Acquiring new customers is great. There’s a reason an old rule of thumb suggests businesses are willing to pay 5x for a new customer over what it costs to retain an existing one. But it can be hard to grow as a company when you’re constantly filling a bucket with a hole in it. It’s a simple formula: growth only happens when you can sustainably acquire more customers than you lose.
Customer retention is all about minimizing that second number. The higher your customer retention rate, the more valuable every conversion will be for your long-term growth. Let’s dive into ways you can optimize your retention rate and keep all those customers you worked so hard to acquire:
How Do You Calculate Your Customer Retention Rate?
You’ve likely heard about customer funnels before. At the top of the funnel is a wide opening where you attract attention. The bottom is narrower, when a few customers become so interested in your brand that they convert and become customers.
And the “funnel” model works if your primary focus is acquiring new customers. But for customer retention, it’s better to use a retention-to-acquisition flywheel.
Image by: Hubspot
A flywheel is more like a spinning top. Ideally, your customer revolves around this flywheel, with each touchpoint naturally leading into the next. Your goal shouldn’t be to convert customers and forget about them. It should be to keep them permanently engaged. For example, a basic model for a flywheel isn’t “Attention, Desire, Action.” It’s “Attract, Engage, Delight.”
That final phase, “Delight,” refers to inspiring customers so they stick around. The ideal customer doesn’t place one order, then leave. If you delight them with the product experience, they should think: “what else can I get?”
Keep this flywheel in mind as we look at the key components of your customer retention strategy. We’ll identify the variables you need to measure to track the success of this “flywheel” at every stage. The more you keep customers moving through the flywheel, the higher your chances of reducing customer churn. Let’s start by focusing on two key stats to measure:
Average order value
Average order value, or AOV, is the total revenue from your orders divided by the number of customers who placed them.
What makes a “good” AOV? It’s context-dependent. If your average item is $50 and your AOV is only $30, it’s a sign there’s plenty of room for improvement. But if your AOV is $195 on an average item of $50, you’re doing a good job of convincing customers to buy early and often.
Expect AOV to differ across unique marketing channels. For instance, let’s say you have a referral program in place. Brand Advocates tend to have higher AOVs than typical customers.
This enhanced cooperation with your brand also reflects in their loyalty numbers. Customers you attract via referral programs tend to order more and stay around longer. That’s why AOV is often your leading indicator for long-term loyalty.
Purchase frequency measures how often the same customer buys from your brand in a predetermined time period. Using the “flywheel” concept, you can use purchase frequency as a solid indicator of how good your first-purchase experience went for the customer. After all, they will not buy from you again unless they have had a positive experience.
Like AOV, a healthy purchase frequency is context-dependent. If you sell coffee, a daily repurchase rate is good, but also expected. If you sell high-end furniture, two purchases in a month can be spectacular.
Some companies like to calculate this in conjunction with your repurchase rate. For example, if you see “returning customer rate” in your dashboard, it indicates how many customers bought twice or more during that period.
Calculate returning customer rate by dividing how many customers made multiple purchases by the total customers for that period. Multiply by 100 for the percentage.
Why bother with purchase frequency, or returning customer rate? Again, go back to the “flywheel.” These are two rock-solid indicators that you’ve been able to “delight” your customer.
If your customers’ purchase frequency is low, it means something happened earlier in the flywheel you need to address. Maybe buyer friction was too high at checkout. Maybe the unboxing experience didn’t “delight.” Either way, purchase frequency is a window into your customers' thinking.
Key Features of Businesses That Retain Customers
The flywheel model (along with the metrics that drive its success) is a great paradigm for learning all about customer retention. But it also helps to know what customers are expecting. What are the key points that keep them loyal to your brand? Here are some features that tend to promote customer satisfaction:
Strong customer support
There’s no divorcing customer support from your ability to retain customers. According to McKinsey, “the vast majority of digital customer contacts require assistance.” The result? Customer support isn’t just for emergencies. It’s part of how customers engage whether your brand is worth buying from. Your customers will gauge their overall brand experience by how well your customer support responds to queries.
Take Athletic Greens as a shining example.
This customer feedback isn't even about the product but about the user experience on the website. Never one to back down from an opportunity to impress, Athletic Greens responds promptly and openly.
Clean customer onboarding
“Leading retailers invest in consistent and friction-free experiences,” reports McKinsey. No matter how enthusiastic a customer might be when they first discover your products, a poor onboarding experience can sully it.
For example, if you have a customer loyalty program that offers people 50% off everything they buy, it won’t matter if 90% of those customers have trouble logging in to view their customer loyalty dashboard. A clean, frictionless experience is key to getting customers to come back.
Connecting incentives with purchases
Customers might like incentives. And they might make the occasional purchase at your site. But if they have trouble picturing the connection between the two, your referral or loyalty programs aren’t going to have the bottom-line impact you’d hoped for.
Companies that retain customers are good at reminding those customers about key benefits. Email reminders might go out, detailing the features of the customer loyalty program they just signed up for.
Or a reminder email about what they can get by referring their friends to the brand.
Social media posts might highlight when new products are available on a first-look basis for repeat customers.
Bottom line: if you can draw the connection between the benefits of being a long-time customer and the specific touchpoints that keep your customers returning, you’ll have more influence over how often they purchase from you.
Strong relationships with brand ambassadors
A customer who becomes a brand ambassador can be one of the most vocal and valuable relationships your company has. Those brand ambassadors advocate for your products, refer customers your way, and enhance your reputation online. Don’t ignore them.
Instead, reward them. Create incentives that keep brand ambassadors referring customers your way. Put them on an email list (with their permission, of course) that offers exclusive looks at new products. Give them a sense of VIP status. After all, they’ve earned it.
5 Ways To Increase Customer Retention Rates
Now that you know how the best brands measure and promote customer retention, it still leaves one question. How should you approach a customer retention strategy?
Your goal should be to create a fast-spinning flywheel. That means every customer experience should be as frictionless as possible, constantly delighting the customer. This, in turn, encourages more interactions. The more positive touchpoints customers have with your brand, the more trust builds over time. Customers become comfortable ordering from you, participating in your loyalty programs, and visiting your store first when they have something they want to buy.
Here are some specific ways you can implement this fast-flywheel approach into the way you do business:
Encourage repeat purchases
For starters, repeat purchases often don’t happen until you give customers a reason to buy again. Two of your main tools here will be referral and loyalty marketing. Consider:
- Rewards and incentives work. That’s why 64% of consumers say rewards play a role in how they spend. Loyalty programs are especially great at creating these incentives. Adding up points towards a future discount, for example, gives customers reasons to keep buying from you. If everything else about your brand lines up, like a great checkout experience, customers will be happy to keep coming back in exchange for those rewards.
- Referral marketing attracts more customers. Referred friends can convert five times as fast as the average customer from other channels. Why? Referral marketing builds on the power of social proof. If a recommendation is coming from someone the customer already trusts, there’s less friction and research required on their end. With a referral program in place, any purchase can become a potential second purchase via referral.
- Lower costs in CPA, or cost per acquisition. CPA gauges how much it costs you to find new customers. If you have lower CPA (here’s what some of Friendbuy’s customers are achieving, as low as $1-6 CPA in health and beauty), you can put more money towards the loyalty programs that reduce customer churn. That, in turn, adds to the average value of each customer.
People will reward big-box brands with loyalty if they can have a frictionless, low-cost experience. But there’s something big-box brands can’t always compete on: the personal touch.
A personal touch reminds customers how much their support means to you. It gets them thinking about the humans behind the company.
This doesn’t have to be a personal note dropped in a product box, either. A referral program can offer the “personal” touch that many brands never experience. When a friend drops a line via email, including a product discount code, that’s far more personal than the average shopping experience.
In the above example with Spanx, customers can include a personal note along with the referral. This enhances the experience of recommending something digitally. It’s no longer just a code shared between friends. It’s the digital version of a handwritten note.
You don’t have to limit yourself to one touchpoint, either. Referrals are a great touchpoint for personalization, but there are plenty of other options, including:
- Unboxing experiences
- Reminder emails for unused loyalty program points
- Testimonials from other customers who have used your referral or loyalty programs before
Use automation to keep your customers happy
Personalization sounds like a good idea, sure. But it’s also difficult to scale without automation built into your customer retention processes.
You can keep customers happy if you implement automation that inspires customers to keep coming back. One of the most important events, for example, is the post-purchase touchpoint for each order. You can then use this touchpoint to trigger all sorts of incentivizing offers for your customer on the backend.
The above example from UNTUCKit is a great demonstration of automation that works to build more customer retention. On the “Thank you” page, a post-purchase overlay pops into action, asking customers to refer their friends.
How does this impact customer retention? Notice that incentive: $25 for referring that friend creates the incentive for your brand advocate to return and spend that $25. And maybe that $25 doesn’t quite cover the $35 they want to spend.
This keeps the flywheel spinning, even as the key point in generating referrals is that it makes it more likely you’ll acquire new customers. A fun side-effect is that it keeps existing customers happy, too.
Add personalized upsells and cross-sells
Every purchase your customers make is a data point. It says something about that customer. More specifically, it says something about the preferences that made them want to buy from you in the first place.
Capitalize on this data by offering upsells and cross-sells designed to appeal to those preferences. For instance, if a customer buys a scarf, it suggests maybe they’re also in the market for a warm hat. If a customer buys a dress shirt for work, maybe they’ll want a similar shirt in a different color.
Upsells and cross-sells capture your customers when they’ve already placed some trust in you. They’re already browsing. Maybe they’ve made a purchase, or they’re close to checkout. Or maybe they’ve purchased a product they need to buy again.
Take the example of Duradry, a deodorant brand. It had a unique customer touchpoint: email reminders when it came time for customers to refill. Duradry created a customized SMS link, as well as further incentives to buy additional products.
When the customer taps the link, it will take them to a personalized landing page. On that page, customers can find additional products that might appeal to them based on their purchase history.
Read more: Post-Purchase Strategies to Boost Sales in 2023
Optimize post-purchase shipping updates
One of the fun aspects of buying online is when customers can track their shipping process. The problem for many brands is that they minimize the information customers can see. A generic post-purchase experience might include a “thank you,” a quick shipping code, and that’s it.
This is a missed opportunity. Brands that want repeat customers will make every aspect of a purchase as fun and informative as possible. Optimizing shipping updates, for example, rewards customers with feelings of control. It’s even a little bit entertaining. This reinforces the positive brand experience, drawing customers to place another order.
One option is to gussy up the post-purchase page with an embedded widget that asks for a referral.
Some brands will try to do more than attach a simple UPS link, however. They may include real-time status updates. These pages could include estimated delivery dates. If you’ve ever seen someone order a pizza on their phone and enjoy reading all about where the pizza is (being prepped? In the oven?), you know the effect this can have on the purchase experience.
A great post-purchase shipping page will do more than make a fun experience, however. Its offer serves as a hub through which you can add your incentives for future purchases. Think referral discounts, loyalty program points, and links to loyalty program dashboards. Each of these gives the customer more reasons to engage with your brand. The more you can make your brand enjoyable to order from, the more likely you’ll inspire future purchases.
3 Examples of Winning Customer Retention Strategies
Example #1: Cora Creates Tired Rewards
The goal is to keep a customer around. To do that, you’ll need to dangle a powerful carrot. For most brands, that motivational carrot is simple enough: give customers reward points for every dollar they spend on your website.
While this straightforward approach can and will often work, you should also think about deepening your relationships with your most loyal customers. Those customers deserve extra perks and benefits, don’t they?
Yet the standard approach employs a basic 1:1 points:dollars ratio. The same ratio applies to a customer who just joined the loyalty program as it does to a customer who’s purchased from you twenty times.
Tiered rewards eliminate that issue. By having your customer unlock new “tiers” of higher reward rates as they make more purchases, you dangle an additional carrot. Yes, someone who signs up for your loyalty program can start using it right away. But if they keep using it, they have bigger rewards to look forward to.
In Cora’s case, the rewards apply to their referral program. The more their advocate keeps referring friends to make a purchase, the more benefits they can unlock. This long-term benefit incentivizes more and more customers, who in turn can join the referral program themselves.
Think of it as making your loyalty or referral program more like an addictive app. The more levels you unlock, the better it gets. That’s the same logic here. The basic structure typically uses at least three reward tiers:
When you do it right, you can inspire more referrals, more loyalty program participants, and keep people involved in your brand. It’s a recipe for customer retention any way you cut it.
Example #2: On Running Creates Special Promotions—With Lingering Effects
At some point, you’re going to run into a special occasion. The holiday season is a prime example of this, making it the perfect time to launch promotions and capture new interest. That’s why for many brands, the goal with a limited-run promotion isn’t to boost customer retention. It’s to get new customers in the door.
But who ever said you couldn’t do both? Using the same principles as the example above, you want to find an incentive that will stick to a customer’s ribs.
Take the example of On Running. They created a limited-time holiday referral promotion with a straightforward concept: 30% off discounts for referring friends and family. Makes sense. But they also added a loyalty-boosting sweetener: if a customer redeemed a coupon 10 times, the Advocate would receive a free beanie.
A beanie might not strike you as a powerful incentive on par with tiered rewards. But it does accomplish something just as good: it gets customers thinking about doing more with your brand. In On Running’s case, it’s doling out extra referral links to friends and family.
In your case, it might be something tied to customer retention. If you can’t part with the higher rewards with tiered discounts, consider adding small prizes for customers who continue to engage with you.
Example #3: Dollar Shave Club’s Fun Customer Dashboard
If you want to keep customers, your best bet is to equip them. Make it easy for them to find their rewards points, order new products, and find everything they need without poking around your entire website each time.
Dollar Shave Club is a prime example of a customer dashboard that inspires long-term customer loyalty. For example, consider the two following options:
- The ability to take a break, which means customers stay signed up without canceling their subscription
- Changing their box frequency while staying signed up, ensuring they don’t feel they have too many products pouring in every month
Ostensibly, these features are counterintuitive. Dollar Shave Club is giving its customers the ability to buy less.
But when customers appreciate that, they stay signed up. They stop thinking about alternatives to Dollar Shave Club. Instead, they think of it as a “system” they can tweak and modify to their heart’s content. All they have to do is log in and see all of these options within the dashboard:
The result is a “stickier” customer service experience. That means more loyalty and less customer churn for DSV.
Making the Most Out of Every Customer Experience
What’s the fastest way to keep customers around? Easy: keep delighting them. The examples we included here are all different methods of keeping customers tickled to remain customers.
Interested in bringing a similar approach to the way you reduce customer churn? Consider reaching out to Friendbuy to build a customer loyalty program for your brand.