It's a notable fact that retaining existing customers costs less than attracting new ones. But that's not the only reason customer retention is crucial for any SaaS business. It also indicates customer satisfaction and loyalty, both of which are measures of business success and growth.
Customer retention cost is a key SaaS metric. Read on to learn more about the importance of this metric, why you should be regularly tracking it, customer retention mistakes to avoid, and more.
What is Customer Retention Cost (CRC)?
Customer retention is your business's ability to retain customers and keep them paying for your products and services over a specific timeframe. It involves continually engaging and nurturing customers to keep your business front of mind and to ensure they return to buy, use and enjoy your product or service.
Customer retention cost (CRC) measures the costs of retaining customers. It can help you evaluate pricing strategies, calculate return on investment (ROI), and identify customer lifetime value (CLV).
A high CRC without a substantial increase in the number of returning customers is a problem. It suggests you're spending a lot on customer retention without any worthwhile results – the challenge then is finding out why customers aren't returning. In contrast, a low CRC coupled with a high customer retention rate means that your strategy is working.
Customer Acquisition Cost (CAC) – is it the same?
Customer retention cost measures how much you're spending to keep customers buying from you over a set time. Customer acquisition cost (CAC) relates to the cost of acquiring new customers over a set time.
For example, measuring CRC might include tracking spending on your loyalty programme or chatbot, as these are tools you use to retain customers. On the other hand, CAC tracks spending on activities that drive people to buy from you for the first time, such as a new customer marketing campaign.
How do you calculate retention cost?
The customer retention cost formula can be calculated in different ways. The two main methods are 'average CRC per customer' and 'average lifetime CRC per customer'. Here they are below, along with examples to demonstrate:
1) Average CRC per customer = total CRC of all customers/number of active customers in the period.
Let's say you spent £5,000 on customer retention during April. In that same month, you had 2,000 active customers. The calculation would be 5,000 / 2,000 x 100 = £250 CRC.
2) Average lifetime CRC per customer = average CRC per customer x average customer lifetime.
Once you know the average CRC per customer, you can work out the average retention cost for a customer over their entire lifespan with your business.
In this example, the average CRC per customer is £250. The average lifetime value of a customer is £2,000. So the calculation would be 250 / 2000 x 100 = £12.50 average lifetime CRC.
What are the costs of retention?
The costs of retention include all the marketing costs incurred while retaining customers. Customer engagement tools – such as helpdesk software, social media scheduling apps, chatbots, knowledge bases and survey tools – are an example. Here are some other costs that should be factored in:
Employee salaries – the cost of employing marketing, customer service and account management staff that carry out customer retention activities.
Customer adoption programs – launching new products or features and generating awareness to help existing customers adopt them. For example, Todoist is a task management app that often launches new features and educates customers about using them. Here's an example of when Todoist introduced kanban boards; a new visual view of tracking tasks.
Loyalty programs – such as a points-based rewards system that incentivises customers to keep purchasing in exchange for collecting points and rewards.
Customer success overheads – any costs involved in building strong relationships and meaningful engagement throughout customers' entire lifecycles. Examples include onboarding materials, churn management and customer support.
Retention marketing campaigns – like win-back promotional SMS campaigns, subscription box models and gamification techniques.
Account management activities – CRM software, collaboration tools and analytics.
Importance of CRC and your existing customers
A recent Forbes article reported that a 5% spike in customer retention can equate to a 25% to 95% growth in profit over time. The 'time' part of this statistic is particularly important because customers become more profitable the longer the relationship goes on (after they've provided returns on the high costs spent acquiring them).
Furthermore, according to digital marketing guru Neil Patel, existing customers spend 31% more than newly acquired customers and are twice as likely to try a new product. Here are some other benefits of retaining customers for as long as possible:
Fewer resources needed – customer retention means investing in customer service and marketing. However, customer acquisition is more resource-heavy. In addition to marketing, you'll need to invest in lead generation, a sales department, and onboarding.
Increased customer loyalty – this is what customer retention is all about: building loyalty – which leads to organic referrals and more new customers for your business.
Improved customer satisfaction – customer retention aims to keep current customers happy. Tracking satisfaction over time will help you identify which areas of your business are performing well and which you need to work on.
Competitor advantage – loyal customers are much less likely to switch to a competitor because they trust and feel happy with the products and service they're getting from your business.
Calculating customer retention cost helps you evaluate business success and decide how to implement your retention programme. It can also help you tailor your financial strategy and qualify and map customer satisfaction – with the aim of turning satisfied customers into loyal ones.
Finally, customer retention cost helps you calculate customer lifetime value (CLV), another critical CX indicator. Measuring CLV enables you to understand how much customers are worth to your business over the course of their relationship.
Customer retention mistakes to avoid
We asked Messente's Marcus Kallavus for some tips on what not to do when implementing a customer retention strategy. As Head of Revenue, Marcus works closely with Messente's customer base and oversees strategic partnerships to drive growth and revenue.
"One major mistake with customer retention is failing to track the costs of your programme. If you don't track CRC, you'll have no way of knowing whether your efforts are delivering a strong ROI. Your programme could be negatively affecting your bottom line because you're spending too much on activities that aren't encouraging customers to stay.
Another common error is not utilising marketing and communications channels like SMS and OTT messaging. Many businesses overlook these, thinking they're intrusive or not cost-effective. Yes, these are direct channels, so they must be used wisely – to convey something of real value. If you do that, you'll find these channels achieve excellent results, especially for delivering loyalty programme rewards."
Here are some other 'don'ts' to note:
Don't offer inconsistent customer service – all agents need to be on the same page regarding how they talk to customers and the advice they give. Empathy and listening skills are essential.
Don't ignore customer feedback – if you're getting similar complaints about price, quality, or customer service issues, it's a red flag that something needs to change.
Don't use ineffective tools – it'll cost more in the long run (and waste time).
Don't overlook the importance of building a personal rapport – customers want to feel like you understand their needs. If you make them feel valued, they'll likely trust your brand.
Don't stay still – continually adapt and innovate your product and service to meet customers' expectations as they evolve.
How to reduce customer retention costs
Adopting a client-centric approach is the best way to cut customer retention costs. This involves putting customer needs at the core of your business and developing an excellent customer experience. Pay attention to the customer journey and ensure it's as smooth as possible – from a seamless payment experience and onboarding process to the ongoing use of your products.
Seek regular feedback to learn what customers like and don't like about your business. Use this to improve satisfaction – make changes to your service or offer new features if needed. Mircosurveys are great for gathering quick feedback because they contain just a few questions and can be completed in seconds. Once you understand more about your customers, segment them according to their preferences or customer journey stage. Then, create personalised marketing experiences.
Consider direct messaging to grab attention, e.g., via a text alert system to notify customers of eligible loyalty rewards or for conversational customer service support. Also, a knowledge bank or in-app help centre should be created so customers can find the answers to FAQs themselves without waiting in a queue to chat with an agent.
Smart customer retention strategies
Customer retention cements business growth by generating profit from existing customers. So, use every opportunity to boost the average order value for each customer. Try:
Upselling – tempting customers to buy a more expensive, better quality product or service than they initially wanted.
Cross-selling – inviting customers to buy complementary or related items that add value to their initial purchase. For example, an antivirus software company could cross-sell a VPN as an add-on feature.
With all customer retention marketing campaigns, carry out A/B testing to see what's working. In the scenario above, the antivirus software company might achieve better results when cross-selling a password manager feature instead of the VPN.
Increase customer loyalty and reduce CRC
Customer retention is a vital marketing strategy to keep customers returning to your business rather than switching to a competitor. It encourages loyalty and sets the foundation for long-term business growth.
CRC measures how much you're spending on customer retention. Not tracking this metric is a mistake because, without it, you won't know the financial implications of retaining existing customers. And you won't be able to make informed decisions about your engagement and loyalty activities.
The aim is to have a high number of repeat customers coupled with a low customer retention cost. The key to reducing CRC and increasing loyalty is to deliver a customer-centric experience that caters to individual customer needs.
Wondering what to read next? Learn how an omnichannel customer experience can win over the modern consumer.
