example, some companies unsubscribe to save money during lean periods or unsubscribe as they make organizational pivots.
- Existing customer revenue growth rate: This measures the percentage of growth of recurring revenue you receive from your existing accounts over a given period of time.
Your existing customer revenue growth rate is a good indication of the amount of revenue you are generating from customer success.
To calculate your existing customer revenue growth rate, first determine the given period of time you want to measure.
Next, take the amount of recurring revenue from the end of that period and subtract it from the amount of recurring revenue at the beginning of that period.
Then, divide that number by the amount of recurring revenue at the beginning of that period.
(Recurring revenue at end of the given time period – Recurring revenue at beginning of the given time period) ÷ Recurring revenue at beginning of the given time period
For example, if we had $10,000 in recurring revenue at the beginning of a given period and $12,000 in recurring revenue at the end of a given period our existing customer revenue growth rate would be: (12,000-10,000) ÷ 10,000 = 20%
It’s possible (and quite likely) that your existing customer revenue growth rate will be a negative number due to your churn rate.
- Repeat purchase ratio: This is the percentage of customers who return to buy products or services from you after the initial sale.
To calculate your repeat purchase ratio, first determine the given period of time you want to measure.
Next, take the number of returning customers for that period of time and divide it by the total number of customers for that period of time.
# number of returning customers for that period of time ÷ # number of total customers for that period of time
For example, if you have 500 total customers over a given period of time and 250 customers return to purchase another product or service during that time, your repeat purchase ratio would be: 250 ÷ 500 = 50%
Your repeat purchase ratio can vary considerably depending on the nature of your products and services and the customers who buy them.
It is better to measure your repeat purchase ratio over a longer period of time (quarterly, annually) to account for the purchasing cycles of your customers.
You may also want to calculate your repeat purchase ratio by product or service type to account for their differing uses and life cycles.
The challenges of customer retention and expansion
There are several challenges businesses face regarding customer retention.
- Focus on acquisition over retention: Most companies focus the bulk of their efforts on attracting new customers. This is most easily seen in the size of a company’s sales team vs the size of its support team, but it goes far beyond that.
For example, product development plans often see more investment in new features or products aimed at attracting new customers or expanding into new markets.
This is opposed to making improvements to existing features that customers already use.
It can also reflect the board’s priorities, who love to see growth in market share above almost any other metric.
- Lack of post-sales support or customer success: During the sales process, many businesses spend considerable time and resources courting prospects with special offers, face-to-face meetings, and personal attention.
Once the initial sale has been made, however, these new customers are passed off to an under-supported customer success team. In many cases, they are rarely shown that same level of care again.
The loss of that one-on-one attention and personal touch leads many customers to feel forgotten. This outcome can lead to high churn rates and a low repeat purchase ratio.
- Weak understanding of customers’ current and future needs: Several factors play into a lack of understanding of customer needs.
Firstly, poor customer segmentation can make analysis and evaluation inaccurate. This can lead to misguided prioritization of issues and over/under-investment in particular business processes.
This can also contribute to irrelevant and off-target messaging that leads to “unfollows” and loss of engagement.
Secondly, a lack of investment in customer feedback collection and analysis can see you quickly fall out of touch.
This can lead to investment in unwanted features/products or operational pivots that don’t align with your customer’s needs.
Poor data collection and upkeep can also play a big part in failing to understand customer needs.
If your data is outdated, inaccurate, or difficult to analyze you may be operating on incorrect assumptions.
Additional factors that can contribute to not understanding customer needs include frequent changes to product development, high employee turnover, and inconsistent or reactionary business practices.
- Lack of appreciation/personalization: No customer wants to feel like just another number.
Yet, developing a personal relationship with every customer can be a time-consuming and resource-heavy endeavor.
High employee turnover, poor data collection, and disjointed account management can leave your customers feeling disconnected and unappreciated.
This erodes customer loyalty and reduces the success of your upsell and expansion initiatives.
- Issues with your product or service: If your product fails to meet the expectations of your customers, or you are consistently failing to deliver on promises (delivery timelines, feature/product releases), your customer retention metrics will reflect this.
To make matters worse, social proof is a double-edged sword that sees most customers speak about their experiences with a product or company only when things are really good or really bad.
In the case of the latter, word tends to spread quickly and that can have negative impacts on customer acquisition.
How a CRM can increase customer retention and expand potential
All of the challenges around customer retention can be solved to some extent by a CRM tool.
- Customer support and success: The key to top-shelf customer support and success is knowledge, both about your products and your customers.
A CRM can help you centralize all of your product and account data and make it accessible to those who need it.
When a customer needs help resolving an issue, a CRM can provide your support team with a complete history of every issue they have ever had.
This helps your customers feel heard and demonstrates the value you place on every customer interaction, improving customer satisfaction before you even address the issue.
What’s more, with access to the latest product information, your support team can help your customers resolve issues faster, reducing the need to go back and forth between departments.
This information can also be used to recommend products/services that your existing customers may find useful.
And since a CRM provides you access to their customer data, you have all of the data you need to position these products/services for maximum effect.
- Identify upsell/expand opportunities: A CRM is not only great at capturing information and making it accessible, but it also helps you organize that data for reporting and analysis.
This can help you evaluate every account, product/service, and business process to see areas for improvement and growth.
For example, your CRM can provide you with the customer data you need to accurately measure your ACV.
This can help identify accounts that have room to grow and even suggest the products/services that could be the best fit, allowing you to create targeted marketing campaigns that feel authentic.
- Improved alignment and messaging: When your whole team is working from the same playbook, you are able to deliver a more consistent customer experience.
This helps you build trust and set expectations that you know you can deliver on.
Also, access to the entire history of an account and all associated contacts allows for easy personalization of messaging.
It also helps keep interactions consistent across departments, or during organizational shifts, such as the transferring of an account to a new team member.
- Consistent customer engagement: Keeping customers happy requires consistent engagement.
Customer needs shift like the tides and if you fail to adapt quickly, you will be left behind.
A CRM can help you keep a contact schedule that ensures regular touchpoints and communication in the most effective manner for every customer.
Some customers will prefer emails while others will prefer phone calls. Some customers like a weekly check-in while others require less regular contact.
Whatever the case, interacting with your customers on their terms shows you know what they need and improves customer satisfaction.
The quality of your customer engagements highly impacts customer loyalty.
Every interaction is another opportunity to show your customers why you are the best option available and deserve their continued support.
FreeAgent CRM can help you increase your customer retention and identify expansion opportunities
FreeAgent CRM is the top user-rated CRM + work management platform on the market.
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Our platform is also customizable and user-configurable, which means you can continue to work the way you need to, without the need for 3rd party support.
To discover for yourself how FreeAgent CRM is leading the way to a better work day, try it out for free today.