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Proven Customer Retention Strategies for Small Businesses

Written by on March 06, 2017

It should come as no surprise that the key to growing your business is not in fact by focusing on customer acquisition—instead, growth comes from customer retention.

This is reflected in the Harvard Business Review’s estimation that it can be 5 – 25 times cheaper to keep a customer than to get a new customer.

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Research by Frederick Reichheld even showed that if you increase your customer retention by 5%, your profits could increase anywhere from 25% to 95%!

You can see a similar trend in the image below from Forentrepreneurs.

Most of the value of the customer comes not from the first sale but from repeated sales
Most of the value of the customer comes not from the first sale but from repeated sales. Image source.

No matter what business you are in, those are some impressive numbers.

Customer retention is a big deal, but it is unfortunately undervalued by a lot of small businesses.

Although you should place a lot of emphasis on your customer acquisition operations, you should spend much more time on customer retention.

Before we look at the best and most practical ways for small businesses to retain customers, we’ll need to go over some important vocabulary related to customer retention.

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Important Customer Retention Terms

Here we’ll quickly go over the most important terms when it comes to customer retention in general. We’ll look at these in more detail further down.

Customer Retention

Although you can find many complex definitions for what customer retention actually is, it is pretty simple. It is the ability (or inability) of a company to keep its customers for a particular period of time.

If your company or brand has high customer retention, this means that your customers come back often, buy your product for a long time, and do not abandon it in other ways.

One company with great customer retention (related to its customers’ loyalty) is Disney, a legendary company that has a whopping 70% return rate!

It is 5-25 times cheaper to keep a customer than to get a new one

The ladder of customer loyalty

This phrase is related to moving your customer through the 6 stages of customer loyalty.

The stages can be broken down as the following:

  • Stage 1: Suspect—this is the earliest stage, when you appeal to a wide variety of people who may or may not be interested in your product or service
  • Stage 2: Prospect—this is a potential client, one who has some limited interest in your product or service.
  • Stage 3: First-time customer—this is when your prospect finally makes a purchase for the first and hopefully not last time.
  • Stage 4: Repeat customer—this is when you have a client, someone who is happy to purchase your product or services again.
  • Stage 5: Advocate—more than just a customer, this loyal person will be happy to recommend your business to others if you ask.
  • Stage 6: Evangelist—this is the greatest form of all customers, the word-of-mouth variety that will preach the beauty of your product or service to anyone with ears.

Customer Life Cycle

This concept was born out of the practice of CRM as mentioned above. This is quite similar to the customer loyalty ladder, but is used more often to map the customer’s journey.

This is especially true for digital or SaaS business models.

The Customer Life Cycle model is similar to the ladder of customer loyalty
Image source

Churn rate

In high-brow circles, this is also known as the attrition rate. It is the rate (percentage) of customers who choose to leave your business for a particular time period.

Your churn rate is important to calculate in order to improve your customer retention

This rate can be seen as an indicator of customer dissatisfaction with your product or service, increased competition, or other reasons.

Although it is applicable to many business types, it is used most in subscription-based service models, such as SaaS.

Customer Resource Management

Customer resource management (usually just written CRM) is a way to manage your company’s current and future customers.

It is normally done by analyzing as much customer data as you can through the customer’s history, as well as trying to improve your company’s relationship with the customers, usually with data.

An example of how different types of customer resource management operate
An example of how different types of customer resource management operate. Image source

The immediate goals are customer satisfaction, improved customer retention, and of course increased sales.

While there are various types of customer resource management tools, it may be overwhelming for the new or micro small business.

Customer Lifetime Value

This particular term is related to how much money a particular client can bring in the entire relationship the business has with the customer.

Because the CLV is based on prediction, it can be a fairly simple prediction model to using complex predictive analytics techniques. Here is a simplified method to calculate your customer’s CLV.

Here is a simplified method for calculating customer lifetime value (CLV)

Strategies to Increase Customer Retention

Although the ‘ultimate’ goal here seems to be to increase your sales overall, the only way to get there is through increasing customer satisfaction.

Therefore, there is no separation really between customer retention and customer satisfaction.

Now that we’ve got the basics covered, let’s look at the meat of the situation: actual ways to increase your customer retention and ensure that your business succeeds.

These are the customer retention strategies to decrease churn rate and increase your revenues

Predict churn to increase retention

In essence, all the tips below are actual ways to decrease customer churn. Remember, churn is the rate at which your customers are leaving your business for various reasons. Churn can be calculated as:

Churn = Customers Lost for Specific Period / Customers at Beginning of Specific Period x 100

Therefore, if we had, say, 50 customers at the beginning of the month and 10 left, we have:

Churn = 10/50 * 100 = 20%

One way to utilize this figure is to see what the “normal” churn rate is and whether there are any changes to it. If the churn rate is relatively stable, and you are aware of what is causing it (or the churn rate is acceptable), then you are on the right path.

Changes in your churn rate

If your churn rate changes, it can be good or bad. If it goes up, that means an aspect of your business is causing great dissatisfaction. If this is not addressed in a timely manner, it could mean an increased churn rate and of course decreased revenues.

If your churn rate is going down, that’s great. You are doing something that is causing customers to stay longer. You should be aware of what that change is and work on extending or building on it.

If your churn rate changes, it can be good or bad. If it goes up, that means an aspect of your business is causing great dissatisfaction. If your churn rate is going down, you’re doing something that is causing customers to stay longer.

Churn prediction

There is one method that has many proponents and critics, however. That is called churn prediction.

The churn rate (as above) is a descriptive model, meaning it only says what has happened, and does little to say what will happen based on other data.

Churn prediction modeling does this (and is a bit too complex to even try to list here) by combining a lot of important customer data.

This is used to predict which customers are more likely to fall along the wayside. A customer service rep will then go ahead and contact these ‘at-risk’ customers before they churn to offer them an incentive to stay.

However, the churn prediction method is often used as a “band-aid” to address the churn rather than the reason for the churn. Although it may be successful in the short-term, it will not impact the long-term without a lot of time and effort to contact individual customers.

Gain feedback

It's important to gain valuable feedback to help increase customer retentionIt's important to gain valuable feedback to help increase customer retention

Now, one of the more practical things you can implement to decrease your churn rate (read: increase customer retention) is to see exactly what is or isn’t working.

Optimally, when a customer churns (decides to leave your business), if possible you should ask an exit question. Namely, it should be similar to:

We are sad to see you go. We’d love to do better and it would be useful to find out which parts of our service/product didn’t work for you.

You can be cuter or more professional than that, but finding out why customers are churning will help you to see patterns and find the root cause.

However, you don’t have to wait until a customer leaves before you ask for feedback. You should in fact be asking for feedback on a regular basis (optimally from different customers).

By asking for and receiving constant feedback, you are sort of keeping your hand on the pulse, making sure you are in tune with whatever changes may be occurring in your customers’ profiles.

This can be done in one of two ways:

  • customer satisfaction surveys
  • feedback box in store or bar on your website

The results for these two methods will depend on your business and location. Nonetheless, any response that you get will be useful in helping your customer move up the loyalty ladder and thereby increase your customer retention.

Offer discounts and promotions

You can offer discounts and promotions to increase customer retention

After your customers made their first purchase, you will need to spend time to ensure that they become repeat customers.

This is the whole spiel of customer retention, and one of the best ways is to incentivize them to make that second, third, fourth, etc. purchase.

Discounts may seem to be the best move, especially when you have digital goods that have more flexibility in pricing.

However, there are certain negative consequences of discounts, including the perception of desperation and devaluation of your product or service.

In fact, it may even have another effect by negating a sale that was going to occur at 100% of the price and substituting it with a discounted sale.

Essentially, the customer had intended to buy at full price, but your discount offer was misguided and you’ve essentially lost potential revenue.

This usually happens because many small businesses throw out discounts to any customer who has bought from them at any point, ever, instead of doing the homework and determining which customers require an incentive to make that second or third purchase.

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Discounts vs promotions

Nonetheless, another (or perhaps more) effective strategy would be to use promotions.

We’ll differentiate discounts and promotions here by defining discounts as only temporary decreases in the normal price of a good or service, whereas a sales promotion creates bundles or some level of excitement and urgency by adding a condition to the sale.

These could be the popular BOGO (Buy One Get One [Free/Half Off, etc.]), 3 for the price of 2, or a free gift with purchase.

There are many other types of sales promotions, but they are based on not blanket-discounting the product. Rather, it is a reward for an action; i.e., if you do this action, you get a special price for this product or service.

This is psychologically different from a discount and may offer more positive results, depending on the applicability of the sales promotion to your business model and your type of business in general.

Enact loyalty programs

Loyalty programs can help you to increase your customer retention
Image source

As the name implies, loyalty programs are built to increase the customer’s loyalty and get them firmly moving up the ladder of customer loyalty.

We can steal something from popular video games, such as Candy Crush Saga or the many MMORPG games that use loyalty points where the players reach new levels, get boosters, rewards and recognition.

They also get special statuses that separate them from the “noobs” (new users) and makes them feel like VIPs.

Customer loyalty and rewards programs work on the same idea. It hopes to direct customer behavior and improve loyalty by offering points and rewards for certain behaviors.

These points are rarely monetary, and instead can only be used “in-store” or with collaborating businesses.  Points can go to discounts, status, charitable donations and many more.

One real-life example is the Starbucks Rewards program that rewards customers with stars (points) that they can then use to get Starbucks drinks, food and other products.

Starbucks has an engaging loyalty rewards card
Starbucks has an engaging loyalty rewards system. Image source

Loyalty programs are so common that most customers are familiar with the system and quite comfortable being enrolled in it if they prefer.

However, because they are so common, customers are also quite inundated with loyalty programs that only the most engaging and rewarding will succeed.

Customer Support

Customer support is obviously not for all types of business. Usually if there is some software or tool (electronics, machines, etc.) involved, your customers will need support for when a problem arises.

By having an easy-to-reach customer support system, you can increase your customers’ satisfaction by providing answers when customers really need it.

The most popular customer support tools are email, live chat, and possibly phone systems (although this is less emphasized in the new online market).

InvoiceBerry's live chat is activated when customers click on the question mark on our site
InvoiceBerry’s customer support is activated when customers click on the question mark on our site

FAQs are also helpful in that they provide a resource for customers who have common problems or questions.

As stated above, customer support should be something that is easy for the customer to reach. It should not be tedious, either by being difficult to find the number or email, or by having the customer wait for a long time to get an answer.

Be active on social media

Social media is one of the easiest and most effective ways to increase customer retention

At the risk of beating a dead horse, it probably goes without saying that social media is important for business. It is also very useful for building up customer loyalty and therefore customer retention.

One of the many ways to use social media is to fold it into your customer loyalty program. It could be for getting the word out about the loyalty program, but also about providing public recognition and rewarding of your best customers.

Two other great ways to use social media for increased customer retention are:

1. Listening to your customers

Your customers are probably eager social media users and will mention you or your products/services for praises or complaints.

At those moments, it is important to get involved in the conversation and thank or assure them that the problem will be solved. It is also useful for seeing what type of products/services/content they prefer.

2. Finding evangelists

Some of your customers are at the top of the loyalty ladder, and you need to find and use them to get more customers.

You can then provide them with exclusive rewards and recognition to increase their love of your brand even more and help move other customers or potential customers up the ladder.

Send out regular newsletters

A newsletter can be a relatively low-cost and low-energy customer retention tool that will have great returns.

Communication is important in building up the trust that your customer has in your business and brand. If you are able to stay in touch, you will be able to:

  • keep your name on your customer’s mind
  • educate them into your business with relevant and informative news pieces, blog posts and other articles
  • provide discounts and sales promotions
  • publicly reward brand evangelists and help create envy and loyalty in other customers
  • provide important information about updates and other technical details
  • create brand personalization by showing your more personal side
An example of the weekly newsletter we send to our InvoiceBerry Blog subscribers
An example of the weekly newsletter we send to our InvoiceBerry Blog subscribers

With programs such as Mailchimp, it can be relatively easy and cost-effective to send out weekly, monthly or quarterly newsletter to touch base with your customers.

Customer Referrals

Lastly, we have customer referrals. Referrals work by having your present advocate or evangelist customers providing positive word-of-mouth to potential customers to convert them into buyers.

If the referral is effective, the referrer may receive a cash reward, credit, or other reward.

As I mentioned before, customer advocates will be happy to refer you new customers if given an incentive, whereas customer evangelists cannot stop themselves from talking about your fantastic products/services.

Their referrals are in many ways unsolicited, although providing them rewards will be beneficial to both parties.

In most customer life cycle (CLC) diagrams, customers at the top of the cycle naturally lead to new customers. This is the connection between customer retention and customer acquisition, where your most loyal or most valuable customers naturally lead you to your new customers.

Therefore, it is best not to think of a customer journey as being a straight line. Rather, it should be more like a self-perpetuating cycle, where a lot of your focus goes to customer acquisition, and even more to customer retention.

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Customer Retention for the Small Business

As you can see, customer retention is an important and involving part of any business, and so it should be for yours.

Instead of focusing so much on marketing and advertising to acquire new customers, it is much more cost-effective and profitable to work on moving your current customers up the ladder of customer loyalty.

Not only will this bring you increased brand loyalty, decreased churn rate and boosts in sales from existing customers.

It will also naturally lead to new customers and many new opportunities.

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