Customer retention
What is customer retention?
Customer retention is the share of the customers you began a period with who are still buying at the end of it. New arrivals are left out of the calculation; they belong to a different number. Read the other way round, the same figure is churn: the share that walked away. High retention means growth is not resting entirely on advertising.
Example
A shop starts the quarter with 500 active customers. During the period 60 of them stop ordering and 80 new ones arrive, so the quarter ends with 520.
- Retention: (520 − 80) ÷ 500 = 88%.
- Churn: 60 ÷ 500 = 12%.
What the 12% costs. If the average customer spends €240 a year at a 30% margin, each one carries €72 of margin a year. The 60 lost customers are €4,320 of margin that has to be found again. At €45 to acquire a customer, simply restoring the headcount costs €2,700.
Pulling churn from 12% to 8% keeps 20 customers: €1,440 of margin that stays and €900 that is never spent on acquisition. Buying the same result through advertising takes more money and more time.
Why it matters for a business
Retention decides how much a new customer is allowed to cost. A customer who stays three years justifies a higher acquisition price than one who buys once, which is why this number is read next to lifetime value. The reverse holds as well: high churn makes every campaign expensive, because it is filling a bucket with a hole in it.
One overall percentage still hides when people leave. A cohort view groups customers by the month of their first order and follows what share of each group orders again in month three and month six. That is how you learn whether the change made in April actually held April, or whether spring was simply good.
How to improve it
- Find the month in which the average customer goes quiet, and put an email or a call just before it rather than after.
- Ask people who left why, while they still answer: the first fortnight produces more replies than a survey six months on.
- Split churn by group — acquisition channel, first product, size of the first order. One channel usually supplies most of the leavers.
- Compare the cost of keeping a customer with the cost of finding one before raising the media budget.
In our digital marketing work, email and repeat campaigns are planned against exactly these numbers.