In the “How to measure customer experience” series, we have tried to help you understand the importance of measuring CX and the most important key performance indicators (KPIs). We have covered the customer satisfaction and loyalty KPIs as the most used, and in this guide, we’ll look at the KPIs for tracking customer lifetime, churn, and retention.
The longer a customer stays with a company, the more valuable that customer becomes. Finally, long-term customers mean more repeat purchases, which means more revenue. This guide will teach you how to measure and calculate the most important performance indicators for retaining customers, their value to the company, and the consequences of losing them. Customer Lifetime Value (CLV), Customer Retention Rate (CRR), and Customer Churn Rate are the three most important customer value metrics.
Customer Lifetime Value (CLV)
As the name suggests, the CLV is a metric that measures the total customer value in terms of company revenue while being a customer. The metric compares the customer’s revenue value to the company’s predicted customer lifespan. So basically, the more extended customers buy from a company, the greater their lifetime value.
The importance and why use CLV?
- Increasing CLV has the potential to increase revenue over time.
- It helps identify issues to increase customer loyalty and retention
- Enables targeting ideal customers
- Increasing CLV can assist in lowering customer acquisition costs.
How to calculate CLV?
- Calculate Average Purchase Frequency Rate (APFR)
- Calculate Average Purchase Value (APV)
- Calculate the Customer Value (CV)
- Calculate the Average Customer Lifespan (ACL)
- And finally, calculate the Customer Lifetime Value (CLV)
To calculate all of the above, use these formulas:
And finally, calculating the customer lifetime value:
Customer retention rate
Customer retention refers to (the process of) keeping customers (keeping a customer). Obtaining new customers has always been a top priority in business, whereas companies should prioritize retaining existing customers. The retention rate indicates how many customers stick with a company over time.
Why use CRR?
- Retaining customers is really important;
- Existing customers are five times more likely to purchase and four times more likely to refer than new visitors;
- A 5% increase in customer retention can boost a company’s revenue by 25-95 percent;
- Repeat customers or customers with the potential to repurchase frequently are critical to a company’s success (especially in a subscription-based business);
- It can improve customer experience by tracking specific points in your product’s/services’ life cycle or specific user groups;
- Provides insights about how much users value your product over time.
- It offers suggestions and opportunities for improvement.
How and calculate CRR?
To calculate the retention rate, add the total number of customers at the end of the month, subtract the number of new customers added during the month, and divide by the total number of customers at the start.
Other ways to calculate CRR
There are a few more methods for calculating the retention rate.
- Subtract the number of customers who churn over time from those who remain loyal.
90% retention – 10% churn = 80% retention rate
- Consider how many customers remain loyal for one period of time versus another.
% of loyal customers in period one / % of loyal customers in period two = retention rate
Customer churn rate (CCR)
Customer churn is the opposite of customer retention. The churn rate will show how many customers leave your business over time or stop paying for your services.
Why use CCR?
- Low churn is essential because getting new customers (customer acquisition) is far more expensive than keeping existing ones (customer retention);
- The lower the churn rate, the more loyal customers;
- It measures the impact of various products/services/projects or company initiatives;
- Determinates the company’s progress and provides benchmarks to measure against
- Some industries are more affected by churn than others: in the United States, online retail has a churn rate of about 22%. However, SaaS companies aim for a yearly 5% or less churn rate.
How to calculate CCR?
- You must first define a specific period to calculate your churn rate.
- After you’ve defined your time, divide the number of customers who churned by the total number of customers you had at the start of the time period.
- The formula is: CCR = total number of customers lost divided by total customers started with.
Another way to calculate CCR
Another possible way to calculate the churn rate is to do a reverse sum of the retention rate.
- Churn Rate = % lost customers in period X / % lost customers in period Y
Should you measure all metrics?
There are so many metrics for measuring the customer experience, and the question of whether you should track and measure all metrics is valid. Well, the answer is no. BUT, you should carefully review your business goals, set the indicators relevant to your business, and measure those. Another essential piece of advice here is before you start sending out surveys and asking for customer feedback, you should know precisely what you intend to do with it and how you will use it. However, we think it’s important to understand your business metrics (churn, retention, and CLV) and the appropriate customer experience metrics for your company’s growth. And if you have difficulty identifying, tracking, and measuring all those metrics, you can always reach out to us. FrontLogix provides strategies for improving your overall customer experience and improving the CLV, CRR, CCR, and other important KPS.
And providing a positive customer experience is critical to keeping your customers happy and satisfied. They’ll stay longer, and you’ll have better business results. As a result, investing time and money in measuring customer experience metrics is essential. These metrics will not only help you understand how simple your customers find it to use your product or service, but they will also provide you with actionable insights into improving many aspects of your business. This can significantly impact your company by lowering churn or increasing retention. Simultaneously, these metrics can help you see where your CX team is excelling and where they can improve. And not only your CX teams but also your products, services, and all your functionalities. The better you understand how your customers use what you offer, the more space for improvement to make the entire CX more enjoyable.