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Updated: Jul 7, 2022

What Is Your Customer Retention Rate?

So, you want to increase your company’s sales equity but you don’t know how. Let’s take a look at the typical sales process:

You give your head of sales a number to meet, you divide that target among sales leaders, everyone gets a quota for the coming year, and the sales begin. You increase funding for the advertising department, as they need to increase their programs to support potential new sales. The branding department updates the brand and the training department launches a new series of products, including sales training.

So far, all you’ve done is spend money, and quite easily. So, how do you get money?

Why Retention Is Important for Growing Sales Equity

While there are endless ways to spend money, there are only three ways you can bring money into your company: AXR.

  • A — Acquire a New Buyer: Find a new buyer and convince them to give you their money.

  • X — Expand Relationship with a Current Buyer: Convince an existing buyer to give you more of their money.

  • R — Retain a Current Buyer: Get money by not losing money. Do this by maintaining your current buyers and convince them to keep giving you their money.

These three ways to increase revenue may seem simple, but don’t fall into the growth traps. The most cost efficient way to increase sales equity is to achieve a “fantastic” retention rate. A fantastic retention rate locks in current revenue while also expanding for other opportunities. You can calculate your retention rate by using this formula:

Why Retention Is Important for Growing Sales Equity

Knowing Your Company’s Tenure Is More Important Than You Think…

Your company’s average tenure is another valuable number to know. The average tenure of your company’s clients will provide insight into whether or not you’re allocating resources in an effective manner to increase sales equity. You can calculate your average tenure by using these formulas:

Knowing Your Company’s Tenure Is More Important Than You Think…

Now that we’ve established the basic economics, let's look at an example with metrics for customer retention:

Not Convinced Yet? Let’s Take A Look At An Example...

If you have an 80% retention rate, this means you lose 20% of your customers annually. Using the average tenure formula, we can calculate that your average customer stays for five years:

Improve Your Retention Rate

Re-Evaluate Your “Good” Retention Rate

By turning clients over all the time, your company is constantly spending money to acquire new clients to take the place of the clients you just lost. Therefore, you’re spending so much time and money trying to replace the clients you’ve lost, you hardly have any time to grow your company or relationships with current clients. In the example above, if the retention rate is increased to 90%, average tenure goes from 5 years to 10 years. Let’s take a look at the graph below. At a 90% retention rate, the curve begins a dramatic accent. Increasing from 90% to 95% retention earns the company an additional ten years average tenure. At this point if your company goes from 95% to 96% retention, your company gains another five years on every client, moving your average tenure from 20 to 25 years! Still satisfied with that “great” retention rate of 90%?

What is Your Retention Rate

Still Not Convinced? Let’s Dive Deeper...

If the 80% retention rate doesn’t sound so bad, let’s dive further. Let’s say a company starts the year with 100 clients. For that year, they had an 80% retention rate, meaning they only retained 80 of those 100 clients. In the following year if they lose another 20% of the remaining clients, by year three they’ll only have 64 of the original customers left. By year five, the company is down to 41 of their original customers. By now, they’ll need to use time and money to find 59 new clients just to break even. With these 59 new clients will come high delivery expenses, because the company will have to dedicate resources to learn about these new clients. Not to mention, this company will be so busy building these new low profit relationships that they won’t even have time to think about achieving profitable growth.

Now let’s look at what would happen with those original 100 customers if your company had a 97% retention rate.

What Is Your Customer Retention Rate

86 of your original 100 customers will still be with you 5 years later if you have a 97% retention rate. Of these 86 customers you’ve retained for 5 years, what are the chances some of these customers will purchase additional products and services? What are the chances some of these customers will refer their friends and family to your business? What are the odds that your company’s sales team is more successful and satisfied in their jobs? With a 97% retention rate, you now have time to think about company growth. Customer retention and customer loyalty go hand in hand, if that isn’t clear already.

Don’t Believe It? Calculate Your Impact Using Our Free Impact Calculator!

At Encompass-CX, we believe your impact matters. Our Impact Calculator will estimate your company’s financial impact, including revenue, profit, and tenure growth. You calculate your impact now, click here to access our Impact Calculator.

The best way to focus on expansion is to grow your revenue by increasing profitability of the existing client base. This happens by getting your clients to pay more, buy more, or lowering the cost of serving them. While you can expand the profitability of a new client, this also involves devoting time and resources to get to know this client, maintain the client, and expand the revenue you’re receiving from them.

Implementing a retention strategy is a great method to increase sales equity. By building customer satisfaction and retention, you will see a positive growth for your business. In today’s rapidly changing B2B marketplace, businesses of all shapes and sizes have yet to explore untapped potential in their existing customer base. In other words, they have yet to build sales equity from their current customer base. Now comes the question, what is sales equity? How do you build sales equity? Stay tuned for next week's blog, where we’ll explore this topic further and provide you with suggestions to increase your retention rate and therefore your company’s revenue.

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