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Small businesses are the lifeblood of economies across the globe. It comes as no surprise that small businesses account for two-thirds of net job growth & 44% of the US economic activity. These small businesses have been tested & put through fire these past few years because of the pandemic & current economic conditions. During these crucial times understanding where to spend your time & money effectively is key. Switching your focus from being “customer-focused” to being “customer-committed” can be life-changing. 

That is where customer retention comes in. Before we dive deeper into questions like “What is customer retention?” & “How to improve customer retention?” let’s look at the following stats by Zippia:

  • Boosting customer retention by 5% increases profits by 25-95%. 
  • Companies have a 60-70% chance of selling to an existing customer vs. a 5-20% chance of selling to a new customer.
  • 65% of a company’s business comes from existing customers.
  • It costs 6x to 7x more to acquire new customers than to retain existing ones.

Now, let’s understand what is customer retention. 


Customer Retention Definition

Customer retention refers to the ability of a business to retain its existing customers over a period of time. It is an essential aspect of any business, especially for small businesses, as it directly impacts their long-term success and growth. The formula for calculating the customer retention rate is: 

CRR = [(E-N) ÷ S] x 100. In this formula:

E = Number of customers at the end of the specific period

N = customer acquisitions during the specific period

S = Number of customers at the start of the specific period

So, let’s say a local gym wants to know its retention over a six-month period. It started with 200 customers (S), ended with 150 (E), and had 10 new customers (N). (E-N), in this instance would be 140—here’s how you’d calculate this retailer’s CRR:

150-10 = [140 ÷ 200] x 100 = 70%

This just means that if the local gym kept 70% of its customers over a 6-month period. Is that a good rate? Let’s find out


What is a good customer retention rate?

100%, undoubtedly, is a great customer retention rate. It means that 100% of the customers who try your service return for a second or third purchase. While this is an aspirational retention rate, it is almost unheard of for businesses to have such a stellar customer retention rate. The average customer retention rate across different industries is 75%. 

Here are five reasons why customer retention is important for small businesses:

  1. Cost-effectiveness: Acquiring new customers can be costly, as it involves marketing and advertising expenses. On the other hand, retaining existing customers is more cost-effective since you already have a relationship with them and they are familiar with your products or services.
  2. Increased profitability: Existing customers are more likely to make repeat purchases and spend more money compared to new customers. By focusing on customer retention, small businesses can increase their profitability by maximizing the lifetime value of each customer.
  3. Word-of-mouth referrals: Satisfied and loyal customers tend to recommend businesses they trust to their friends, family, and colleagues. Positive word-of-mouth referrals can significantly benefit small businesses by attracting new customers without additional marketing efforts.
  4. Brand loyalty: Customer retention helps in building brand loyalty among your existing customer base. When customers feel valued and appreciated, they are more likely to develop an emotional connection with your brand, making them less likely to switch to competitors.
  5. Competitive advantage: In today’s competitive marketplace, where consumers have numerous options available at their fingertips, retaining existing customers gives small businesses a competitive edge over their rivals. By providing exceptional customer service and personalized experiences, you can differentiate yourself from competitors.


How To Improve Customer Retention? 

While each small business can engage with its customers in unique ways, there are five strategies that every business can adopt to improve customer retention rates:

  1. Personalized communication: Regularly engage with your customers through personalized emails or newsletters that offer relevant content or exclusive offers based on their preferences and purchase history. 
  2. Exceptional customer service: Provide prompt responses to inquiries or complaints and go the extra mile in resolving issues promptly. Create a positive experience for your customers at every touchpoint.
  3. Loyalty programs: Implement loyalty programs that reward customers for their repeat business. Offer incentives such as discounts, exclusive access to new products or services, or a points-based system that can be redeemed for future purchases.
  4. Customer feedback and surveys: Regularly seek feedback from your customers to understand their needs, preferences, and areas of improvement. Use this information to tailor your products or services accordingly.
  5. Post-purchase follow-ups: Stay connected with your customers even after they make a purchase. Send follow-up emails or make courtesy calls to ensure their satisfaction and address any concerns they may have.

In conclusion, customer retention is crucial for small businesses as it helps in reducing costs, increasing profitability, generating referrals, building brand loyalty, and gaining a competitive advantage in the market. By implementing effective customer retention strategies, small businesses can foster long-term relationships with their customers and drive sustainable growth.