A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.
All of us in business know that success depends on winning and retaining customers. Reducing customer attrition or churn, or the rate at which customers stop using your products or services is therefore a key focus for management. How can we measure if we are doing a good job at keeping our customers? We can use the customer retention rate.
The customer retention rate is a measure of how many customers you have as measured against the start of a period. It can be calculated by assessing the following:
- The number of customers at the start of a given period (S)
- The number of new customers acquired during that period (N)
- The number of customers at the end of the period (E)
To have a true figure, it is necessary to assess the number of customers remaining at the end of the period without including the number of new customers acquired. The number of remaining customers may be calculated by subtracting N from E. To calculate the percentage we divide the number by the total number of customers at the start and multiply by 100.
A simple example is:
- 1000 customers at start of period (S)
- 200 new customers acquired during the period (N)
- 700 customers at end of period (E)
Customer Retention Rate – E-N/S X 100
700 – 200 = 500. 500 divided by 1000 = 0.5 x 100 = 50% customer retention rate.
In this example above, a catastrophic drop in customer retention is shown. In real life, losing so many customers would have a drastic impact on an organisation’s revenues and profit. The impact would be felt in lost sales and the cost of acquiring new customers to replace those lost.
The importance of excellent customer service to win and retain customers is very clear. Well known statistics, in the public domain, used to quote that:
- 68% of customer defection takes place because customers feel poorly treated
- 95% of people who have a bad experience do not complain
- 13% tell up to 20 other people, while a satisfied customer tells only five other people
- It can cost five times more to buy new customers than retain existing ones
These figures sound tame now but they were published before the internet was invented. We know now that empowered customers can inform thousands of people of their customer experience, at the click of a button. Dissatisifed customers who upload a video to youtube that goes viral,can attract millions of views negatively impacting a company’s PR and share price, as United Airlines found out recently to their cost.