Customer retention cost is the total expenses incurred over a period of time to keep existing, repeat customers engaged and satisfied with a business.
Tracking retention cost for your ideal buyers provides powerful insights into profitability and lifetime value.
In this article, we explain step-by-step how to calculate retention cost. Then we'll share proven ways to leverage the data to reduce costs and maximize value from your best customers.
Why calculate retention cost?
Customer retention costs directly impact your bottom line. The cost to keep customers happy and engaged is much less than constantly acquiring new ones. According to Fred Reichheld who authored a large Bain & Co report on retention costs, a 5% increase in customer retention leads to a 25% increase in profitability, even up to 95%.
- High retention cost eats into profit margins.
- Calculating this metric also reveals which customer segments are most expensive to retain. You can tailor engagement strategies based on true cost-to-serve.
- Monitoring changes indicates where friction exists. You can course correct before customers defect.
- If retention cost is rising over time, that likely signals dissatisfaction or inefficiencies.
It also is directly related to customer retention rates. If your retention rates are low, expect higher costs to keep an existing customer.
Let's go through the formula to measure it for your business.
How to Calculate Retention Cost
Follow these steps to determine retention cost for a given period:
- Identify total retention spending.
Add up all expenses related to retaining customers like:
- Customer support and success team costs
- Relationship management tools (CRM, marketing automation)
- Loyalty programs, promotions and perks
- Product education and training initiatives
- Connection building and engagement events
- Divide by total customers retained.
Take your total retention expenses and divide by the number of customers who stayed during the same period.
For example, $100,000 in retention spending to keep 1,000 customers is $100 per retained customer.
- Compare to customer lifetime value.
Compare retention cost per customer to their lifetime value. If it's more than 25-30% of LTV, explore ways to optimize.
This simple calculation provides an invaluable metric. Now let's discuss ways to turn data into action.
Strategies to reduce retention cost
- Identify your most valuable customers. Segment customers based on engagement, profitability, length of time, and total spend, then prioritize accordingly. Focus retention efforts on those with highest lifetime value.
- Don't ignore your least valuable customers. Where you can, continue to communicate with old customers and roll out features to them as well, to try to woo them back.
- Build engaging self-service resources. Shift common inquiries to less expensive FAQs, community forums, and tutorials. Empower customers to help themselves.
- Improve onboarding and training. Smooth onboarding lowers repeat questions. Expect that you may need to educate your customer to an extent to increase uptake of your products and services.
- Automate when possible. Leverage automation like chatbots for faster, more scalable support at lower cost.
- Keep program costs aligned to ROI. Use perks and promotions to incentivize customer behavior and the ROI will follow. For example, a perk that thanks your customers for going paperless will save your company thousands over time.
Even small optimizations compound to dramatically lower retention cost over time.
A "good" retention cost is anything that is lower than LTV
There is no universal "good" retention cost, as the optimal amount will depend on factors unique to each business. It's generally worthwhile to spend on retention if it's lower than the cost of acquiring a new customer.
- As a percentage of revenue per customer, less than 25-30% is considered reasonable for most businesses. (The Pedowitz Group)
- The retention cost target should align to customer lifetime value – spending up to 70% of LTV to retain customers is often sustainable. (ChurnZero)
- For SaaS/subscription businesses, benchmark to monthly recurring revenue. Good retention costs tend to fall below 15-20% of MRR per account. (ChurnZero)
- The retention cost of your best customers can justifiably be higher than average. (Harvard Business Review)
- Compare your rate to industry benchmarks to contextualize. It varies greatly by business model.
The goal should be balancing investment in retention with profitability per customer.
Then what? Increase the gap between cost and profitability
On the flip side, you can also boost lifetime value to widen the gap between retention cost and customer profitability.
- Upsell and cross-sell once trust is established. Offer premium tiers or cross-sell complementary products to increase revenue per customer.
- Incentivize referrals and advocacy. Referred customers have higher lifetime value. Reward referrals.
- Continuously gather feedback. Seek input to improve the customer experience and increase satisfaction.
Retained customers are a business' most valuable asset – let's ensure your approach reflects that. If you're curious how to reduce your retention costs and churn, and increase LTV, let's talk.