It’s common for businesses to track revenue and profits, but it’s also important to measure your company’s ability to retain existing customers as well. Going beyond profits and losses, your customer retention rate helps you see how well you keep customers over months or years. It gives you a measure of how well you prevent customer turnover, also known as churn. Without this information you may not know that you have a problem until it is too late.
What is customer retention rate?
In case you’re wondering, customer retention rate (CRR) is a figure that reveals how effective your organization is at keeping customers happy so they continue doing business with your company. It is expressed as the percentage of customers that stay with your company through such actions as repeat purchases, additional purchases, upgrades or subscription renewals. This measurement can be made for any given period of time and should be calculated on a routine basis to ensure continual growth of your company’s customer base.
Why should you calculate customer retention rate?
Measuring your customer retention rate helps you go beyond a customer acquisition focus. It allows you to make sure you aren’t losing customers as fast, or faster, than you’re adding them. If that would be the case it would be like treading water or running in place.
A company’s growth must be assessed by more than sales and marketing performance. Tracking customer retention allows you to know what other adjustments are needed within your company to allow you to meet your growth targets. It’s a good predictor of revenue for the upcoming quarter, an indicator of how well your customer service department is performing and it reveals when it’s time to add or adjust your loyalty program.
Customer retention rate formula
When you’re ready to calculate your customer retention rate (CRR), you will need to specify a period of time such as a month, a year or a quarter.
Once you have decided on the time period, select the start date and end date that apply.
Next, you’ll need to gather the following information:
- The number of retained customers at the start of the time period (S)
- The number of retained customers at the end of the time period (E)
- The number of new customers you acquired during the time period (N)
You will plug these numbers into the following formula:
CRR = ((E-N)/S) x 100
This formula isn’t at complicated as it may appear. Once you gather all the necessary information you simply subtract the number of new customers from the number of customers retained at the end of the time period. Then take the resulting number and divide it by the number of retained customers you had at the start of the time period. To convert that figure to a percentage all you need to do is multiply it by 100 and you’ll have your customer retention rate.
Let’s look at an example:
If you start with 2,000 customers (S), end with 2,200 (E), and added 400 new customers (N) during the period your formula looks like this:
((2200 – 400)/2000) x 100 = 90%
This reveals that you kept 90% of your customers and lost 10% through churn.
What does this mean?
Since replacing lost customers costs more than retaining them it’s important to dig deeper to understand if this turnover will mean trouble to your particular business. For example, if your new customers are spending more than the ones you lost then this may not have a major impact on your bottom line. However, if you’re retaining customers and they are spending less or downgrading subscriptions to less costly ones, this could mean trouble in the long-run. Plus, another consideration is your actual cost of acquiring new customers. If it is extremely low, retention may be less of concern than if it is high. So remember to look at revenue to provide a more complete picture.
Although customer retention rate is not a stand-alone indicator of the overall health of your business, it is critical that you track it routinely to ensure you can proactively address issues as they arise. Always remember to balance customer acquisition and retention for optimum results.