Customer Loyalty and Customer Retention

Both customer loyalty and customer retention are vital parts of a business strategy. Understanding and measuring both is crucial to succeeding in any market, particularly when considering increasingly competitive markets, such as B2B SaaS. Although they’re sometimes used interchangeably, it's essential to understand how they’re different and critical to each other and across the customer journey.

What is Customer Retention?

Customer retention is a measurement of whether an existing client continues to use your products or services over a given period of time. Growth-minded businesses cannot depend on customer acquisition alone. Studies have shown that retaining customers costs between 5 and 25 times less than adding new customers. In the last decade, companies have significantly prioritized improved customer success functions. According to Forrester, as many as 72% of companies named it their top priority.

Retention Metrics: How to Measure Customer Retention Rate

There are a variety of ways to measure customer retention. For subscription models, the simplest way is to follow these steps:

1. Pick a time period. At the end of the time period, take your number of current customers and subtract the number of new customers you added since the beginning of the time period.
2. Divide the output from step one by the number of customers you had at the beginning of the time period.
3. Multiply that output by 100 to get your customer retention rate.

For example, in 2022, you started the year with 300 customers. At the end of the year, you had 350 customers and sold 72 new deals. The calculation would be:

• Step 1: 350 - 72= 278
• Step 2: 278 / 300= .9267
• Step 3: .9267 x 100= 92.67% retention rate

Retention Metrics: How to Calculate Customer Churn Rate

The customer churn rate is the inverse of the customer retention rate. Churn measures how many customers leave over a given time period. To get your customer churn rate for a subscription model, follow these steps:

1. Pick a time period. At the end of the time period, take your number of current customers and subtract the number of new customers you added since the beginning of the time period.
2. Subtract the number of customers you had at the beginning of the period from the output of step one. This gives you the number of customers you lost.
3. Divide the number of lost customers by the number of customers you had at the beginning of the period.
4. Multiply that output by 100 to get your customer churn rate.

For example, in 2022, you started the year with 300 customerss. At the end of the year, you had 350 customers and sold 72 new deals. The calculation would be:

• Step 1: 350 - 72 = 278
• Step 2: 300 - 278 = 22
• Step 3: 22 / 300 = .0733
• Step 4: .0733 x 100 = 7.33% churn rate
  
  

Retention Metrics: Other Ways to Calculate Retention and Churn

There are many other ways to calculate retention and churn rates. While the above formulas give a company a good idea of how they are doing in these areas, more than this simplistic way of measuring retention and churn may be needed. In cases where customer size (whether by revenue or user numbers) varies a lot, you may want to measure revenue retention rate and revenue churn rate (often referred to as MRR churn) or user retention rate and user churn rate. The formulas remain the same, but the input numbers would be revenue or users instead.

How Do You Optimize Customer Retention? Build Customer Loyalty

Retained customers keep money coming in the door while you grow a sales team or build out the right channel partners. High customer retention levels give your business more opportunities to upsell, cross-sell, and grow. Existing customers are a pool of potential revenue you can tap into – repeatedly. Higher customer retention means that you’re increasing your customer lifetime value (LTV or CLV) and increasing your revenue at the same time.

But how do businesses improve customer retention? Customer retention is a broad and binary concept. To achieve greater customer retention, you need to measure, improve, and build customer satisfaction and customer loyalty.

What Is Customer Loyalty?

Customer loyalty, sometimes referred to as brand loyalty, is a measurement of a customer’s relationship with a business. While there are many ways to measure customer loyalty, in a basic sense, loyal customers help your business grow because they spend more money with your business, improve word-of-mouth, give referrals for new customers, provide crucial testimonials for case studies, and help you improve your product.

While it makes sense intuitively that satisfied customers will spend more with your business, a lot of research backs this up. According to Crazy Egg, existing loyal customers are 50% more likely to try a new product offering than a prospect. Customer loyalty is built by setting customer expectations that are met or exceeded, designing customer engagement that helps a customer succeed in using the product, and facilitating a positive customer experience that is reinforced repeatedly. A company’s success in building customer loyalty can often be measured by evaluating and analyzing customer behavior. Let’s investigate these components closer:

Customer Expectations

Customer expectations are behaviors and actions a customer can expect from a business and a product. For subscription-based SaaS products, expectations are typically built during sales and onboarding processes. Meeting and exceeding customer expectations is crucial to building customer loyalty.

Customer Engagement

Customer engagement is the actions a company takes to build customer relationships, both through the actual product and the way company employees interact with these customers. Whether it is the marketing team or the customer support team, each interaction is part of the company’s overall engagement with the customer. Companies that engage customers effectively create more loyal customers.

Customer Experience

Customer experience is how a customer perceives a business driven by its interactions with the company and product. Customer Experience is driven by customer engagement choices a business makes. Customers can feel several different ways about their experience depending on their expectations and how well these match the customer engagement they received. Customers with a positive experience are more likely to be loyal customers.

Customer Behavior

Customer behavior is how customers interact with a business and use their products. Organizations attempt to measure granular behaviors to tell them how a product or service is performing prior to a renewal decision. For example, a company employing a SaaS-based subscription model may measure how many company users are active, how often they interact with the software, how many support tickets they open, etc. Understanding and measuring customer data is extremely important to build customer loyalty. Without this understanding, a company may not know the customer is unhappy until it is too late, and they churn.

Measuring Customer Loyalty: Net Promoter Score (NPS)

To improve customer loyalty, a business needs a way to measure it. By analyzing, benchmarking, and improving key customer behavior metrics, improved loyalty can be achieved. Another important way customer success teams track loyalty is through customer feedback and surveying, the most famous of which is the Net Promoter Score (NPS). An NPS is calculated by asking customers one question: How likely are you to refer this organization’s product or services to a friend, peer, or colleague?

On a scale of 1 – 10, how likely are you to refer this organization’s product or services to a friend, peer, or colleague?

Here is how you calculate the Net Promoter Score:

1. Find the percentage of “Promoters” – customers who answered 9 or 10.
2. Find the percentage of “Detractors” – customers who answered six or below.
3. Subtract the percentage of detractors from the percentage of promoters. That’s it!

Example: You have 300 customers. 60% of them give you a 9 or 10. These are your promoters. 30% of them give you a six or below. These are your detractors. Your NPS score is:

60 – 30 = 30 NPS

NPS is just one way to measure customer loyalty. Other metrics customer success teams use include:

• Customer Satisfaction Score (CSAT)
• Customer Effort Score (CES)
• Product Engagement Score (PES)
• Customer Health Score

What is a Customer Loyalty Program?

A customer loyalty program is a customer engagement strategy that rewards customers who repeatedly purchase, use, and interact with a company. While in e-commerce, these programs often involve giving points or discounts designed to drive repeat business, B2B SaaS companies can create programs to reward engaged and loyal users. Customer loyalty programs for B2B are typically smaller and reward only top users and customers. Quality incentives can be cost-effective and include rewards, discounts, company swag, and early access to new software features.

How Training for B2B SaaS Companies Impacts Customer Loyalty and Retention

To create a loyal customer base, you must ensure your users know how to use your product to its potential. Users who are confused and not getting the full value of the platform are much more likely to churn. As new features get released, you must ensure that customers can easily learn them. Many SaaS companies don’t have enough manpower to train each user one-on-one, so they need to find the right cloud-based learning management systems to implement automation of their customer training.

We have found that training customers who spend money on customer training go on to spend more on repeat purchases of your products and services – at a staggering 1:10 ratio.

According to Wyzowl, 86% of people say they’d be more likely to stay loyal to a business that invests in onboarding content that welcomes and educates them after buying. Precursive’s 2021 customer onboarding research report showed that poor onboarding was the third most important reason for churn. Study after study shows the importance of high-quality onboarding and training for customer loyalty and retention, and most SaaS companies cannot train individually. Learning Management Systems are now a core customer retention strategy for B2B SaaS companies.