A Startup Founder’s Guide to Customer Retention

Overview

The ability to acquire customers has long been held as the standard of success. And it’s true: any successful business needs new customers to fuel their growth.

However, what’s become abundantly clear is that new customers alone won’t deliver long-term value. Here’s why:

• The cost of customer acquisition has gone up. It was relatively inexpensive for companies to acquire customers through Facebook advertising over the last five years. But in the last year, social media advertising costs have steadily increased.
• Investors are paying close attention to gross margin and profit. These days, it’s more important to be a sustainable business rather than a flashy one. Even before startups turn a profit, customer retention has become an early indicator of staying power. Take Peloton: Since its IPO in September 2019, the company has maintained an extraordinary 94% customer retention rate, among other strong indications of customer engagement and loyalty.
• It has become clear from big companies’ work on customer retention that managing your margin requires keeping your existing customers. Existing customers are more profitable than acquiring new ones. What’s more, loyal customers will drive cumulative margin over time and build your brand.

Clearly, the focus on balancing customer acquisition and retention has changed. Loyalty leaders —companies that excel in fostering long-term relationships with their customers—grow revenues roughly 2.5 times as fast as their industry peers, according to research in Harvard Business Review. Other research has shown that by increasing customer retention rates by only 5%, a company can increase its profits by 25% to 95%.

This guide will take you through how to develop a customer retention plan:

1. Developing a customer retention strategy
2. 3 tactics to drive customer retention
3. Understanding customer service and experience
4. Creating KPIs to measure customer retention
5. Resources we love

We’ll also share brass-tacks strategies you can use to build long-term, loyal, and valuable relationships with your customers. Let’s get started!

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Developing a customer retention strategy

As we covered in our customer acquisition guide, the path to purchase consists of roughly nine phases. The focus of this tutorial is on the last three phases: steps that occur after someone makes her first purchase and becomes a customer. These are the adoption, habit formation, and evangelizing phases.

Each of those phases is driven by a key question:

• Adoption: Will the customer know how to use your product well?
• Habit-Forming: Will the customer use your product regularly?
• Evangelizing: Will the customer become an advocate of your product?

Once a customer has completed their first purchase, your company’s work is just beginning.

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3 tactics to drive customer retention

Each phase comes with its own tactics that deliver the desired outcome. From adoption and habit formation to brand evangelization, make the most of your customers’ time and attention with three primary tactics.

1. Fuel customer adoption

Offer complementary products: A complementary product, such as a digital product, can encourage customers to move from trying your product to considering it a necessity. Consider these two companies:

• OPTE, a skincare brand, is a great example of how complementary products can promote adoption. (Full disclosure: M13 is working with P&G to bring this product to market.) OPTE’s wand reads your skin, and wherever it finds hyperpigmentation, applies pigment to cover it. This is the immediate benefit from using the product.
• The wand also applies vitamin C, niacinamide, and other vitamins in a hyper-focused way. OPTE’s digital product reads data from the wand and shows you how to improve usage. Ideally, over time, it will show you the progress you’re making by using the product every day. That data component complements and reinforces product usage and adoption.
• Imperfect Foods, a grocery delivery subscription service, sends customers a physical box that’s complemented by their digital platform. The company gives shoppers a window of time to pick and choose which products end up in their box. Users can save their preferences: never give me avocados, include coffee every week, etc… The digital shopping experience helps Imperfect Foods personalize each customer’s default box, so it becomes easier and more automatic to get the foods you like.

Provide next-level customization: Customers already expect some level of personalization when they shop. The Imperfect Foods example shows us how powerful customization options can be. Brands retain loyal customers when they take customization a step further, by tailoring product features to each individual customer.

• Rent the Runway is one company that’s mastered personalization. The clothing subscription service uses customer data to recommend styles unique for each individual.

Our average subscriber wears Rent the Runway 120 days a year, and on every one of those days, she's giving us data on what she wore, whether she liked it, and how it fits.
CEO Jennifer Hyman in a Salesforce.com blog interview

"We can also use that data to recognize a wealth of other things—that a subscriber is in her second trimester of pregnancy, for example, along with her style preferences, what kind of office she works in, and what events are coming up in her life. All these data points help us understand the kinds of clothing that person needs, and how to personalize her experience.”

Companies that build a feedback loop into their customer retention strategy—whether through AI, machine learning, or simple data collection—learn from each customer’s purchase and can tailor the customer experience more intelligently.

Encourage subscription sign-ups: Obviously, not every product is suited for a subscription offer. Large, one-time purchases like a car don’t lend themselves to frequent repeat purchases. However, both consumable products and digital products can be offered as a subscription purchase.

Here’s why subscriptions are a win-win for your company and the consumer:

• Subscriptions take the thinking out of a purchase decision. A customer doesn’t have to remember to reorder online or get to the store before your product runs out.
• Subscriptions offer a flat rate, helping customers stay within their budget. Offer an incentive with subscription sign-up: a gift with purchase, a small discount, or access to an exclusive community of subscribers. This drives customer lifetime value and helps your margins.

Over time, you’ll spend less engaging with subscribers than trying to win new customers.

A few tips on making subscription work for you:

• Encourage subscription sign-up at the very first purchase. When a customer buys from you for the first time, they’re excited about the prospect of your product and the benefits it will bring them. This is the perfect moment to capitalize on that goodwill.
• Remove the obstacle of shipping costs, which can dissuade someone from signing up for a subscription. If your absolute price point is more than $30, customers will expect free shipping.
• Offer a free money-back guarantee within 30 days. Remember: your goal is to remove barriers to adoption.
  

Make it easy for a customer to adjust their subscription cadence or skip the next shipment without canceling, particularly if they’re trying your product for the first time. Data may tell you that traditional re-ordering will take place after 30 days, but provide the customer with options for 45 days or 20 days.

Subscription shouldn’t feel like a trap, but it should encourage adoption and regular use of the product.

2. Make your product a regular habit

Customers stay with your brand when you create a product they reach for over and over again out of sheer habit. Habits are built over time through repeated behavior until such behavior becomes unconscious.

Take Starbucks—the company launched a Mobile Order & Pay feature within their app that allows customers to order their coffee before they arrive. The app not only remembers your order and keeps track of loyalty points, but it also sends push notifications during “happy hour” to incentivize orders in the afternoon.

There are a few ways to induce habit-forming use of your product:

• Link your product to a specific routine, time of day, or regular use (e.g., Coca-Cola’s holiday campaigns).
• Keep your product front and center with specific triggers , including email drip campaigns, SMS messaging, and app push notifications

For a customer to adopt your product as part of their everyday life, you must tie it to cues, keep it relevant, and make it easy to love.

3. Turn your customers into brand evangelists

Want your customers to spread the word about your product? Incentivize your loyal fans to tell their friends by fostering a community and rewarding referrals.

Glossier grew from a simple beauty blog to a $400 million company in the space of four years by capitalizing on the value of community. It started in the comments section of Into the Gloss, founder Emily Weiss’s beauty blog. From there, Weiss intentionally grew her early adopters into brand evangelists with a simple referral scheme.

As described in The Glossier Effect: The Power of a Community Led Social & Digital Strategy, “by launching a referral scheme that gave the referrer a £10/$10 store credit, and the referee 10% off their first order, Glossier landed that word-of-mouth credential that is essential for a brand entering a crowded market. Beauty hoarders were out there recommending the brand to anyone who would listen in the hopes their makeup bag would be bankrolled by their generosity. Links to the point of sale were populating bios publicly and infiltrating group chats privately, and with each link personalised to the consumer, it was easy to track where the traffic was coming from.”

In addition to tapping early adopters, Glossier used their content channels to promote cool user-generated content, as well as encouraging consumers to hand over their data in exchange for phone wallpapers, stickers, quizzes, beauty tips and tricks, and exclusive product launches.

In addition to tapping early adopters, Glossier used their content channels to promote cool user-generated content, as well as encouraging consumers to hand over their data in exchange for phone wallpapers, stickers, quizzes, beauty tips and tricks, and exclusive product launches. The community built around their brand has made it possible to expand from a simple moisturizer to million-dollar makeup brand—with 50% of its revenue derived from repeat customers.

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Understanding customer service and experience

Obviously, the best way to retain customers is to offer a high-quality product. No amount of marketing can replace product efficacy—nor can it make up for a subpar product.

If a great product is at the core of customer retention, the second layer is the customer experience. The customer experience starts with the product itself but also encompasses the collective impression your brand leaves with the customer. It’s what your customer remembers about your brand and can be influenced by the tactics we outlined in this tutorial—as well as your customer service, marketing campaigns, online reviews, and more.

As detailed in McKinsey’s Customer Experience: Creating Value Through Transforming Customer Journeys, “Across industries, successful projects for optimizing the customer experience typically achieve revenue growth of 5% to 10% and cost reductions of 15% to 25% within just two or three years. Moreover, companies offering an exceptional customer experience can exceed the gross margins of their competitors by more than 26% while they make their employees happier and simplify their end-to-end operations.”

At the simplest level, the quality of your customer experience will only be as good as your product and your people.

McKinsey’s research finds that companies that score highly in customer satisfaction do so by considering the entire customer journey, and not just discrete touchpoints. As such, customer service is inseparable from marketing, sales, and all your other customer retention efforts.

Many companies ignore how important customer service is to developing brand loyalty. According to research from Zendesk, 40% of customers will purchase from a competitor because of their reputation for great customer service. Know that these basic tenets need to be upheld by your brand to improve customer loyalty:

• Your customer service must be “always on”: Customers must be able to reach you and get a fast response whenever they have a question, concern, or issue.
• Your service must be personalized: A customer must feel a 1:1 connection with your brand’s customer service representative.
• Your service must “provide a connected experience”: Information should be shared between your marketing, sales, and service teams so that each touchpoint has a holistic view of a customer’s history with your brand.
• Your service must be proactive: Identify and troubleshoot before a disruption occurs.

Keep in mind that the average customer uses 10 different channels to interact with brands; customer service is a cross-functional priority for your team.

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Creating KPIs to measure customer retention

Use these KPIs to measure your customer retention and to see where your company can improve the customer experience.

Customer churn

The rate at which customers stop doing business with you

Why it matters: Some churn is natural—your product won’t be right for everyone. But if your annual churn rate is greater than 5%-7%, it may be a sign that your product or service isn’t meeting your customer’s needs.

How to measure: Annual churn rate = (number of customers at start of year - number of customers at end of year) / number of customers at start of year

Revenue churn

The percentage of revenue you've lost from existing customers over a specific period of time

Why it matters: Track this on a monthly and customer-by-customer basis to see if customers are having a problem with your product or if they’re getting to a point where they might cancel their subscription.

How to measure: Monthly revenue churn rate = [(MRR at start of month - MRR at end of month) - MRR in upgrades during month] / MRR at start of month

Existing customer revenue growth rate

The rate at which revenue from your existing customers is growing (or not)

Why it matters: When revenue from existing customers is increasing, it’s a good sign that your marketing efforts are working—you’re motivating people to increase their spending with you.

How to measure: Monthly revenue growth rate = (MRR at the end of month - MRR at the start of month) / MRR at the start of month

N-month repeat rate:

What % of customers that you acquired are actually transacting again

Why it matters: Transactional (non-subscription) businesses also need to understand customer retention to project future revenue, set CAC targets, and measure customer satisfaction. This metric allows transactional businesses to track changes in retention rate over time. Note: this can’t be calculated for cohorts acquired less than N months before present date.

How to measure: N-month repeat rate = [# of customers acquired in a cohort that made a second purchase within N months]/[# of customers in that cohort]

Repeat purchase ratio

The percentage of customers who buy from your company again (and again…)

Why it matters: This is a good indicator of customer loyalty. If someone comes back to buy your product, that means they had a great experience the first time around.

How to measure: Repeat purchase ratio = number of returning customers / number of total customers

Product return rate

For product-based companies, this is the proportion of total units sold that are sent back to you.

Why it matters: Products are returned for all kinds of reasons, but a high product return rate is not a good sign. “B2C retailer average return rates for in-store and online purchases hover around 9% and 20% respectively,” according to HubSpot. Anything higher than that should be a red flag.

How to measure: Product return rate = number of units sold that were later returned / total number of units sold

Net Promoter Score (NPS)

A quantitative measure of general satisfaction and loyalty to your brand

Why it matters: A good indicator of what phase your customers are in so you can leverage evangelist tactics at the right moment.

How to measure: Net Promoter Score = % of promoters - % of detractors as measured through customer surveys

Time between purchases

A measurement of the time it takes for an average customer to buy from you again

Why it matters: This measure shows you if customers are happy with your product, the right amount of time to set between subscription refills, and how willing a customer is to try other competitors.

How to measure: Using your CRM and sales data, time between purchases = sum of individual purchase rates / number of repeat customers

Customer Lifetime Value (CLV)

How much revenue is generated by a single customer

Why it matters: Ideally, this number will rise over time as customers become more committed to your brand, try new products, spend more, and remain loyal indefinitely.

How to measure: Calculate the average revenue you can expect from a customer over one year. Then, determine how many years a customer stays with your business. Average revenue per customer X average lifespan of a customer = CLV

Average resolution time

The average time it takes for your customer service team to resolve a customer’s issue or question

Why it matters: This measure shows you how efficiently your team responds to customer requests.

How to measure: This depends on the medium you’re using to respond to customer issues; factor in your social media channels, call center, email response time, and any other channels you may be using.

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Resources we love

Want to learn more about customer experience? We've rounded up a few helpful articles to get you started.

• How to Turn Products into Habits: Getting Your Users Hooked: Does your product have a trigger, an action, a reward, and an investment? Learn more from bestselling author Nir Eyal. [TNW]
• Customer Experience: Creating Value Through Transforming Customer Journeys: Read this full report to learn how optimizing customer experience can translate into revenue growth. [McKinsey]
• The Value of Keeping the Right Customers: Dig more into customer churn rate with this Q&A. [Harvard Business Review]
• What is Customer Experience? Discover top trends, customer service management, and more strategies. [Zendesk]