How to Use the Customer Retention Rate Formula

Customers are key to every business’s survival, and keeping them from churning and turning to competitors is an always-on priority.

Learning to calculate the rate at which your business is holding onto its customers can be a valuable first step toward attracting, delivering the experiences and outcomes they expect, and driving long-term loyalty and retention.

To calculate it, you need to know:

• The number of initial customers
• The number of new customers
• The number of final customers

Then, you can simply subtract the number of new customers from the number of final customers and divide that result by the number of initial customers. To represent customer retention rate as a percentage, you’ll multiply that result by 100.

Keep reading to discover how to use the customer retention rate formula, common variations, and how you can put it to use in your organization.

What Is Customer Retention?

Before we move on to the customer retention rate formula, it’s important to understand what customer retention is.

Customer retention is a measure of the portion of customers that are still active at the end of a measurement period, which might be a month, 12 weeks, 6 months, year-over-year, or any window of time that you want to evaluate.

The higher your customer retention rate, the better. A higher retention rate means you’re maintaining a level of customer satisfaction and providing a customer experience that fosters loyalty.

A high customer retention rate indicates that your retained customers trust your business and your products or services. As a result, these customers tend to increase their average order value over time, contributing to a higher customer lifetime value (CLV).

For years, it’s been said that it costs five times more to acquire a new customer than to retain an existing one.

However, thought leaders have recently offered a different perspective: while customer retention is a goal to strive for, you shouldn’t put all your efforts into retention at the expense of acquisition.

Companies should balance retention and acquisition costs, taking each customer’s potential CLV into consideration, according to Peter Fader, a Wharton marketing professor interviewed by Blake Morgan at Forbes.

Another perk to keeping more of your valued customers is that you have more time and opportunity to cultivate positive relationships with brand ambassadors.

Customer retention rate may be confused with customer churn rate. However, customer churn rate is the inverse of retention rate: The lower your customer churn rate, the better. A low churn rate means few of your customers stopped doing business with you or switched to a competitor.

The Customer Retention Rate Formula

The full customer retention rate formula is easy to grasp and only requires three unique figures to be calculated with precision. Those figures are as follows:

• Initial Number of Customers (INC) – These are all of the customers that were actively transacting with your business at the start of a given period of time.
• Final Number of Customers (FNC) – This number represents all of the active customers that your business had on the very last day of a specific time period.
• Number of New Customers (NNC) – These are all of the customers that your business has transacted with for the very first time between the starting and ending dates of a given stretch of time.

With all of the above figures in mind, you can fill in the blanks of the following formula to quickly calculate your customer retention rate:

[(FNC-NNC) / INC] x 100 = customer retention rate

The final result that you get from the formula above should be a clean percentage that you can plug into your wider datasets to analyze in detail.

Of course, there are a few variations of the standard customer retention rate figure that can be tracked as well to get a more comprehensive perspective of your customer retention results. Let’s take a look at a few of the most commonly used variations on customer retention rate.

Repeat Purchase Rate

This metric is a measurement of the percentage of your customer base that places more than a single purchase with you over a given time period.

This is an especially important metric for companies with non-subscription-based business models to keep track of.

Customers who come back to your company to place fresh orders and engage in repeat business are valuable and it is essential that you cultivate as many of these as possible.

You can even take this a step further by calculating the number of customers who have made two, three, or more purchases over a given stretch of time.

Revenue Churn

This metric is arguably of similar importance to your primary customer retention rate figure as it relates directly to the amount of revenue you are holding onto over time.

Revenue churn measures the amount of monthly recurring revenue that your company is shedding. You should pay special attention to your revenue churn measurements if you find your customers are less likely to leave altogether than they are to simply reduce their spending with your organization.

Customer Lifetime Value

This metric is mostly used to determine whether or not your company is keeping enough customers interested in its products or services.

However, it can also be used to determine just how much you should be putting into your marketing efforts.

Customer lifetime value is a measurement of the profit your business derives from your average customer.

The formula for this metric accounts for the overall cost involved in acquiring new customers as well, helping to guide both marketing and product-based decisions.

How to Use the Customer Retention Rate Formula

Utilizing the customer retention rate formula comes down to aligning it with your company’s objectives, first and foremost.

Once you have a clear view of the direction you would like your organization to grow in, you can leverage any number of the following retention rate-based actions to support your strategy:

Identifying Effective Retention Techniques

Techniques for retaining your customers abound, but not all of them are perfect for your business. By tracking customer retention, you can figure out what works and stop bothering with actions that have little effect on keeping customers satisfied.

Discovering Your Customer Churn Rate

As mentioned previously, your customer retention rate can actually be used to calculate your customer churn rate as well. In fact, the two are linked and inversely proportional.

If you find you have a customer retention rate of 85 percent, then you can quickly subtract that figure from 100 to determine your churn rate as well (that would be “100% – 85% = 15%” in this case).

Monitoring your customer churn rate can prove to be a highly effective strategy for curbing drops in revenue and addressing gaps in the customer journey more rapidly.

Improving Customer Retention Rate

Your company’s customer retention rate can be improved over time with a little care and consistent monitoring.

The customer retention rate formula is simple: Subtract the number of new customers from the number of final customers.

Then divide the result by the number of initial customers and multiply by 100 for an easily understood percentage you can track and visualize over time.

By measuring your retention rate, uncovering reasons for customer churn, and taking steps to improve customer satisfaction and reduce churn, your business can laser-target your products, services, and customer interactions to better meet your customers’ needs.

This blog post has been re-published by kind permission of CallMiner – View the Original Article

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