If you want to implement a successful client retention program, you need to dig into your numbers. Data will tell you for sure if your retention efforts are paying off and exactly where you need to tweak or make improvements to your strategy.
There are three key metrics that will show you whether your efforts to turn one-time buyers into lifelong brand advocates are working.
Client Retention Rate – CRR
Client retention rate (CRR) calculates how many clients you’ve kept over a given period of time. It’s usually expressed as a percentage. Start by defining a period, such as three months. This should be the period of time when you’d expect the client to make a second purchase. This will depend on your industry, market, and product type.
- Take your number of clients at the end of this time period.
- Subtract the new clients you’ve gained during this period. We’ll call this X.
- Divide X by the number of clients at the beginning of the period and multiply by 100 to get a percentage.
For example, your period is January to March. As of March 31, you have 340 clients. Thirty are new, so subtract this and you have 310. On January 1, you had 380 clients.
340 / 380 = 0.894736…
0.89 x 100 = 89%
Client Acquisition Cost – CAC
Client acquisition cost (CAC) is the cost of turning a potential client into a buyer.
CAC is calculated by defining a period and dividing all the costs associated with acquiring new clients by the number of new clients acquired. These costs include marketing, advertising, promotions, and labor, but note that it only includes those aimed at gaining new clients. Don’t include marketing costs for existing clients.
For example, you choose June to August as your time period. Taken all together, you spend $1,000 a month on new client acquisition. You’ve acquired 20 new clients from June 1 to August 31. This means that your CAC is $50 (It costs $50 to acquire one new client).
If the CAC is too high, this might mean there’s a shift in the market. It could mean that your targeting is off, or your offer isn’t appropriate for your target market.
Life-Time Value – LTV
Life-time value (LTV) calculates the net profit you gain from each relationship with a client. When you look at LTV in relation to CAC, you can easily see whether your retention efforts are paying off.
- Define a time period and measure average purchase value. Add up the total number of purchases during this period and divide by revenue. This tells you how much each purchase is getting you on average.
- Calculate purchase frequency for each client. Divide the total number of purchases by the total number of clients.
- Multiply average purchase value and average frequency. This gives you a figure for the value of each individual client.
- Now, average the lifespan. Take all your clients and determine the average length of time they continue to buy from you.
- Multiply the average client lifespan by individual client value. This gives you the LTV.
For example, your average purchase value is $30 over the course of 3 months. Each client makes an average of 2 purchases over this 3-month period. This means that each client gives you about $60 per 3 months. If you usually retain a client for 2 years, your business’s LTV is $480. This means that each person spends $480 during their lifetime with your company.
Calculating these three key metrics should be a regular part of your client retention strategy. The objective data they reveal will help you guide your future efforts towards success.