How to Measure Customer Retention
Published July 3, 2022.
Learning how to measure customer retention is one of the most valuable things you can do when you’re analyzing the potential of your business. Depending on your industry, increasing customer retention by only 5% can increase profits by 25-95%. However, the only way to successfully increase customer retention is to start by figuring out where you stand.
Retained customers are generally much more valuable than their counterparts because they’re already familiar with your company. Loyal and engaged customers can even become advocates for your brand on social media and help you to boost the credibility of your business.
How Do You Calculate Customer Retention Rate?
Calculating your customer retention rate is easier than you’d think. Just like any method of measuring website performance, you’ll need to start with some information.
Collect information about the number of existing customers you had at the beginning of a period, and the number you had at the end of a specific time period. You’ll also need to know how many new customers joined your business during the same defined time.
Once you have this information, you can calculate customer retention by using the following formula:
[(Number of customers at the end of the period — number of customers acquired over that time) / the number of customers at the beginning of the period] X 100
For instance, if you had 100 customers at the start of a period, and ended with 100 customers, but defined that 10 of those customers were new, you’d have a retention rate of:
[(100-10)/100] x 100 =90%
What Is a Good Customer Retention Rate?
When learning how to measure customer retention, it’s common to wonder what kind of numbers you should be looking for, so you can start setting up goals. However, there’s no definitive answer to what a good customer retention rate should look like.
If you’re a SaaS company reliant on monthly subscription models, you’re likely to have a higher retention rate than a coffee company that mostly serves traveling customers at a train station. For most industries, customer retention rates usually sit at around 20%. In the finance and media sector, the number is closer to 25%, and for e-commerce companies, retention rates are typically 35%.
If your customer retention rate is lower than expected, the best thing you can do is look for ways to reduce churn and improve customer loyalty. This could mean:
- Offering deals and discounts to repeat customers.
- Setting up a loyalty program to keep customers coming back.
- Improving your customer service strategy.
Gathering customer feedback can give you a good insight into why your retention rate might be low.
What Customer Retention Metrics Should You Be Tracking?
Customer retention rate is just one example of a worthwhile metric to track when you’re building customer loyalty and repeat purchases. Some other points to consider include:
- Customer churn Revenue churn, or churn rate, refers to the number of customers who abandon your business within a specific period. If your retention rate is 90%, for instance, your churn rate would be 10%. A high churn rate could indicate you need to take extra steps to improve customer experience and loyalty.
- Net promoter score NPS is a tool for measuring customer loyalty. You ask your customers to rate how likely they would be to recommend your product to other people, which can give you an insight into how much customers value you.
- Repeat purchase rate This refers to the number of customers who do business with your company more than once. You can calculate this number by dividing your total number of customers by your number of return customers.
- Customer lifetime value Customer LTV looks at the amount of money a person is likely to spend with your company over their lifetime. Knowing which customers have the highest lifetime value makes it easier to focus your marketing efforts on the right people.