So is there a correlation between customer satisfaction and customer retention? Of course, there is! Satisfied customers stay, what’s there to research and analyze?
However, while the correlation seems as direct and obvious as it can possibly be, the matter is much more complex and multi-layered.
In a nutshell, customer satisfaction is their attitude towards your brand and your product, the way they perceive it.
Customer retention, on the other hand, is their behavior towards you, their readiness to purchase from you again and again and at a higher price, too.
In other words, customer satisfaction is how customers feel, while retention is how they act.
Moreover, while customer satisfaction and retention are seemingly related, it can happen that your satisfaction score grows while customers drop off and your sales plummet.
Let’s sort out what both concepts imply and how they can influence each other. After that, we will try to find out what you can do to improve both customer satisfaction and retention and make them work for your benefit.
What is customer satisfaction?
Customer satisfaction generally represents how happy customers are with your product or service, how close it meets their expectations. Seems rather vague and hard to measure, huh? In fact, customer satisfaction is a perfectly measurable thing and there is even a methodology to evaluate it.
What you do is measure the Customer Satisfaction Score, or CSAT. CSAT is one of the key customer satisfaction metrics that any customer-facing business worth its salt should monitor.
The best way to get a CSAT measurement is to ask the customer after an interaction with you to rate how happy they are with your product or service.
One straightforward question:
How would you rate your overall satisfaction with our product/service?
and a clear 1-5 or 1-10 rating scale:
and you will have your CSAT score which is calculated with the following formula:
CSAT = sum of all scores / number of respondents * 10.
For example, 40 / 6 = 6.6 * 10 = 66% CSAT.
Usually, a good CSAT score varies between 60% and 80% in the US, depending on the industry.
However, CSAT does not always show the true customer satisfaction with your business in general and cannot forecast a churn trend.
The thing is that the CSAT survey is usually offered immediately following an interaction, and most customers rate your service by this most recent experience.
You may get the highest rating with the customer being more than happy with how your service agent helped them – but what if the customer contacted the service to return a product, in the first place? Not exactly what you expected, right?
This leads us to a conclusion that while CSAT is a valuable tool for monitoring the efficiency of your customer service and, to a lesser extent, the quality of your product, you should not focus on CSAT only if you want to increase retention.
Customer satisfaction, although an important indicator, still is not the only factor that influences retention.
What is customer retention?
Now, customer retention is something different. Remember, it is how customers act towards you and your service and how often they return to you.
You retain your customers when they renew their subscription, make regular purchases, upgrade to a premium version. The form may be different but the essence is the same – they come back.
When they don’t, it’s called “churn”, and an upward churn trend should make you really worried.
It is much easier – and cheaper! – to keep your existing customers than attract new ones, this is why businesses are so concerned about customer retention and loyalty.
Both retention and churn deal with clear numbers, therefore, they are easily measurable. Being, in fact, two sides of the same coin, these two metrics are based on the number of customers at the beginning and end of a period.
The calculation of retention uses the number of acquired customers, while the calculation of churn – the number of lost customers.
So you’d calculate your customer retention rate with the following formula:
CRR = (# of customers at end of Period – # of customers acquire during period) / # of customers at start of Period * 100
For most industries, a customer retention rate of 20-30% is considered good.
Monitoring your customer retention over time, you can see whether you are losing customers or retaining them and getting new ones.
Do customer satisfaction and customer retention correlate?
Mostly, they do, but in reality, there may be cases when customer satisfaction and retention show distinctly opposite behavior. Dissatisfied customers may remain with you while satisfied customers may go. Unfortunately, that happens, especially now when the market has become really crowded and highly competitive.
Depending on your type of business, the industry in which you operate, your target groups, price policies, service organization, the reasons for such behavior may be different but we may still find some common points.
Why satisfied customers may want to take their money elsewhere?
- Customers may be OK with your product but wanting something better – more advanced, modern, technologically sophisticated. Think of the SaaS industry – there are hundreds of apps that provide similar services but some may be slightly more feature-rich than others.
- Your competitors may offer a lower price. With nearly the same product or service quality, even a small price difference can tip the scales. The difference may be even not in the price as such but in slightly better conditions – a longer subscription period, more flexible cancellation conditions, a longer list of included options.
- Customers may experience certain changes in their personal situation that affects their lifestyle – a salary cut, a move to another place, a large but necessary loan, even a new baby. They need to make sacrifices and your service may be one of them. Sad but true.
- Your customers may get simply bored and start seeking new experiences.
At the same time, sometimes unhappy customers surprise you by staying. Why is that?
- You may have strict cancellation conditions making it too expensive for them to leave right now.
- Customers may be members of a loyalty program with a lot of accumulated benefits that they do not want to abandon even if they are not too happy with your product.
- You may have a great product but poor service. Customers will struggle with incompetent agents and then give you a low rating (remember, customer satisfaction is about emotion and attitude) but at the end of the day, they continue their business with you because it’s the product that matters.
- You may be lucky to hit the market with low supply and sparse competition.
Obviously, the relationship between customer satisfaction and customer retention is not always direct. Still, that’s an encouraging idea, as it stimulates you to seek new opportunities and adopt new tools and techniques.
What can you gain by monitoring customer satisfaction and customer retention?
When you gather customer retention and satisfaction statistics over some time you will see some definite trends that show the direction in which you need to develop. Analyze the data you obtain from customer metrics and try to find answers to some of the key questions:
- Is there a distinct segment of customers that is growing or shrinking? Millennials or Generation Z? Office workers or freelancers? B2B or B2C sector companies? This knowledge will allow you, on the one hand, to target your marketing campaigns better and, on the other hand, to improve your product to cater to the groups that need attention.
- Calculate your customer value over time. This metric shows how much money a customer brings in a certain period, for example, a month. The main takeaway of this analysis will be whether your retention strategy is effective or whether it needs revision.
- Compare the estimated cost you may face to retain customers to the value you expect them to bring. With this information, you can plan your marketing efforts more efficiently.
Such analysis will give you a much more complete picture of the customer satisfaction and retention in your company and allow to plan future strategies more effectively.
5 tips to improve customer satisfaction and retention
Regardless of whether you found that your metrics need improvement or your business performs just fine, you should always remain alert and maintain your business in perfect shape. Here’s what you can do as part of your strategy of increasing customer satisfaction and retention.
1. Always provide great customer service
Customer service is the main point of contact between your customers and your business. You must have heard of cases when business opportunities were ruined by substandard customer service. Even an excellent product may fall victim to poor service.
Thus, make sure your customer service is perfect. Train your agents, encourage their learning and professional development, create comfortable working conditions, and provide them with an effective tool for customer communication.
2. Invest in customer onboarding and education
Customer engagement and retention largely depend on how well they know your product and can use it. Make sure you implement an effective client onboarding program and assist customers in their experiences – help them with software installation and configuration, advise on setting up working environments, provide user instructions.
Needless to say, your service agents must be familiar with onboarding procedures and capable of providing professional assistance.
3. Monitor customer satisfaction and retention metrics
If you keep track of your CSAT score, retention rate, churn rate, and other key metrics, you will always know whether your initiatives lead to actual improvement. Invest in an effective analytical toolset to gather and process customer metrics, and you will be able to adjust your marketing campaigns quickly and effectively.
Based on the monitoring results, identify customer groups and use them to test different marketing strategies or product modifications. Such A/B testing will help you see which approaches to develop and which to discard.
4. Constantly gather customer feedback
Feedback is a useful addition to your set of customer metrics, as it shows where your product may lack.
Customers describing their experience with your brand will help you see whether a new product version is OK, whether a change in the pricing plan is justified, whether anything needs to be added, removed or modified.
Remind customers to provide feedback on your service, too. The quality of your customer service is a key factor in the overall satisfaction rate, therefore, make sure to listen to what customers say about it and respond quickly.
One of the easiest and fastest ways to gather customer feedback is through a live chat widget on your website / inside your app. An automated message inviting your customers to answer a few quick questions will help.
#5 Implement a loyalty program
Loyalty programs are a powerful tool for retaining customers. They are a method of caring for your existing customers and rewarding them for their loyalty to you and your product. With a smart system of bonuses, user statuses and rewards, you can maintain your customers’ engagement and make sure they stay with you for a long time.
In addition, they provide an excellent channel of customer communication via the data provided in their accounts. Your loyal customers should be the first to know about special offers, promotions, new products, limited editions – you know what we are talking about.
Retaining customers can be challenging but also extremely rewarding. Loyal customers, in addition to raising your revenues directly, become your brand ambassadors starting viral marketing loops and referring you to their colleagues and partners.
Excellent service and effective customer communication are a key component of your strategy for improving customer satisfaction and retention.
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