Last editedDec 20222 min read
How much do you spend to keep your existing customers? This metric, also known as customer retention cost, plays a significant role in calculating customer lifetime value. Calculating customer retention cost is also important in formulating a financial strategy. So, what is customer retention cost, and how can you calculate it? In this guide, we’ll show you how to use the customer retention cost formula most effectively.
What is customer retention cost (CRC)?
Customer retention cost shows how much your business spends to keep a customer purchasing its goods and services over time. In other words, it’s the cost of customer retention over a specific timeframe.
Retention costs include everything needed to maintain your customer relationship. This will vary by company and industry, but could include things like:
All costs related to customer service, including agent salaries
All costs related to account management
Training services for customers
Customer loyalty programs and rewards
Customer engagement tools
It’s important to pull these together and analyse the cost of customer retention because it gives you some indication of value for money. Are you spending money on chatbots, apps, and customer service agents without seeing a return? Measuring CRC helps you make better financial decisions.
What is the cost of customer acquisition vs retention?
Customer retention is often compared with new customer acquisition. Your customer acquisition cost shows how much money is spent to win new customers, compared to the cost of retaining existing ones. Standard research shows that it costs approximately five times more to acquire new customers than retain existing ones.
Both metrics are important to follow. If you’re spending too much in either area yet still experiencing high churn rates, this indicates you need to fine-tune your retention and acquisition strategies.
How to calculate customer retention cost
To get started, you’ll need to decide which customer retention cost formula to use. These formulas attempt to add the total cost involved with keeping existing customers, dividing them by retained customers.
Here’s what the customer retention cost formula often looks like:
Costs should include anything related to sales and marketing targeting your existing customers. However, one thing to note is that general calculations look at all customers as equal. You might spend far more supporting one customer compared to another. Calculating cost per customer on an individual basis is far more accurate, though this gets tricky with high volumes of customers. It’s worth using automated tools to take on these types of calculations with greater accuracy.
How to reduce customer retention cost
Are you spending more on retention than you should be? Individual customer costs decrease over time as they get to know your brand and products. This often means you can spend less on retention. Yet there are downsides to slashing your customer retention budget and relying on familiarity. It’s better to invest in new features and continuously improve the user experience to make your brand stand out from the competition.
It's better to focus on improving customer retention rates and reducing churn. Ask for customer feedback at regular intervals to find ways to improve. This will also help you stand out in a crowded marketplace, as customers like to feel their voices are heard.
An inefficient payment process is a major source of involuntary churn. You might be unwittingly losing customers due to failed payments or a complicated platform. GoCardless can help streamline the payments process using Direct Debit to pull payments directly from customer accounts on the day they’re due. This eliminates awkward conversations regarding late payment, for improved communication and retention. We also offer the Success+ intelligent retries solution to recover up to 70% of payments that fail the first time around – essential for reducing involuntary churn.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.
Improve customer retention by saying goodbye to failed payments, using our bank payments solutions.