Generally speaking, there’s a clear correlation between customer satisfaction and customer retention. Happy customers stay put, right?
Often, yes. But not always. In fact, the relationship between your customer satisfaction levels and your retention rate can be quite a bit more complex.
Here, we explain the link between the two metrics and why one doesn’t always tell the whole story about the other. But first, let’s deal with the definitions and formulas.
What is Customer Satisfaction? (And How Do You Measure It?)
Customer satisfaction looks at how happy your customers are with your product, service, or a particular part of the customer journey.
For example, maybe you want to evaluate how well your customer support staff are doing, and identify team members worthy of praise or employees that need more training. Or perhaps you want to know how a software update is performing, or if a customer is enjoying their newest purchase. Customer satisfaction lets you track that in a quick and efficient way.
You do this by measuring the customer satisfaction score (CSAT)—one of the most common customer experience metrics.
CSAT works like this:
You set up a scale of 1 to 10 (or 1 to 5, or 1 to 7), where the lowest end of the scale is “very unsatisfied,” and the higher end is “very satisfied.” (As an aside, you don’t need to use numbers. Some CSAT surveys run with a scale of smiley faces instead. It’s up to you how you design it.)
Next, your customers give you a response according to the scale you’ve chosen.
Once you have your results, you can calculate customer satisfaction by finding the percentage of customers that gave the two highest scores. On a scale of 1 to 10, that would be 9 and 10; on a scale of 1 to 5, that would be 4 and 5. With smiley faces, you’re looking for 😊 and 😁. Essentially, “satisfied” and “very satisfied.”
- Finally, you plug your numbers into this formula:
(Total number Top 2 responses) / (Total responses) * 100 = % of satisfied customers
So, if you receive 1,000 responses, and you have 570 “satisfied” and “very satisfied” customers, your customer satisfaction score would be 57%.
By the way, alongside conventional CSAT surveys, the Net Promoter Score (NPS) is a powerful tool for tracking customer sentiment and predicting future loyalty. It’s a metric you definitely should be monitoring in your customer retention program.
What is Customer Retention? (And How Do You Measure It?)
In simple terms, customer retention looks at how long your customers remain customers.
Do they make repeat purchases?
Do they renew their subscription before it expires?
Do they upgrade to a premium version?
In other words, do they keep coming back for more?
You can measure your customer retention rate (CRR) with the following formula:
CRR = (number of customers at period end - number of customers gained during period) / number of customers at start of period x 100
So, if you end a quarter with 100 customers, having gained 20 new customers, but you started the quarter with 105 customers, you’d have a retention rate of 76%. You’ve kept over three-quarters of your existing customers.
CRR = (100 - 20) / 105 x 100 = 76
But customer retention is more than a measurement. It also encompasses the activities used to build customer loyalty and turn one-off sales into repeat buyers. Customer retention strategies can run the gamut from closing the loop on customer feedback to running a loyalty program.
You can read more about these (and others) here: 10 B2B Customer Retention Strategies
So, Are Customer Satisfaction & Retention Linked?
For the most part, yes they are.
Customer satisfaction (and specifically the top two groups of responses in the CSAT) can act as a pretty accurate predictor for customer retention, as happy customers are more likely to stick around for longer.
However, it’s not always as cut and dry as that.
Sometimes, satisfied customers choose to leave. And occasionally, disgruntled customers opt to stay. That’s why there may be times when your customer satisfaction score points to one reality, while your customer retention rate paints a different picture entirely.
Why Might Satisfied Customers Look Elsewhere?
There are a number of reasons why a customer might give you a glowing customer satisfaction rating, then take their business somewhere else. You may have experienced this with your own customers, or even as a consumer yourself:
You’ve matched your competitor stride for stride in terms of product or service quality, range of features, marketing, sales, and support, but you can’t compete with them on price. A customer may like everything you do, but they’re just not willing to pay more for it.
Your product or service was the perfect fit for where your customer was in their life/business at that particular point in time. But now they’ve outgrown what you offer and need to move on to something more advanced. On the flip side, perhaps their strategy changed and they don’t need a product as extensive as the one you offer.
Your customer has experienced a change in their personal/professional life that impacts their budget. Whether they’ve lost an account or gained a new baby, they may need to cut their cloth accordingly—and that could mean dropping a valued product or service like yours.
Your customer champion left the firm. The stakeholder who led the charge to purchase your services may have moved on, and with them went the internal knowledge of how difficult it was to implement the tech, or the vision they had for a collaboration between your organizations. (Note: always engage multiple stakeholders in your surveys, so you know more than your champion is happy).
Why Do Unhappy Customers Choose to Stay?
On the other hand, there may also be times when your customer satisfaction score is low, but your retention rate stays high. This can be for a variety of reasons:
You might make it difficult for customers to leave due to your cancellation policy (feeding their discontent while boosting your retention numbers).
Your product or service might be top of the range, but your customer service or support is sorely lacking.
You may not have much (or any) competition, so even if your customers aren’t happy, they don’t have an alternative option at the moment.
Your product might be “sticky”. Which is usually down to high switching costs in the form of expensive onboarding fees of a new provider, or because of the significant time it takes to convince, train and roll out a technology globally.
(I had a conversation just the other day with a colleague who said “we’d never change to a different product now because it took so long to get set up.” That’s a safe space to be as a product or service provider, although it may let you become complacent and start delivering poor experiences.)
From the above examples, you can see that the link between customer satisfaction and customer retention isn’t always direct and obvious. However, as you’ll discover in the next section, it’s still essential to monitor both.
Why Should You Monitor Both Customer Satisfaction and Customer Retention?
While they might not always trend in the same direction, it’s vital that you start (or continue) to monitor both customer satisfaction and retention.
In an ideal world, you’d be looking at high customer satisfaction and high customer retention numbers. The former likely feeding into the latter. And the benefits of this scenario are clear:
When satisfied customers stick around, it helps you reduce marketing and sales costs (making it anywhere from 5 to 25 times cheaper to keep an existing customer than find a new one).
Happy customers also tend to buy more, with 86% willing to pay more for the satisfaction.
And those on the receiving end of a great (personalized) customer experience are 49% more likely to make impulse purchasing decisions.
But if you’re staring down an imbalance between your satisfaction and retention numbers, don’t panic. This is precisely why you need to collect and monitor customer data in the first place—to measure, act, and grow.
Low satisfaction and high retention? Evidently, something is wrong somewhere along the customer journey. Consider using a Voice of Customer survey (and follow-up questions) to pinpoint the issue and bring your numbers back into alignment.
High satisfaction and low retention? You might be doing all the right things, but there’s still a part of your customer experience that isn’t quite working. To find out what it is, we recommend designing your survey with cascading questions. This offers a more personalized experience for your customers and a more accurate root cause and driver analysis for your company.
This type of analysis not only helps you to determine the reasons behind your numbers, but also shows the way to monetize opportunities with existing customers.
Want to learn more? Here’s why you should use cascading questions in your surveys.
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