Last week we went over common customer retention mistakes and what your business can be doing now to set yourself up for success when the tides shift. Here’s a quick refresher of a few data points from last week's post on the importance of customer retention (via Harvard Business Review and Bain & Company):
- It costs at least 5x more to acquire new customers than to retain current ones… and that’s a conservative estimate
- A 5% increase in retention increases profits by at least 25%... also a conservative estimate
- And you don’t need a publication to tell you that it’s a hell of a lot easier to sell to a current customer, than to a new one who might not trust you
This week let's walk through how to calculate the metrics you should be tracking to better understand your customer retention.
Customer Acquisition Cost (CAC)
Take your salespeople’s cost, both what you pay them in wages and commission, and their overhead (the truck, insurance). Add in advertising and marketing, website costs, etc. Then, for a given period of time (month, quarter, or year) divide that number by the net new clients.
It’s not perfect, a customer may have heard of you a year or two ago, but generally, it will get you a decent number. If you want a best practice, break it down by channel (digital, print, referrals, etc.).
Customer Lifetime Value (CLV)
Multiply the average revenue in a given year from a customer by how long they’re a client. As a simple example, say you have a client who pays you $1000/yr, and on average your clients stay with you for 10 years. So, $10,000. Now multiply that by your profit margin. If you’re making a 25% net margin, the client’s value is $2,500.
Your churn is the percentage of customers who left in a given period of time. Simply take the number of customers you lost, divided by the number of customers you had at the start of that period. Measure this annually at the extreme minimum.
Most companies measure this quarterly, or even monthly. Obviously, a more seasonal business means adjusting this period to make sense for you.
CLV vs. Churn Rate
Take your CLV against your churn rate, and you’ll have a good sense of how much money is walking out the door. Remember, changing the churn by 5% will help your profits by 25% because you won’t have that heavy CAC burden, and the customers are immediately profitable. A new client isn’t profitable until they’ve paid off the CAC!
Let’s hope the day business slows down is far down the road but when it does come, having a clear understanding of your customer retention metrics will provide you with the solid footing necessary to navigate through uncertain times.