Understanding Customer Retention Rate: The Ultimate Guide

Marketing defines customer retention as the process of engaging the customers you already have so that they continue to buy your company’s products or services. Every time you get repeat business, that counts as customer retention.

Firstly, know what is customer retention?

Your customer retention rate — the way to measure as a percentage how many customers you retain over a given period — is a useful indicator of the growth of your business, or otherwise.

This article will explore ways to crunch those numbers, and why having numbers to analyse is important.

Why is Customer Retention Important?

Customer retention is often thought of as the third step in marketing. The first is lead generation – in broad terms, the act of identifying and cultivating potential customers. The second step is customer acquisition, also known as conversion in the digital realm. You acquire a customer the minute they buy something from you – simple!

What you do by way of follow-up to make sure that customer keeps buying from you, or continues with their subscription in the case of SaaS, falls under the umbrella of customer retention.

Frederick Reichheld of Bain & Company did research which revealed that increasing customer retention rates by 5% increases profits by 25% to 95%. One saying that has acquired almost proverbial status is that it costs five times more to acquire a new customer than it does to keep an existing one. The third rule of thumb to bear in mind is that returning customers spend 67% more than new customers. This is what is a good customer retention rate.

All these statistics point to two basic truths about the advantages of customer retention rate

  • you save money, and

  • you make money.

In other words, it makes good business sense.

Statistics Take Time

Your statistics are developed over a period of time. If your business relies on monthly subscriptions, you can measure customer retention rate monthly.

We have a free downloadable spreadsheet. Why don’t you experiment with it to see how customer retention and customer growth can determine your bottom line?

You can use the spreadsheet to set goals or input actual data that you have already collected using four basic numbers:

  • Current Customers

  • Customer Growth

  • Customer Churn

  • Customer Goal

Customer churn? The flipside of customer retention is customer churn, also known as customer attrition. This is another metric that needs careful monitoring.

Since the customer retention rate can be considered a key performance indicator (KPI), let’s examine the ways in which customer retention can be expressed. We do this so that the numbers are meaningful. Meaningful here means that the numbers give you information that can inform your ongoing CRM strategy.

CRM is Customer Relationship Management. Simply put, these are things you do to keep your customers loyal.

Ways To Express Customer Retention Rate

In case you haven’t cottoned on to it yet, in business, there are usually several different ways to express the same thing, or similar things using the same basic data.

Enter the fascinating world of analysing business figures and the useful extrapolations you can make from them. Why? Well, it’s all about maximising your profits. That is motivation enough, right?

How you express your customer retention rate kpi will depend on personal taste and the usefulness of the particular metric to your business. Important questions to ask yourself about any business statistic are:

  • Does this number provide useful information?

  • How can I use this information to improve business performance?

If the answer to the first question is yes, and the strategy you should adopt is clear from the answer to the second question, you have a winning combination!

There are three useful customer retention rate calculations that you can do.

  • raw customer retention rate

  • profit-adjusted retention rate

  • sales-adjusted retention rate.

We discuss these below.

Raw Customer Retention Rate

This calculation is a simple one and is partially reflected in the customer retention and customer growth spreadsheet we mentioned earlier.

If you look at the first month in that spreadsheet, you will see that there were 100 new customers, yet the company lost 30 customers, leaving a net of 70. So, for that month alone, you can say that the company retained 70 out of every 100 new customers. Expressed differently you can say that the company (for that one month only!) has a customer retention rate of 70%.

You can draw other conclusions from the customer retention example in the above spreadsheet. For instance, over the course of the first 12 months, the company acquired 1200 new customers, but lost 589 customers, meaning that they retained 611 customers. If you divide 611 by the 1200 total, you will see that the customer retention rate for the first year is 50.92%.

Admittedly, I added something to the existing spreadsheet template to arrive at 50.92%. You can do the same.

Adding other data adds more dimensions to your numbers and makes them more meaningful. The profit-adjusted customer retention rate is one such number.

Profit-Adjusted Retention Rate

To calculate this, take the profit earned from retained customers. Express this as a percentage of the profit earned from all new customers at the start of the period you are measuring. In our example above, we are doing it monthly.

Our example does not show profit figures, but we assume that you would be able to extract such information from your billing system. If you cannot, you should get in touch with us real soon!

This is a KPI. Although it does not tell you what your total profit is for the month, it tells you the percentage of profit you have made from customers you have retained. The lower the percentage figure, the more work you have to do to retain more customers.

Sales-Adjusted Retention Rate

Another way of using customer retention rate and numbers is to calculate the sales-adjusted retention rate. You calculate this by taking the value of sales made from the retained customers and express it as a percentage of the sales achieved from all new customers at the beginning of the period you are measuring.

The variables of this figure depend on which customers you lost. If you lost several big spenders, then your percentage will look meagre indeed.

Keeping Track of Customer Retention

The old adage that time is money is still true. You can do all of these calculations manually if you like. Or, you can work smarter.

We are great believers in leveraging as much as you can from integrated billing systems.

Sure, billing systems make billing your customers and monitoring payment easier. But they pack a real punch when it comes to generating data that you can use to make real business decisions. Like how to treat your customers.

They give you information that informs your business strategy. Things like whether and why your customers are (dis)satisfied, and what you could be doing differently. Tracking these things is important to your bottom line – and that’s something you should never lose sight of.

Organizing Your Data

Organizing your data makes your business organized. Keeping an eye on your customer retention rate and related metrics such as the customer Value Score contribute significantly to the overall growth and success of your business.

Your customer retention information might lead you to conduct customer satisfaction surveys. Those, in turn, could lead to changes in the way you present your products and services to your customers, and the way you choose to develop your relationship with them.

Discovering what your customer retention rate is will mark the beginning of those great relationships, and opportunities to grow your business. What are you waiting for?

You can also read other blogs on our website to gain more insights on what is pro-rating and how you can use it in your subscription business and Choosing the best recurring payments system for your business.