What Is Customer Retention Cost? (Definition & Formula)

What is customer retention cost?

Customer retention cost is the total amount you spend on making sure customers continue to buy from you over a given time period.

Compared to other growth metrics like customer acquisition cost and churn, customer retention cost is much less commonly tracked.

Like acquisition costs, it’s important to keep retention costs as low as possible in order to maximize profitability.

Which costs are included within customer retention cost?

Your customer retention cost should consider every dollar spent that goes into retaining one customer.

Here's a list of possible costs you could include in customer retention cost:

  • Salaries for dedicated customer success & customer support staff
  • The cost of creating & delivering customer training materials & events
  • Digital adoption software for messaging & in-app prompts promoting features
  • The cost of each customer using your product
  • Marketing initiatives targeted towards existing customers
  • Cost of customer loyalty programs

How to calculate customer retention cost (formula)

To calculate customer retention cost, the simplest method is to add up your total spending on customer retention per year, and divide by the total number of customers.

Here's the formula:

Customer Retention Cost = Total Retention Spending / Number of Customers

And here's an example.

A SaaS product has 1,000 paying customers. Here’s what they spend on retention:

  • 2x support staff salaries totalling $10k per month
  • 2x customer success manager salaries totalling $10k per month
  • 1 lifecycle marketer working on customer marketing, with a $5k per month salary
  • A digital adoption platform costing $1k per month
  • A budget of $500 per month for customer loyalty initiatives
  • Misc. other software costs totalling $500 per month

Altogether, we have costs of $27k per month ($324k per year).

Applying the formula, we have: $324k / 1,000 = $324.

An average of $324 per customer, per year spent on retention. For more mature companies, it pays to segment customers and figure out how retention costs differ across different market segments, pricing tiers, and other differentiators.

Now you have the average retention cost, you can answer the question: is this a sustainable amount to spend per customer? The answer will depend on your average revenue per customer.

How to reduce customer retention cost

Everybody knows it’s cheaper to retain a customer than to acquire a new one. That doesn’t mean you can invest infinite resources to keep each customer, though. 

Here’s some ideas to keep retention costs down, without sacrificing the customer experience.

Create content to enable self-serve customer education

Invest in creating a comprehensive knowledge base to answer common customer questions.

Create a customer onboarding video series, interactive walkthrough, or checklist.

The goal is to invest time up front to reduce unnecessary human interactions in the future, and keep your customer-facing teams lean. That doesn’t mean you can’t build personal relationships with customers, it just means that face-to-face time can be spent on something more important than basic questions that can be bulk-answered.

Learn from churning customers

When customers churn, do whatever you can to find out why. If there are problems with specific areas of customer knowledge, feature adoption, customer service, or even product stability, you can fix them. Improvements in any of those areas will reduce the efforts & costs required for retention.

Align your pricing with the cost of customer retention

Some customers cost more to retain & support than others, but pricing models don’t always reflect that. If you have customers that have an unsustainable retention cost, then you need to identify that and either reduce it (as above), or charge more. Charging a higher price for high-maintenance customers doesn’t reduce the total retention cost, but it does reduce the percentage of revenues spent on retention.

Implement a customer success platform

Customer success platforms are purpose-built to do two primary things:

  • Improve net revenue retention by finding expansion opportunities & predicting churn
  • Improve workflow efficiencies to reduce the workload (and therefore cost) of the customer success team

While they're an investment up front, once implemented correctly, you can expect a customer success team to manage a bigger book of business per CSM.

Smarter decision making, task automations & better data/insights all contribute to that.

Customer retention cost quick FAQs

1. Is customer retention cost a KPI?

It can be, yes. If a business is tracking this metric, it’ll usually be owned by a customer success team. Their objectives might include: reducing churn, reducing retention costs, and increasing expansion revenue.

2. Why is customer retention cost important?

Retaining customers is cheaper than acquiring new ones. However, you still need to track how much it costs to retain a customer. If the cost is too high, your business & growth are not sustainable, and you need to figure out ways to either a) increase your price, or b) reduce the retention cost.

3. How can customer retention cost be reduced?

Improving customer experience, automating onboarding & customer training, and ensuring product stability are all great ways to reduce retention costs. Find out why customers churn or contract, and fix the problems.