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Customer Retention: A Critical Metric and Key to Sustainability

Most solution providers would agree that cloud services—and its underlying recurring revenue model—should be a key component of their business. And many have some pretty impressive statistics to share around their cloud practice success. But there’s one metric .. Continue

Customer Retention: A Critical Metric and Key to Sustainability

Category
Company & Partnership News
Growth & Best Practices

Published on
Written by
Tim Fitzgerald

Most solution providers would agree that cloud services—and its underlying recurring revenue model—should be a key component of their business. And many have some pretty impressive statistics to share around their cloud practice success.

But there’s one metric that’s essential and often overlooked when calculating success: customer retention. In simple terms, customer retention is the ability to keep customers engaged over a set period of time. Why is this important? Because if a company can’t hold on to current clients, it doesn’t matter how many new customers they activate.

Getting the “hole” story

Imagine for a second you had a cracked hose or leaky bucket. If you run water through it, you’ll wind up with a puddle on the ground. It’s the same for your business. Nothing breaks the promise of exponential growth from monthly recurring revenue (MRR) quite like customer churn—which is the opposite of retention. And when it comes to keeping customers, solution providers have plenty of room for improvement.

According to the 2018 U.S. State of the Cloud report—a research project by The 2112 Group, Ingram Micro Cloud and Microsoft—the average solution provider loses one to 10 existing accounts each month.

It may seem like an acceptable number until you consider that the average partner gains about that many new accounts in the same time frame. The math is pretty straightforward—and it shows us that many partners are barely breaking even.

Get more by keeping more

As Bain & Company and Fred Reichheld established years ago, there’s no substitute for keeping existing customers. Their research found that an increase of just 5% in customer retention can lift a company’s profits by 25% or more. That’s because satisfied customers buy more over time, refer friends and family, and will more likely pay a premium for the products and services they purchase from a trusted provider.

What’s more, it costs up to 25 times more to acquire a new customer than it does to retain an existing one, according to Harvard Business Review. Of course, for solution providers to see how they’re faring in this area, they need to know how to calculate how many customers they’re retaining.

The not-so-secret formula

Customer retention is calculated by defining a period of time for assessment (for example, monthly) and then using the following formula:

  • Retention Rate = ((# of Customers at End of Period - # of Customers Acquired During Period) / # of Customers at Start of Period) X 100

Here’s the calculation for a solution provider that starts the month with 20 customers, gains five new customers in that month and loses three customers in the same time frame.

  • Customer Retention Rate = ((22-5)/20) x 100 = 85%

While 85% might seem like a respectable number, signaling that the solution provider is holding on to more than three-quarters of its customers from month to month, that percentage needs to be higher for the partner to maintain a profitable cloud practice over time.

Based on nearly a decade of industry research and analysis of the channel’s highest-performing solution and service providers, 2112 has concluded that desirable retention rates are more than 95%. Anything less than that—especially rates under 90%—put a partner's cloud practice at risk of not being sustainable over time.

What’s a solution provider to do? Partners have proved they can turn leads into sales, but how can they get to the next level by converting clients into avid fans and brand advocates?

Stay tuned for part two on customer retention and find out how to keep your clients coming back for more.

Evaluate your company's cloud presence

The 2112 Group Cloud Altimeter, a cloud assessment tool exclusively for Ingram Micro partners—helps you understand your cloud computing capabilities and performance relative to companies with the same profile as yours in your region.

By collecting answers to a few questions about your company and its cloud practice, the tool will generate a comprehensive report on how your company compares to others in the same class. To see how your business stacks up in the cloud, try the 2112 Group Cloud Altimeter