How to calculate customer retention rate

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Customer Retention Rate measures how well your business can keep customers. It can help measure the success of your products, marketing, and customer service programs. 

In this article, we’ll show you how to measure Customer Retention Rate (CRR) and develop a customer retention strategy. We’ll cover: 

  • How to calculate Customer Retention Rate
  • Why Customer Retention Rate is important
  • Common mistakes
  • What are normal Customer Retention Rates
  • How to improve your Customer Retention Rate
  • Other key customer retention metrics
  • How machine learning can back up your customer retention scores 

How to Calculate Customer Retention Rate

The formula used to calculate Customer Retention Rate can vary depending on your type of business. Here are the 3 basic steps to calculate and measure Customer Retention Rate for your business:

1. Choose a Period to Measure

You might want to know how many customers stay after six months, 12 months, or any other time frame. Choose a timeframe that will help you answer your question. 

2. Collect Your Customer Data

There are three pieces of data you need to collect to calculate the retention rate:

  1. # of customers at the beginning of the period (day 1)
  2. # of new customers acquired during the period
  3. # of customers on the last day of the period

3. Use the Customer Retention Rate Formula

Now that you have the data you need, you can calculate the retention rate for your given variables using this formula:

 

[C. Last day customers] – [B. New customers]

_______________________________

[A. Day 1 customers]

X 100

An Example Customer Retention Rate Formula Application 

Here’s a simplified example that uses this formula: XYZ Inc changed how it handles support requests. It wants to calculate Customer Retention Rate to see if that has affected customer retention. 

They have the following data:

  • Started with 200 customers on August 1
  • Gained 50 net new customers throughout the month
  • Lost 25 customers
  • Ended with 225 customers on August 31

Based on the above formula, they make the following calculation:

225 – 50 / 200

[Last day] – [Gain] / [First day]

X100 = 87.5% retention rate for August

This indicates that their Customer Retention Rate for the month is 87.5%  

Why Customer Retention Rate Is Important

Customer Retention Rates are an essential business metric to monitor. Marketers know it’s far easier to sell to repeat customers who already know and trust their brand rather than earning trust from new customers. That makes it much cheaper too. 

The more loyal your customers are, the longer they’re likely to remain a customer and the more they’re likely to pay over their customer lifetime.

A Common Mistake in Calculating Retention Rates

Knowing your Customer Retention Rate can help inform business decisions; however, it may not provide the complete analysis you need. 

While the customer retention formula is excellent for understanding varying timeframes, you may want to segment your customer base by how long they’ve been a customer. You may also want to do a retention calculation for different groups of customers, including ones who are not new, have been a customer for 3-6 months, or have been a customer for 12 months. 

By doing separate retention calculations based on how long they’ve been a customer, you better understand customer loyalty and satisfaction and how it differs between those new to your business and those already loyal.

For example, you may find a high retention rate in “older” customers because they’re loyal to your brand and willing to overlook the occasional mishap or error. New customers may be more discerning and may leave at the first sign of trouble because you haven’t built the same brand trust. 

Either way, there’s an issue to address, but by looking at just one segment of data, you may not be getting the whole picture. 

What Are Normal Customer Retention Rates?

“Normal” Customer Retention Rates will vary depending on your industry and business model. Aim for as high customer retention as possible, or at least increasing percentages over time as your business grows and optimizes processes and products for more satisfied customers. In reality, most companies find a sweet spot at 85%.

What your CRR says about your existing customers

Customer Retention Rates are a reflection of several aspects of your business:

  • Customer loyalty
  • Customer satisfaction
  • Product satisfaction
  • Product offerings
  • Customer service
  • Sales efforts

Higher Customer Retention Rates generally mean you’re doing something right. If you launch a new product or make a policy or process change, you can compare your Customer Retention Rates to see if the change had a positive or negative impact. It’s a way to test changes to see if your customer likes them. 

How to Improve Your Customer Retention Rate

If your retention rate drops or isn’t as high as you want, there are several ways you can improve your rate:

Refresh Customer Onboarding

If you calculate separate CRR for your new and existing customers, you may notice that new customers have a higher dropout rate. This may indicate a problem or misalignment in your client onboarding process. 

Look at how new customers get onboarded:

  • Do you provide any welcome packages?
  • Is the welcome documentation clear?
  • Are you offering any 1:1 start-up support?
  • Is your sales messaging not aligning with the product the customer receives?
  • Are all onboarding materials clear, concise, and on-brand?
  • Where are you not meeting customer expectations?

The actual “problem” can likely be uncovered through exit surveys, customer interviews, or other customer feedback platforms

Revise Your Product Roadmap

A common reason customer retention is low is you don’t have a straightforward customer journey or products and offerings to support their full journey. 

For example, let’s say you have a 20% Customer Retention Rate after the customer has been with your company for six months. Upon deeper evaluation, you realize that the customer’s needs typically change after using your offering for that amount of time. They’re ready for the next level of product, but you don’t offer it, so they’re going to your competitor who does.  

To help increase your Customer Retention Rate, consider adding additional products to support the customers’ changing needs and journey. 

Find Weaknesses and Improve

A low retention rate means you’re not meeting your customers’ needs. This is usually the result of a weakness in your business somewhere. Your job is to uncover what that weakness is and fix it. 

Sometimes, this can be difficult to see on your own. Machine learning and AI algorithms can link all your online apps (including sales and marketing systems, help desk, customer support, and customer data) to look for correlations. Then, they can let you know about decreasing customer retention before it affects your bottom line too significantly. Robust AIs can even suggest what’s causing the drop so you can address it quickly before any significant damage is done. 

Understand the Client Funnel and Journey

Do you know your customer’s journey? From customer acquisition to net new customers to brand loyalty, understanding the journey with your brand can help uncover gaps in support and products. 

For example, you may discover that you have a product for beginner users and advanced users, but the jump from the beginner to advanced product requires additional knowledge or a mid-level product to help ease the transition. 

Boost Customer Service

Customer service can make or break your business. Bad customer service can put a bad taste in your customers’ mouths and be the catalyst they need to stop being a customer. On the other hand, good or excellent service can encourage customers to stay longer. 

A great way to understand if your customer service needs improvement is to send surveys to your customers after interacting with a help desk or support team member. This can be as simple as asking, “Rate your satisfaction with our customer success team today.”

Update Your Content Marketing Strategy

Another common reason for low customer retention is your communication and customer education. If you’re not communicating effectively with your current customers, they may get confused and leave. 

Look at what materials and resources you have for customers in all stages of their journey, create content to fill any knowledge gaps, and ensure it’s easily accessible when they need it (such as in a searchable customer portal, emailed directly to your customers, or publicly available on your website). 

Also, look at the materials used in your customer acquisition strategies. You may need to revise them to ensure expectations are managed and correct in any pre-sales content they see before purchasing. 

Upsell/Cross-sell to Existing Customers

Perhaps you have low customer retention because they don’t know a helpful product or service is available to them. Use upsells and cross-sells to let them know you have other ways to support their journey. Aim to be the one-stop shop so they don’t have to go to a competitor to fill in the gaps or leave as a customer altogether. 

Identify Likely Customer Churn Demographics

You may also want to identify the most likely demographic of customers with low retention rates. To do this, run several customer retention calculations based on different demographics you suspect are lowering your overall score. 

You may discover that a specific gender or age group has a higher likelihood of a high customer churn rate. You might see that users in a particular region or city are more loyal than a neighbouring community. Your data may show that customers with higher post-secondary education are more likely to drop off after 12 months, but those with only a high school certificate stay for at least two years. 

Once you know which group(s) are more likely to drop, you can drive deeper to see how you can increase their satisfaction so they remain customers longer. 

Create a Referral Program

Try other customer retention initiatives, such as incentivizing customers who refer your offerings to others. An excellent example of this is cloud storage companies. They give the user extra storage space when they refer someone who signs up for a paid plan. Look at your product and service offering to see what high-value, low-cost incentives you can provide someone for sending you more customers. 

Other Key Customer Retention Metrics

Customer retention scores only tell part of the story. To better understand your customers and their needs, there are other related customer retention metrics to track:

Revenue Churn

This metric calculates how much revenue churn you have in a period. This measures the impact on your bottom line, not how many customers you have (like Customer Retention Rates). 

To calculate this metric, divide the dollar value of monthly recurring revenue you’ve lost by the revenue at the beginning of the period. Multiply this result by 100.

This is helpful because if you notice your Customer Retention Rate is lower, but people are spending more, you may still have more revenue with fewer customers, which could be advantageous. 

NPS Score

Net Promoter Score (NPS) calculates customer satisfaction. Customers complete a survey that asks various questions about their experience with your brand. From this survey, you get a score that rates how happy and loyal your customers are. 

It’s generally expected that your Customer Retention Rate will increase if you have a high NPS score. Likewise, if your NPS drops, you’ll likely see a drop in your customer retention. 

Customer Lifetime Value (CLV)

Another consideration is how much money you earn from each customer over their lifetime as your company’s customer. For example, they may only spend $20 per month on your product, but the average customer stays loyal for ten years. 

Here is the formula to calculate your customer lifetime value

Customer Lifetime Value (CLV) =

[Average Transaction ($)] X [# of Transactions] X [Retention time period]

This is a helpful metric to use with your Customer Retention Rate. Knowing your overall retention rate can help you understand how long the average customer stays with you—a metric needed to help you calculate your CLV.

Repeat Customer Purchase Rate

If your customers purchase from your business more than once, it’s helpful to know how often these repeat purchases occur. Your repeat purchase rate calculates the average percentage of customers who will return and buy from you again. 

This metric helps understand the ebbs and flows in your revenue. For example, you can use machine learning algorithms to look for correlations between your repeat purchase rate and monthly revenue to notice trends. From this, you may discover that September is a busy month for customers to purchase from you. 

How Machine Learning Can Back Up Your Customer Retention Scores 

To improve your customer retention scores, you need to understand what is causing them. This requires you to look at all aspects of your business to identify when Customer Retention Rates drop or increase and what areas within your company have changed to trigger it. The goal is to attribute a business change to the change in retention. 

Machine learning platforms like Idiomatic can analyze and quantify the customer feedback from all your data sources to identify the issues that cause changes in your customer retention. It shows those customer insights, so you don’t have to manually review the open-ended customer feedback from all your customer data sources and manually look for those causes. 

FabFit Fun Case Study

The popular monthly subscription box FabFitFun was manually reviewing its data to look for ways to reduce customer churn and keep customers longer. They needed a scalable, data-driven way to translate the voice of the customer cross-functionally. The company turned to Idiomatic for its AI-driven customer intelligence platform and saw a:

  • 250% increase in product satisfaction
  • 6% increase in 5-star ratings

Read the full case study here.  

Idiomatic gives you analyst-quality insights in real-time so you can act immediately to maximize efficiency in your business, increase your happy customers, and keep them as customers longer. 

Request a demo of the Idiomatic platform today and see how it can help maximize your Customer Retention Rates.