Best Practices

Best Practices for Customer Retention

Customer retention is the true indicator of predictable revenue streams

Measuring customer retention is an important activity to assure predictable, recurring revenue and lasting profitability for your subscription-based business models. Even a modest increase in subscriber retention can result in sizable ongoing revenue boosts. Customer retention is the ability for a company to keep its existing customers. It is the measure of a company’s ability to provide enough value with its products or services for customers to keep them coming back for more.

The true health of any business is closely related to how well it acquires and retains customers. These two functions will tell you much more about the long-term outlook of the company than a yearly financial filing. This truth has extra significance for online businesses, especially those with a subscription or recurring revenue business model.

Measuring customer retention

Three key metrics signal customer retention success—or failure:

  • Active churn: This measures the active attrition rate of your customers. When subscribers cancel their service because they no longer want it, that’s active churn.
  • Passive churn: When a subscriber wants to stay with your service but can’t, churn is passive. Failed payment transactions are the leading cause of passive churn, which is also called involuntary churn.
  • Average customer lifetime value (ACLV): This is the average revenue generated per customer acquired. Spend more on acquisition than your ACLV, and you can’t be profitable. But the higher your ACLV, the more you can invest in acquisition.

ACLV is the most impoirtant customer retention metic for subscription or recurring revenue based businesses. In a subscription context, ACLV is the product of the average customer duration and the amount charged on a recurring basis: (average customer duration) x (amount charged) = ACLV. Increasing the average customer lifetime by just a few months can lead to significantly higher ongoing revenue streams.

Many subscription businesses focus customer acquisition efforts around optimizing the conversion rate, especially if they offer a free trial or provide a freemium offering. They then rate their various marketing campaigns and activities around that metric. For example, if webinars drive the highest conversion rates, they will pour more money into developing additional webinars.

However, a better approach is to focus business activities around minimizing customer churn and maximizing ACLV. To identify long-term profitable customers and thereby maximize ACLV, acquisition, conversion and retention metrics should be viewed together versus in isolation..

Tips to improve retention

One of the simplest ways to fight voluntary churn and to determine why customers are choosing to leave is to work with your customer service department to identify the top five support issues. The most common issues should be addressed with specific retention offers used by customer service representatives and also incorporated into the website and self-support.

In addition to continuously improving support issues, it is necessary to communicate to your customers about the changes and enhancements that have been made to your products and services and highlight the value you provide.

Another thing to consider is the security of Personably Identifiable Information (PII). For digital businesses with recurring billing models, data security is even more important, as storage of the customer’s payment information is required along with their name and address. Once customers know that a digital business is taking all possible precautions and has implemented strict security standards, they are more likely to feel comfortable, both initially and on subsequent visits. With this is mind, the PCI DSS should be considered a baseline to build upon for true data security.

Fighting involuntary churn

But what about involuntary churn? Payment failures are a fact of life in the subscription business and can happen for a wide variety of reasons, such as reissuing a lost or expired credit card or temporarily exceeding the credit limit. At the first sign of a payment issue, many subscription billing systems automatically interrupt the subscription service. At Vindicia, we believe that a customer should never leave your subscription service due to payment failure that could easily have been fixed by the powerful retention features built-in to Vindicia subscription billing and recurring payment solutions.

Both Vindicia® CashBox® and Vindicia Select™ SaaS-based billing solutions will help you minimize involuntary churn due to payment failures. Our Advanced Retention Technology™ (ART) system features smart business rules to retry cards, offers full integration with Account Updater services with payment processors, and stores highly secure “payment wallets” that have backup payment methods – all ensuring that the highest possible percentage of transactions are successful.

The bottom line? Our clients typically experience up to a 5% immediate lift in customer retention just by deploying a Vindicia subscription billing and recurring payment solution.