What is retention rate anyway?

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Customer retention rate is the metrics that actually reveals if your marketing, customer care and sales teams are working effectively and fortifying your business.

So what is retention rate anyway?

Customer retention rate: simple yet tricky

Customer retention rate is defined as a percentage of customers who keep doing business with you over a certain period of time, in comparison with those who stop buying from you (churned customers).

In a nutshell, customer retention rate helps you understand how loyal your customers are.

You can increase the profitability of your business by 75% with only 5% increase in customer retention. What’s more, it’s cheaper and easier to expand existing customers than acquiring new ones.

There are different ways to calculate customer retention rate. One size fits all approach does not work here, as your customer retention rate depends also on the period of time that works for your business and the way your clients purchase.

How to calculate customer retention rate?

how to calculate customer retention rate

Here is the most used formula:

CRR = ((E-N)/S)x100

Where:

  • CRR= Customer Retention Rate;
  • E= the number of customers in the end of a given period;
  • S= the number of customers on the beginning of a given period;
  • N= the number of customers acquired during that period.

What’s a good customer retention rate?

Like most business key performance indicators (KPIs), it depends on the industry the business operates in. According to Mixpanel research, most application and software have 6%-20% eight-week retention rate, which should be a benchmark for product teams. There are three questions that need to be answered in order to understand what is a good retention rate for your business:

  • What is the period of time over which the CRR will be measured?

Define the period of time for measuring customer retention rate. It can be tracked over several periods of time: one day, one week, fortnightly or monthly. If you see the decline in returning customers starting from certain period, you should measure CRR within shorter periods of time, to find out the reasons of customer churn.

  •   How many actions over that period compose retention?

After all, in order to calculate retention, your product team should set a threshold of actions required for CRR measurement: it can be one action, two actions or a whole set of valuable actions that lead to returning a customer (e.g. upgrading to premium user and buying extra service etc).

With such a customer retention analysis, you can see the retention trends for your business and work on preventing customer churn. It’s especially useful to measure customer retention rate against companies that are your competitors.

What does customer retention rate mean to your business?

why customer retention rate is important

The key to successful retention measuring is determining what customer retention means to your business. For example, it’s not enough just to find out about the loss of customer – it’s crucial to know what this loss results in. Here is where you should combine customer retention rate with other metrics, such as revenue retention etc. Consider the following things while calculating customer retention rate for your specific case:

  •      If the churned customers are replaced with more valuable ones, then the attrition is less concerning, especially in the short term period;
  •      If your retained customers are worth less (spending less money on your products or downgrading packages), then there is a possibility that your high CRR is misrepresented;
  •      If you spend extremely low costs on customer acquisition, then retention is less concerning than if it costs a lot to acquire new customers.

To complete the picture, you should consider the revenue of the company and many other metrics, which makes it more complicated to calculate the retention rate.

Measuring customer retention rate is not only about fitting the figures into formula. If you really want to make it work, you should track it in a way that works for your business in particular, otherwise you will not notice the early signs that your customers are about to leave you.

StackTome helps you not only measure customer retention rate, but develops a customer retention strategy for your business: enjoy watching your customers come and stay with you.

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