Definition – What is Customer Retention?

Who is this article for?

• Companies in industries with high customer churn rates, such as telecommunications, software-as-a-service, retail, and financial services
• Customer success teams responsible for ensuring customer satisfaction and reducing churn
• Marketing teams focused on increasing customer lifetime value and brand loyalty
• Operations teams looking to streamline and improve customer-facing processes
• Executives and business owners who want to boost revenue and profitability through improved customer retention

Customer retention is a critical priority for these teams because even small increases in retention rates can have an outsized impact on revenue and growth. Existing customers are more profitable than new customers, so focusing on retention delivers a higher ROI than acquisition alone.

What is customer retention and why does it matter?

Customer retention refers to a company’s ability to turn customers into repeat buyers and prevent them from switching to a competitor. It’s a key indicator of how well your product and service quality meet customer expectations.

Many companies make the mistake of prioritizing customer acquisition over retention. But according to the Harvard Business Review, acquiring a new customer can cost 5-25x more than retaining an existing one. Existing customers are also more profitable – increasing customer retention rates by just 5% can boost profits by 25-95%.

Beyond the direct financial benefits, high customer retention is also a strong indicator of customer satisfaction and brand loyalty. Happy customers become advocates for your business, referring new customers through word-of-mouth. This creates a virtuous cycle of retention and acquisition that fuels sustainable growth.

How do you measure customer retention?

The most common metric for tracking retention is the customer retention rate – the percentage of customers who continue purchasing from you over a given time period.

To calculate your retention rate, you’ll need to know:

• Number of existing customers at the start of the time period (S)
• Number of total customers at the end of the time period (E)
• Number of new customers added over the time period (N)

Then plug those numbers into this formula:

((E-N)/S) x 100 = Retention Rate

For example, if you started the quarter with 200 customers, ended with 180 customers, and added 30 customers during that period, your retention rate would be:

((180-30)/200) x 100 = 75% retention rate

The ideal retention rate varies by industry, but in general, an acceptable rate is considered 85-90% over a one year period.

You can also look at customer churn rate, which is essentially the inverse of retention rate – the percentage of customers lost over a given period. If retention rate tells you what percentage of customers stayed, churn tells you what percentage left.

What factors influence customer retention?

Many variables can impact a customer’s likelihood to continue purchasing from you over time. Some of the most important factors include:

• Customer satisfaction – How well does your product or service meet or exceed customer expectations? Highly satisfied customers are more likely to stick around. One study found that customer satisfaction has a significant impact on customer loyalty, which in turn influences retention (Gustafsson, Johnson & Roos, 2005).
• Perceived value – Do customers feel they are getting their money’s worth from your offering? Value perceptions are shaped by product/service quality, price, convenience, and brand. Research shows that customers’ perceptions of a supplier’s value offering has a positive effect on retention (Verhoef, 2003).
• Brand trust – How much do customers trust your company to deliver on its promises and act with integrity? Brand trust is earned through consistency, transparency, and always putting the customer first. One study found that while both satisfaction and trust impact retention, satisfaction has a stronger effect (Ranaweera & Prabhu, 2003).
• Switching barriers – How easy is it for customers to leave you for a competitor? High switching costs, contractual commitments, and lack of alternatives can prevent customers from defecting even if they are unsatisfied. For example, a study in the German mobile phone market found that lack of phone number portability between carriers was a major barrier to switching (Gerpott, Rams & Schindler, 2001).
• Service quality – For service-based businesses, the quality of customer service and support is critical. Service failures or poor support experiences can erode trust and satisfaction. A study of B2B service firms found that service quality is a key driver of trust, which in turn influences commitment and retention (Gounaris, 2005).
• Social influence – Customers don’t make decisions in a vacuum. They are influenced by the attitudes and behaviors of others in their social networks. One fascinating study found that a customer’s exposure to a friend or neighbor who defected from a cell phone provider increased their own likelihood of defecting by 80% (Nitzan & Libai, 2011).

6 proven strategies to boost customer retention

While many factors that influence retention may feel out of your control, there are proven strategies you can employ to keep customers coming back. Here are six of the most effective:

1. Deliver fast, frictionless customer support

73% of customers say that quick resolutions of support issues are key to a good experience (Zendesk CX Trends Report, 2021). Strive to minimize customer effort and frustration by offering fast first response and resolution times.

Tallyfy can help you automate support workflows to ensure the right agent responds to the right issue at the right time. No more dropped tickets or frustrated customers.

2. Personalize customer interactions

71% of customers expect personalized interactions, and 76% get frustrated when this doesn’t happen (McKinsey). Use customer data to tailor experiences, offers and communications to each individual’s needs and preferences.

With Tallyfy, you can easily capture customer information to inform personalized service. Customizable forms ensure you collect all the relevant details to resolve issues efficiently.

3. Proactively gather customer feedback

Don’t wait for customers to come to you with problems. Regularly solicit feedback through surveys, interviews, and other voice-of-customer programs. This allows you to identify and address issues before they escalate into lost business.

4. Empower customers with self-service

69% of customers prefer to resolve issues on their own before contacting support (Zendesk CX Trends Report, 2021). Provide robust self-service options like knowledge bases, chatbots, and online communities. This allows customers to quickly find answers while reducing your support volume.

Tallyfy’s customer-facing forms enable customers to kick off requests and provide information on their own, without logging in. You can also build out self-serve workflows for common tasks like returns, cancellations, or account updates.

5. Deliver omnichannel support

Customers expect to engage with you on their preferred channel, whether that’s phone, email, chat, or social media. Provide a consistent experience across all touchpoints. 64% of customers used a new support channel in 2020, and 73% plan to keep using it (Zendesk CX Trends Report, 2021).

Tallyfy integrates with 2,000+ apps, so you can meet customers where they are. Trigger workflows from new support tickets, chat conversations, social media mentions, and more. Ensure no customer slips through the cracks.

6. Reward customer loyalty

Loyalty programs are a powerful retention tool. Customers who redeem loyalty points have 1.6x higher lifetime value than those who don’t (Accenture). Consider implementing a points-based program, tiered rewards, or exclusive perks for your best customers.

Risks and pitfalls to avoid in customer retention

• Neglecting at-risk customers – It’s easy to focus on your most loyal, high-value customers. But don’t forget about those who may be at risk of churning. Proactively reach out to customers who have decreased their usage or had a poor support experience to re-engage them before it’s too late.
• Over-relying on discounts – Discounts and promotions can be effective for short-term retention, but they can also devalue your brand and attract price-sensitive customers who will leave as soon as a better deal comes along. Balance discounts with other retention strategies focused on delivering value.
• Failing to close the loop – Gathering customer feedback is important, but it’s meaningless if you don’t act on it. Make sure you have a process in place to analyze feedback, identify key insights and opportunities, and implement changes. Close the loop with customers to let them know their feedback was heard and valued.
• Treating all customers the same – Different customers have different needs, preferences, and value to your business. Segment your customer base and tailor your retention strategies accordingly. Your highest-value customers may warrant more personalized attention and perks, while lower-value customers may be more responsive to automated touch points.
• Focusing on retention at the expense of acquisition – While retention is important, you can’t neglect acquisition entirely. You need a steady stream of new customers to replace those who inevitably churn over time. Strive for a balance of retention and acquisition that aligns with your business model and growth goals.

How Tallyfy improves customer retention

Tallyfy is a workflow automation platform that helps you deliver the kind of exceptional, personalized experiences that keep customers coming back. Here are a few key ways Tallyfy supports your retention efforts:

Streamline customer onboarding

Tallyfy allows you to build guided onboarding workflows that automatically assign tasks, send reminders, and track progress. You can also integrate with your CRM, so customer data flows seamlessly into the onboarding process. Getting customers up and running quickly and smoothly sets the stage for a long-term relationship.

Personalize customer interactions

With Tallyfy, you can capture customer data and preferences through customizable forms. This information can then be used to tailor future communications, offers, and experiences to each individual. Personalization shows customers you value them and helps build loyalty over time.

Automate customer support

Tallyfy’s conditional logic allows you to automatically route support requests to the right team or agent based on factors like issue type, customer tier, or language. You can also set up SLA reminders and escalations to ensure timely responses. Faster, more efficient support resolution is critical for maintaining high customer satisfaction.

How is AI Changing the Game for Customer Retention?

Artificial intelligence and related technologies like machine learning are revolutionizing how businesses approach customer retention. AI enables companies to gain deeper insights into customer behavior and preferences, personalize experiences at scale, and proactively engage customers to drive loyalty.

With AI, businesses can analyze vast amounts of customer data in real-time to understand each individual’s unique needs and interests. This allows hyper-personalization of offers, content, and interactions to strengthen the customer relationship.

AI-powered predictive analytics can also identify customers at risk of churn, allowing companies to proactively intervene with targeted retention strategies. Affective commitment and loyalty programs that provide economic incentives have been shown to positively impact both customer retention and share of wallet (Verhoef, 2003).

Chatbots and virtual assistants powered by natural language processing are enabling 24/7 customer service at a fraction of the cost. AI helps route inquiries to the right agent and surfaces relevant information to resolve issues faster. Higher service quality and satisfaction lead to greater trust, a key driver of retention (Ranaweera & Prabhu, 2003).

What Does the Future Hold for AI-Driven Retention?

Looking ahead, AI will become even more deeply embedded in customer retention strategies:

• Hyper-personalization engines will tailor every aspect of the customer experience in real-time
• Augmented reality and virtual reality will enable immersive customer support and onboarding
• Emotional AI will detect customer sentiment to preemptively address dissatisfaction
• Blockchain-based loyalty programs will offer more flexibility and value to customers

AI will help businesses scale 1:1 relationships and experiences that were previously cost-prohibitive. By making customers feel recognized and valued at every interaction, companies can dramatically increase retention and customer lifetime value.

However, AI also introduces risks that must be carefully managed. Algorithmic bias can lead to discriminatory treatment that erodes trust. Lack of transparency around AI decision-making can make customers feel manipulated. As AI becomes a key competitive battleground, responsible and ethical deployment will be critical.

Ultimately, while AI will be a powerful tool for customer retention, it is not a silver bullet. Building lasting relationships still requires a customer-centric mindset and a focus on delivering real value. As Gustafsson et al. (2005) note, even a satisfying service recovery may be inadequate to restore lost trust.

Related Questions

What is an example of customer retention?

A great example of customer retention is when a coffee shop offers a loyalty card program. Every time a customer buys a coffee, they get a stamp on their card. Once they collect 10 stamps, they get a free coffee. This encourages the customer to keep coming back to the same coffee shop, rather than going to a competitor. The free coffee reward helps build loyalty and a lasting relationship between the customer and the business.

Why is customer retention important?

Customer retention is crucial because it’s much cheaper to keep an existing customer than to acquire a new one. Loyal customers tend to spend more over time, refer friends and family, and are more forgiving if a mistake happens. Focusing on customer retention helps build a stable, reliable income stream for a business. Happy, loyal customers are also more likely to try new products or services, helping the business grow.

How do you retain a customer?

To retain a customer, you need to build a strong relationship with them. This means providing exceptional customer service, actively listening to their needs and feedback, and going above and beyond to solve their problems. It’s also important to regularly engage with customers, whether that’s through personalized email offers, exclusive loyalty programs, or simply checking in to ensure they’re satisfied. Continuously delivering value and showing appreciation for their business is key to keeping customers coming back.

What are the five key factors of customer retention?

The five key factors of customer retention are satisfaction, loyalty, trust, engagement, and personalization. Satisfaction means ensuring the customer is happy with the product or service. Loyalty is about incentivizing customers to keep choosing your business. Trust is built by being reliable, honest and delivering on promises. Engagement involves regularly interacting with customers and showing that you value them. Personalization is tailoring the customer experience to an individual’s needs and preferences. Focusing on these five factors helps create strong, lasting customer relationships.

References and Editorial Perspectives

Baal, S., V., & Dach, C. (2005). Free Riding and Customer Retention Across Retailers’ Channels. Journal of Interactive Marketing, 19, 75 – 85. https://doi.org/10.1002/dir.20036

Summary of this study

This study examines the phenomenon of free riding, where consumers use one retailer’s services but ultimately purchase from another, in the context of multi-channel retailing. The authors found that over 20% of consumers engage in free riding behavior between online and offline channels. They also investigated how product characteristics like search attributes, technological change, and purchase frequency influence cross-channel consumer behavior. The findings have implications for channel management and retailer-manufacturer relationships.

Editor perspectives

As a workflow automation platform, we at Tallyfy find this study highly relevant to understanding modern consumer behavior across channels. The insights on free riding and customer retention have important implications for designing omni-channel customer experiences that drive loyalty. Businesses must think holistically about the customer journey to minimize channel switching and maximize lifetime value.

Gerpott, T., J., Rams, W., & Schindler, A. (2001). Customer Retention, Loyalty, and Satisfaction in the German Mobile Cellular Telecommunications Market. Telecommunications Policy, 25, 249 – 269. https://doi.org/10.1016/s0308-5961(00)00097-5

Summary of this study

This study examines the relationships between customer retention, loyalty, and satisfaction in the German mobile telecom market. Using data from 684 customers, the authors found that satisfaction significantly impacts loyalty, which in turn influences retention. Factors like service price, personal benefits, and number portability had the strongest effects on retention, while customer care had no significant impact. The findings highlight the importance of number portability regulations in promoting competition.

Editor perspectives

At Tallyfy, we believe this study provides valuable lessons for any subscription-based business looking to improve retention. The causal links between satisfaction, loyalty and retention underscore the need to deliver consistent value to earn long-term customer commitment. Making it easy for customers to stay – through seamless processes enabled by workflow automation – can be just as important as proactive outreach.

Gounaris, S. (2005). Trust and Commitment Influences on Customer Retention: Insights From Business-To-Business Services. Journal of Business Research, 58, 126 – 140. https://doi.org/10.1016/s0148-2963(03)00122-x

Summary of this study

This study investigates how perceived service quality and customer bonding techniques used by suppliers influence trust and commitment, which in turn affect customer retention in B2B services contexts. The authors examine the causal relationships between these constructs, finding that both service quality perceptions and bonding efforts play important roles in building the trust and commitment needed for long-term retention, even for services tied to tangible goods.

Editor perspectives

Trust and commitment are absolutely essential in B2B relationships, where the stakes and switching costs tend to be high. As a B2B workflow software provider, Tallyfy recognizes the need to consistently deliver high quality service and to invest in relationship-building activities that demonstrate our commitment to customers’ success. Digitizing and automating key processes can itself be a powerful trust-building and bonding mechanism.

Gustafsson, A., Johnson, M., D., & Roos, I. (2005). The Effects of Customer Satisfaction, Relationship Commitment Dimensions, and Triggers on Customer Retention. Journal of Marketing, 69, 210 – 218. https://doi.org/10.1509/jmkg.2005.69.4.210

Summary of this study

This study looks at how customer satisfaction, affective commitment, calculative commitment, and situational triggers affect retention in the telecom services industry. The authors found that satisfaction, calculative commitment, and prior churn consistently impact retention, with prior churn also moderating the satisfaction-retention link. The findings have implications for using satisfaction surveys to predict retention and for managing customer relationships.

Editor perspectives

At Tallyfy, we’re fascinated by the interplay of rational and emotional factors in shaping retention. While satisfaction is clearly important, this study shows that “harder” factors like evaluating switching costs also come into play, as do situational triggers. From a workflow perspective, the key is to design customer-facing processes that maximize satisfaction and make it easy to stay, while having proactive risk-monitoring capabilities to intervene when needed.

Lewis, M. (2004). The Influence of Loyalty Programs and Short-Term Promotions on Customer Retention. Journal of Marketing Research, 41, 281 – 292. https://doi.org/10.1509/jmkr.41.3.281.35986

Summary of this study

This study models how a grocery/drugstore loyalty program influences customer retention, treating purchases as sequential choices in a dynamic optimization problem. Using a discrete-choice dynamic programming approach, the author shows how the loyalty program shifts customers from single-period to multi-period decision making. Simulations demonstrate that the program successfully increases annual purchasing for many customers, performing better long-term than other promotions like email coupons.

Editor perspectives

Loyalty programs are a powerful tactic for encouraging retention, but it’s often hard to untangle their specific effects from other simultaneous marketing efforts. We appreciate how this study’s sophisticated modeling approach provides a clearer picture of loyalty program impact. At Tallyfy, we believe well-designed loyalty workflows – supported by streamlined internal processes – are key to getting the most out of these programs.

Nitzan, I., & Libai, B. (2011). Social Effects on Customer Retention. Journal of Marketing, 75, 24 – 38. https://doi.org/10.1509/jm.10.0209

Summary of this study

This study examines how customers’ social networks influence their likelihood of defecting from a service provider, using data on a million cellular customers. The authors found that exposure to a defecting neighbor increases defection hazard by 80%, with the effect decaying over time. Tie strength, similarity to the defecting neighbor, and the neighbor’s connectedness also mattered. Highly connected and less loyal customers were more susceptible to social influence on defection.

Editor perspectives

At Tallyfy, we’re intrigued by the power of social influence on customer behavior – it’s not just about individual experiences, but also about the surrounding social context. For businesses managing workflows across many clients, it’s worth segmenting and analyzing social network effects. You may need to prioritize retention efforts toward highly connected customers or design “stickier” experiences for more socially susceptible segments.

Ranaweera, C., & Prabhu, J. (2003). On the Relative Importance of Customer Satisfaction and Trust as Determinants of Customer Retention and Positive Word of Mouth. Journal of Targeting, Measurement and Analysis for Marketing, 12, 82 – 90. https://doi.org/10.1057/palgrave.jt.5740100

Summary of this study

This study looks at the relative effects of customer satisfaction and trust on retention and positive word-of-mouth in the UK fixed line telephone market. The authors found that while both factors strongly drive retention and WOM, satisfaction has a much stronger impact than trust on retention. However, trust is nearly as important as satisfaction for driving WOM. The results suggest firms need strategies for building both satisfaction and trust, and that service recovery may not fully restore lost trust.

Editor perspectives

Trust is hard to gain and easy to lose – that’s a key takeaway for us at Tallyfy. While satisfaction is the biggest driver of retention, trust plays an outsized role in turning customers into advocates. And since trust is more fragile than satisfaction, we believe it’s critical to have robust workflows for “make it right” scenarios, even if the customer seems mollified. Retention isn’t just about preventing defection, but about preserving relationships.

Thomas, J., S. (2001). A Methodology for Linking Customer Acquisition to Customer Retention. Journal of Marketing Research, 38, 262 – 268. https://doi.org/10.1509/jmkr.38.2.262.18848

Summary of this study

This study presents a modeling approach to account for the link between customer acquisition and retention, which are often treated independently due to data limitations. The author demonstrates that retention analyses based solely on acquired customers can be biased and misleading. The proposed model estimates customer lifetime and corrects for the acquisition-retention link, showing the financial impact of failing to account for this relationship.

Editor perspectives

At Tallyfy, we firmly believe that the customer journey needs to be treated holistically. Acquisition and retention aren’t separate phases, but part of a continuous relationship. We see many businesses optimize their acquisition workflows without considering downstream retention impacts. Connecting the dots, as this study does, is essential for making sound customer management decisions and accurately projecting CLV.

Verhoef, P., C. (2003). Understanding the Effect of Customer Relationship Management Efforts on Customer Retention and Customer Share Development. Journal of Marketing, 67, 30 – 45. https://doi.org/10.1509/jmkg.67.4.30.18685

Summary of this study

This study investigates how customer relationship perceptions and relationship marketing instruments differentially affect customer retention and share development over time. The author found that affective commitment and loyalty programs providing economic incentives positively impact both retention and share development, while direct mailings only influence share development. However, the effects are relatively small. The results suggest firms can use the same strategies for both retention and share growth goals.

Editor perspectives

This study resonates with us at Tallyfy, as we often see businesses struggle to understand which elements of their CRM efforts are really moving the needle. It’s eye-opening that even effective tactics like loyalty programs and direct mail have relatively modest impacts. We believe the key is to focus on the customer’s holistic experience and use workflow automation to deliver consistent, valuable engagement across all touchpoints.

Glossary of terms

Customer retention

Customer retention refers to a company’s ability to keep customers over time, often measured as the percentage of customers who continue doing business with a firm from one period to the next. Retention is a key driver of profitability, as retaining existing customers is generally more cost-effective than acquiring new ones.

Customer loyalty

Customer loyalty is the tendency of customers to favor one brand or company over competitors, reflected in their repeat purchasing behavior and positive attitudes toward the firm. Loyal customers are less sensitive to price, more receptive to cross-selling, and more likely to recommend the company to others.

Customer satisfaction

Customer satisfaction is a measure of how well a company’s products or services meet or exceed customer expectations. Highly satisfied customers are more likely to remain loyal, increase their spending over time, and engage in positive word-of-mouth. Regularly monitoring and improving satisfaction is critical for driving retention.

Relationship commitment

Relationship commitment reflects the psychological attachment and enduring desire to maintain a valued relationship with a company. It encompasses both affective commitment (a positive emotional connection) and calculative commitment (a rational evaluation of benefits vs. costs). Strong two-way commitment supports long-term retention.

Customer lifetime value (CLV)

Customer lifetime value is the total worth of a customer to a business over the entire span of their relationship. It factors in the customer’s initial and recurring purchases, referral value, and cost to serve, discounted to present value. CLV helps guide retention efforts by quantifying the long-term payoff of keeping customers.