How to Calculate Customer Retention Cost

Look around you and you’ll probably find at least one product from a well-recognized brand.

Maybe it’s your iPhone. Or a pair of Nike shoes. Or a bag of Kirkland chocolate-covered almonds.

These brands all have one thing in common—they have a lot of repeat customers. Evidently, you’re one of them. 

These brands didn’t reach this status by solely focusing on customer acquisition. As important as it is to acquire new customers, it’s equally important to keep existing customers coming back for more. 

There are a lot of metrics you can use to track customer retention—customer lifetime value, net promoter score, etc. Of all of them, one reigns supreme: Customer Retention Cost (CRC).

We’ve put together this blog post to help you understand what customer retention cost is, why it’s such a crucial metric to track, and how to calculate it. We’ll even share a few proven tips to help you increase your customer retention rate.

Excited?

Let’s dive in.

What is Customer Retention Cost?

Customer retention cost refers to the average cost of retaining a customer over a set time period. 

To determine CRC accurately, businesses need to first calculate the total amount they’re spending on customer retention. And we’re not just talking about obvious costs. One big mistake most businesses make is considering their customer service costs as their total customer retention spending.

Maybe the reason a majority of consumers purchase from you repeatedly is that you send heartfelt thank-you notes along with your products. Or maybe it’s because your staff is extremely polite with your consumers. Maybe, it’s because your team sends regular updates to your customers related to the issues they face with your product or service.

You see, the amount you spent on printing these heartfelt thank-you notes or employee training should be taken into consideration while calculating total customer retention costs.

Every single thing you do, every system or process you have in place to retain customers needs to be factored into the costs you’re spending on customer retention. 

That being said, allow us to show you how to calculate customer retention.

How to Calculate CRC

The real challenge isn’t calculating your CRC; calculating how much you’re actually spending on customer retention is the tricky part.

If you onboarded five employees last year and spent $1,000 per employee on their training (teaching them how to greet your customers and politely interact with them), that’s $1,000 x 5 = $5,000 you spent on customer retention.

Running a customer loyalty program? Spending $100,000 each year on customer success? Investing money in customer engagement tools like chatbots? All of those costs need to be factored in as well. 

The next part is simple. You divide your total retention costs over a specific period of time by the number of customers you retained during that period. 

For example, if your business spent $100,000 on customer retention last year which led to repeated purchases from 1,000 customers, then your last year’s CRC is $100,000/1,000 = $100.

Why Should Local Businesses Calculate Customer Retention Cost?

So now you know what CRC is and how to calculate it, but you may still be wondering: Why should I calculate CRC in the first place? 

As mentioned by Jeff Wright, former VP of Customer Retention & Engagement at Autodesk, in Totango’s Customer Retention Cost report, “It makes so much sense to pay attention to how much you are investing in the success of your customers. At Autodesk, we know that helping our customers succeed, from early in the relationship, greatly increases the likelihood that they’ll remain customers for a long time. Tracking a metric like CRC will help companies allocate investments more effectively.”

Imagine this: You spent $100,000 last year on your customer retention efforts yet were only able to retain 100 customers. That’s a $1,000 CRC. 

Unless your average customer spends more than $1000 on your products and services consistently, you’re spending too much trying to retain them. At the end of the day, you need to make sure that your total gross profit from repeated purchases is less than your total customer retention costs. 

Calculating your CRC will not only help you understand how much you’re spending per customer, on average, towards retention, but you can also use it as an indicator of growth and customer satisfaction. If your CRC is too high, then you can conduct an audit to identify the reason(s) behind it and find better ways to cut down the costs without reducing the impact of your customer retention efforts.

Customer Acquisition Cost vs. Customer Retention Cost—What’s the Difference?

The internet is flooded with metrics—it’s hard to keep them all straight. 

Customer Acquisition Cost (CAC), is the average cost of acquiring one customer over a specific time period. You can calculate CAC using this formula:

So for example, if you spent $500,000 on customer acquisition last year which resulted in 5,000 first-time purchases, then your CAC stands at $500,000/5,000 = $100. 

To acquire new customers, you need to put in a lot of time, effort, and money. But ideally, retaining a customer will be a bit easier. So, if your CRC is greater than your CAC, you might want to investigate and see what’s going on there.

Want to dive deeper into customer retention metrics? Check out this article to learn more.  

Don’t Make These Customer Retention Mistakes

Following are the two big customer retention mistakes many local businesses make:

• Using ineffective tools. The right tools can improve customer communication, help decrease response time, and help you understand your customers and their behavior. All of these things lead to better retention. Many local businesses make the mistake of either investing in the wrong tools or investing in the right tools but failing to use them to the fullest extent.
• Ignoring customer feedback. Knowledge is power. Customers will tell you exactly what you need to do to keep their business, but you have to be willing to ask for that feedback and then implement changes based on those responses. 

3 Tips Local Businesses Should Consider to Improve Their Customer Retention

The market is hot. The competition is fierce. It’s harder than ever to meet customer expectations and win business. Businesses that aren’t willing to adapt and modernize will fall behind. 

Inflation and demand are also huge obstacles for small businesses right now. Those can impact customer retention. Maybe customers don’t have the cash to spend on repeat purchases like they did last year. Maybe they’re looking for cheaper alternatives. Some local businesses are struggling to get the inventory their customers want. It’s a difficult time right now for both local businesses and their customers.

Let’s talk about three things you can do to tackle those challenges and keep customers coming back for more. 

1. Consider Your Customer Journey

A good customer experience isn’t just limited to a single interaction—it’s every single interaction you have with your customers, whether it’s their first time visiting your physical store or they’re reaching out to you with a question related to one of their orders. 

If you want to improve your customer retention, you need to think about every step of the customer journey. Based on that, you can build streamlined processes and cater to your customers’ expectations. 

2. Make it Easy for Your Team to Provide the Best Experience Possible

The modern customer cares deeply about speed and convenience. If local businesses want to improve retention, it’s important for them to implement solutions that cater to those customer expectations. But without the right tools to get the job done, your team will burn out quickly. 

Using a platform like Podium will help you consolidate all your customer information like reviews or feedback, purchase history, and conversation history in one place. 

3. Offer a Seamless Payment Experience

The payment experience is becoming more and more important—if you don’t offer convenient, flexible payment options, your customers might not purchase from you.  

One solution you might consider? Text payments.  

Text-to-pay, also called SMS Pay, is one of the easiest payment processing methods. As displayed above, if you want to request a $245 payment, you can do it via a simple text message. It’ll not only make your business look good but also make sure that the payment experience feels safe and effortless for your customers.

It’s not only beneficial for customers but also for businesses. 95% of texts are opened in no more than 15 minutes, which means you get paid more quickly. 

Podium Helps Local Businesses Improve Customer Retention

Want to improve your customer retention rate and cut down your CRC? Podium is an all-in-one solution for local business owners that helps them delight their customers at every touchpoint. 

But we don’t expect you to just take our word for it. See what all the hype is about for yourself. Start a free 14-day trial today.