Customer retention is a must for companies seeking profitability and revenue growth. While acquiring new customers is fundamental to growth, retaining your existing customers is just as important to your bottom line. That’s because it costs between three to five times more, on average, to acquire a new customer compared to retaining an existing customer.
However, it’s also important to remember that customer retention comes at a price. Costs associated with customer retention can include customer support costs, loyalty programs, referral or affiliate programs, and more.
The question is: do you truly understand how much customer retention is costing you – and more importantly, do you know whether what you’re spending on customer retention is actually making a difference? To find out, you’ll need to first understand your Customer Retention Cost, or CRC.
In this blog post, we’ll explain what Customer Retention Cost (CRC) is, why it matters, and how you can use this metric to inform and improve your customer retention strategy.
Customer Retention Cost (CRC) is a measure of the total amount of money spent retaining existing customers over a specific period. It includes all expenses incurred during customer retention activities such as customer support, loyalty programs, promotional activities, and referral programs. Essentially, CRC is the cost of keeping your customers happy and satisfied.
To calculate your Customer Retention Cost, you need to track all expenses related to customer retention. CRC is often measured over a year period and should factor in every expense associated with maintaining your current customer base, including:
Once you have captured the total customer retention spend, simply divide the total cost by the number of retained customers over the same period. You can use the following formula:
CRC = total cost of customer retention program ÷ number of active customers
The result is how much it costs you to retain one customer.
While Customer Retention Cost (CRC) refers to the cost of retaining an existing customer, Customer Acquisition Cost (CAC) refers to the cost of acquiring a new customer. CAC takes into account all of the costs associated with identifying, attracting, and converting a prospect into a paying customer.
This typically includes the cost of marketing and sales staff (including salaries, commissions, and bonuses), as well as marketing and sales spending (including paid advertising, creative development costs, marketing technology costs, and more).
These costs are measured over a period of time and compared to the total number of new customers acquired within that same time period. CAC can be calculated quite simply with the following formula:
CAC = (cost of sales + cost of marketing) ÷ new customers
The result is the total cost to acquire one new customer.
In short, CAC measures the cost of everything that happens before the sale that leads to said sale, while CRC measures the cost of what happens after the sale that leads to happy, loyal customers.
While both CRC and CAC metrics are important for business growth, the use of these metrics is a balancing act. In order to grow, you don’t want to invest too little in either acquisition or retention. However, you also don’t want to overspend in either area without a clear return on the investment.
Measuring CRC provides valuable insight into the effectiveness of your customer retention programs. By monitoring changes in your CRC, you can get a pulse on customer satisfaction and the factors that influence your customer loyalty. From there, you can identify which customer retention strategies are working and which ones are ineffective–and make informed decisions on how to best spend your customer retention budget.
Your CRC is one of your business’s vital signs – it’s one of several indicators of the success of your customer retention program. As a result, a high customer retention cost is often a sign that your customer retention strategy needs work. That is, if you’ve invested a lot of money in customer success, but you’re still seeing high attrition, something isn’t working. Now, you need to figure out what isn’t working–and more importantly, why.
There are a number of ways you can do this, but the best approach gets to the source: the customers themselves. The best way to improve your customer retention strategy – and lower your customer retention costs – is to listen to your customers and understand what they value most. Getting to the heart of what matters to your customers will help you understand why they stay–and what’s driving them away.
A customer value analysis, which refers to the process of evaluating how customers perceive the value of your solution, is often an excellent place to start. When you understand what is contributing to (or detracting from) your customers’ perceived value of your solution, you can make informed decisions about how to measurably improve customer satisfaction and retention. As you make adjustments, continue to monitor your CRC to understand the impact of those changes.
Customer retention is more important than ever, and understanding your Customer Retention Cost is a critical first step to optimizing your customer retention strategy. From there, you can make smart investments and focus on the right customer retention activities that will make a measurable impact on customer happiness, loyalty, and your bottom line.