A 5% increase in Customer Retention can increase your profitability by 75%
Coronavirus is causing businesses to shutdown nationwide. Besides a lucky few, those that remain are still on edge. With more of the world working from home, reliable technology is needed more than ever. So here’s what you should know about retaining and reassuring your customers and how you can help them in this time of great need.
1. Firstly, consider some numbersBegin by determining which type of retention rate is smarter to optimise for. Gross retention rate (GRR) or net retention rate (NRR). GRR is the percentage of customers that stay with you over a given period – a year in many cases. Because you can only renew customers you already have, the maximum GRR possible is 100%. It’s calculated by dividing the revenue renewed during a given period by the total amount able to be renewed. Renew £800,000 over a year out of a possible £1,000,000 and your GRR is 80%. However, in that year, you may have upsold or cross- sold to your customers. Add these takings to your GRR and you get your NRR. This means an NRR can be more than 100%. So if you renew that £800,000 and upsell say £300,000 then your NRR is 110%.
(800,000 + 300,000)/1,000,000 = 1.1 (or 110%)
But which one is best to optimise for? Net will tell you more about how well the business is currently doing, but gross will say more about the long term health of the business; This may help you think further on which is more appropriate. Next, consider the LTV; the lifetime value of a customer; how much a typical customer is worth to you. There are many ways to work this out but for subscription models, the following method works well. Take the average monthly amount expected from a customer and multiply that by the average length of time they will be retained for as your customer. So if your customers spend on average £1000 every month for an average retention period of two years (24 months) then their LTV is £2400. This will help you determine how much to spend on retention. Depending on what you’re reading, acquiring a new customer is anywhere from five to twenty-five times more expensive than retaining a new one. And with MSP customer retention rate at 90% or more, that’s a high LTV for a typical MSP customer. This makes expenditure on retention a wise move. So here are some methods for doing so.