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Sometimes, it’s so easy to get caught up in the process of converting new customers that you forget about the importance of customer retention. But your best customers—your existing customers— are sitting right in front of you. You’ve already won them over with your products or services. Focusing on retaining these customers will bring you a wealth of benefits.

It’s easier to convince your existing customers to buy products from you again, and the longer they stay with you, the greater their lifetime value becomes. In addition, once you’ve built a solid relationship with your loyal customers, they’ll refer their friends. So, they’ll become powerful advocates who can bring new customers your way!

Clearly, keeping existing customers is as important, if not more important, than obtaining new customers for your business. Let’s dive further into the importance of customer retention, with 4 reasons to focus on retaining customers.

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Focusing on your existing customers helps keep your retention rate high

Retention rate is the percentage of customers who have remained with your company over a period of time. (The opposite of retention rate is churn rate, which shows the percentage of customers you have lost over a given time).

For example, if you started the year with 1000 customers, and then found out that 800 of those customers remained your customers at the end of the year, your customer retention rate for the year is 80% and your churn rate is 20%.

A higher retention rate is directly connected with higher profits. After all, as the Harvard Business Review explains, “you don’t have to spend time and resources going out and finding a new client — you just have to keep the one you have happy.”

According to Destination CRM, increasing your customer retention rate by just 2% has the same effect on profits as cutting costs by 10%. And, as Customer Thermometer reports, increasing your customer retention rate by 5% can increase your company profits by 25% to 125%.

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Your existing customers are more likely to spend more on your products

Satisfying your customers helps you build a large, reliable customer base. This strengthens the pool of customers you can count on to repeatedly purchase from you. By having satisfied customers, you’re also paving the way for offline marketing to happen – like word of mouth and referrals.

When your existing customers are satisfied, they’re more likely to buy from you again. So, it’s far more cost-effective to persuade existing customers to make a repeat purchase than it is to acquire a new customer (think of the money you don’t have to spend on ads as well as the time it takes to find people in your niche).

These compelling stats drive home the importance of customer retention to your bottom line:

  • 80% of your future profits will come from just 20% of your existing customers.
  • Your existing customers will be responsible for 65% of your sales. 
  • According to Neil Patel, repeat customers spend an average of 31% more than first-time customers.
  •   In addition, you’re at least 40% more likely to convince an existing customer to buy from you again than you are to convert a prospective customer.
    • The probability of getting a prospective customer to make their first purchase from you is only 5% to 20%, while the probability of selling to an existing customer is 60%-70%.
  • Also, compared to new and prospective customers, existing customers are 50% more likely to try out your new products.

Retaining existing customers increases their lifetime value

Lifetime value measures the total profit contribution that a customer has brought to your business. The longer someone remains your loyal customer, the greater their lifetime value.

Customers with high lifetime value are extremely important to your business’ success because their purchases are not counteracted by acquisition costs.

A new customer who spends the same amount of money on products as your average existing customer doesn’t bring nearly as much profit as the existing customer, because you must account for the one-time costs to acquire that new customer.

If your acquisition costs are greater than your average customer’s lifetime value, you could be losing money, and you will need to rethink your marketing strategy. But the more customers you retain, the higher your average customer lifetime value becomes, leading to more profits.

How to calculate your average customer lifetime value? Use this basic formula:

Average annual profit contribution by a customer (X) The average number of years that someone remains a customer ( – ) the initial cost of customer acquisition for each customer

For example, say your average length of customer retention is three years;

Customers spend $500 a year on your products, on average;

and it costs you $800 to acquire a new customer.

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This means you could be losing money.

Your average customer’s lifetime value is $100 less than your acquisition costs.

But what if your average length of customer retention becomes 4 years (assuming that your acquisition cost and the average amount customers spend both stay the same)?

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That’s $400 more than it costs for you to acquire each new customer.

Increasing your average customer lifetime value makes all the difference! Thus, focus on building customer loyalty, so that you can reduce acquisition costs and increase your customer lifetime value.

Satisfied existing customers will refer others to your business

Existing customers’ real lifetime value is even higher than the value of their repeated purchases. Your existing customers are your greatest advocates. If they’re happy with your products and pleased with your customer service, they’ll refer others to your business, authentically and naturally.

As Inmoment reports, 75% of loyal customers will refer their friends and family to your brand.

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Loyal existing customers’ referrals come in a variety of forms, including:

These recommendations are powerful tools that should never be underestimated. People trust referrals from their family, friends, and peers far more than they trust messaging that comes directly from your brand. It’s one of the many reasons why you need a referral program.

After all, they feel that the people they know are least likely to mislead them. Plus, when people make decisions about what to buy, they rely on these genuine referrals most, because they value personal experience— referrals come from people who have had real experiences with your brand.

  • A Nielsen survey reports that 90% of people trust recommendations from friends, family, and peers they know over other sources.
  • According to a survey we conducted here at Referral Rock, 83% of Americans say that word-of-mouth recommendations from friends or family members make them more likely to purchase that product or service.
  • We also found that 72% of consumers will take some sort of action after reading a positive review.
  • 88% of people trust online reviews written by other consumers as much as they trust recommendations from people they know, as BrightLocal reports.

Your existing customers’ recommendations can reduce your marketing costs even further. After all, their referrals come naturally, at absolutely no cost to your business!

  • Prioritize your existing customer’s experience, and new customers will end up rolling in for free. You won’t need to spend nearly as much money on new customer acquisition!

Most crucially, referred customers already have a positive impression of your brand, since their trusted friend, family member or peer gave your brand the thumbs up.

  • Referred customers are more likely to become loyal, lasting customers: their average lifetime value amounts to 16% more than the value of non-referred customers.
  • And best of all? Referred customers are more likely to keep the cycle going, and refer their friends to you.

Key Takeaways on the Importance of Customer Retention

Why is customer retention so vital?

  • Your existing customers are more likely to spend more on your products or services;
  • Existing customers keep your retention rate strong;
  • Their lifetime value keeps increasing with every consecutive year they stay loyal, and;
  • They are likely to refer new customers to your brand.

All of these factors help you spend less on customer acquisition. So focus more time, money, and energy on retaining your existing customer base—new customers will still follow as a result!

Now that you’ve seen details of the importance of customer retention, make sure to:

Jessica Huhn

Posted by Jessica Huhn

Jessica Huhn is a writer at Referral Rock. When she is not writing, there is a good chance that Jessica is singing, arranging songs, sharing and enjoying content on social media, or hanging out with her mini Goldendoodle. She believes that it's always important to cultivate gentle strength.