What is a good retention rate, and how can companies achieve it? There is no simple formula to determine the answer, as retention rates across multiple industries differ. This article will discuss average retention rates and how companies can improve their results.
In this article, we'll cover:
Why Is Customer Retention Rate So Critical?
What makes it so important to consider retention rates? There are a few benefits to getting this business component right:
- Loyal customers know that a company can provide what they want. They, therefore, are more likely to buy more regularly.
- Businesses can spend less on marketing to repeat customers as they already understand the product range. As a result, these customers often have fewer buying objections.
- Loyal customers become brand ambassadors, spreading the word about a business. This word-of-mouth recommendation is valuable to any company as it lends credibility.
- Repeat customers may not be as price sensitive as those who have not tried the products. However, users who have used and seen the value of products are more likely to be willing to pay a premium for them.
- Customers who use a product or service over an extended period are a valuable source of feedback. They can better identify pain points and bottlenecks in the processes because they understand how things work. They are also in an ideal position to suggest enhancements or complimentary products.
What Is a Good Retention Rate on Average?
According to Statista, the answer varies widely depending on the industry. Top-performing industries such as Media and Professional Services see retention rates as high as 84%. Hospitality, Restaurants, and Travel at 55% are on the opposite end of the spectrum.
According to the research, the average across all industries is 75.46%. However, before businesses begin to aim toward this arbitrary figure, they should research the rates for their industry. They should also determine their current retention rate and see how it compares to industry norms.
A business that lags behind its competitors may need more time to bridge the gap, so it may instead aim to improve retention by a certain percentage rather than trying to jump several points.
What Impacts Retention Rates?
The answer to “What is a good retention rate?” is only a small part of the puzzle. Companies wishing to improve their results should understand why their customers choose to stay. What is the company’s competitive advantage or differentiating factor? Understanding this will make enhancing strengths and reducing weaknesses later on easier.
Understanding why customers remain loyal is essential in creating a solid strategy for engendering that loyalty in new customers. Here are some reasons why customers may stay.
If a customer feels satisfied with the product or service, they will not look look for alternatives. Conversely, when their experience falls below their expectations, they will look for other solutions.
Companies should monitor customer satisfaction strategies and see the impact on retention. However, they must rely on more than this measurement, as there may be many factors that will drive customers away.
For example, a customer may be perfectly happy with a company or product but need more disposable income to purchase it. They may also be tempted away by clever advertising or deals that competitors offer.
Maintaining good customer satisfaction is a winning proposition on several levels, so improving this rating is laudable.
Another thing to consider is customer success. Companies should take steps to understand the key pain points their products or services address and how these evolve.
Take, for example, the first mobile phones that came out many years ago. They were revolutionary for their time because they allowed people to communicate without the need for a landline. Today they are nothing more than a nostalgic novelty because smartphones are more powerful and advanced.
How many customers today would want to carry the old type of Nokia that was similar to a brick and had no internet capabilities? The world moved on, and so did customers’ pain points. Today’s consumers need to access instant messaging and other features, making phones a multi-functional communication tool.
Companies that can keep up with changing customer needs and ensure that customers are successful adopters of their new products should experience better retention rates overall.
Customer reliance also impacts a business’ retention rates. Consider a typical banking customer. They may:
- Pay their salary into their account
- Have an overdraft facility
- Use a bank credit card
- Allow several automatic payments to go off their account
- Have a mortgage
- Use a bank savings or investment account
The point is that such a customer is far more dependent on the bank than someone with a basic savings account. Someone with a basic savings account can more easily move their account because they do not have a mortgage, overdraft facility, and so forth. They do not have to convince their new bankers that they are credit-worthy.
Difficulty in Leaving
Companies may also improve retention rates by making it too expensive for customers to leave. A gym contract is an excellent example of this concept. However, as a policy, charging penalties for canceling services can cause ill-fillings, so it may be more prudent to provide incentives to encourage customers to stay instead.
How to Improve Customer Retention?
With the metrics for what makes a customer retention rate good or bad so interchangeable across industries, companies should focus on making incremental improvements over time. Of course, the ultimate goal is achieving 100% retention, but that is challenging. So instead, companies can boost profits by increasing retention by 5% or 10% which can increase a business’ revenue by anywhere from 25% to 95%.
See Customer Retention as an Ongoing Strategy
Businesses may initially push to improve retention and then slack off when they reach their goals. However, maintaining high retention rates is an ongoing process. Companies never know if some industry-changing development will lure customers away.
Retention software can identify worrying trends and provide valuable insights into how companies can adjust their overall strategy. In addition, using the power of artificial intelligence to process big datasets can prove invaluable in identifying a strategy’s strengths and weaknesses.
It can also automate processes like exit interviews and reduce retention costs overall.
Be Proactive When It Comes to Customer Success
Customer success plays a critical role in retention. If customers do not know how to access a feature they need here and now, they may look elsewhere for a product or service that is easier to use. Companies can forestall this action by proactively ensuring customer success.
This entails understanding a customer’s pain points and ensuring that customers understand how a product addresses these. The process would start with the sales consultants correctly identifying customers’ needs and providing the best solution.
It might continue with adequately demonstrating how to use the product effectively. This could be in the form of a well-timed tutorial sent to every customer shortly after purchase. Finally, it might continue with a courtesy call to check how customers are enjoying the product and asking if they have questions.
Such a strategy is slightly more long-winded than usual, but that can also differentiate a company from its competition. Many customers today feel that businesses focus on making the sale rather than worrying about after-sales care. Such a strategy might get them to rethink this stance and improve customer satisfaction as well as success.
Furthermore, this proactive approach allows companies to gain valuable feedback from their end users.
Monitor the Metrics
Any improvement strategy today relies on careful monitoring of data. Regular data analysis gives companies time to adjust strategies that are not quite making the grade. It’s also important to keep monitoring relevant industry benchmarks to see how a company’s competitors are performing.
Businesses that achieve rates far higher than the norm may be onto a winning strategy. Companies falling short may need to rethink the direction they are taking.
There is no simple answer to “What is a good retention rate?” as the response depends on the industry in which a company operates. However, companies should research industry norms and see how their performance compares.
Even where a company measures up well, it is worth performing some introspection and looking at ways to improve customer satisfaction and success going forward.
Anna has been working as a writer for 6 years. She previously wrote about financial markets, conducting the research on the state of bonds and stocks on a daily basis. She is a keen reader with interest in historical literature and international cuisine. Her latest obsession — customer communication and ways to perfect it. If you want to connect with Anna, follow her on LinkedIn.Posted on