While growing your customer base is a worthwhile goal, you need to make sure the customers you have don’t disappear. Understanding and improving your retention rate is key to long-term business growth.
18% of businesses prioritize customer retention over customer acquisition—and for good reason. Your current customers can be your most powerful asset. Focusing on attaining a good customer retention rate can be your opportunity to pull ahead of your competitors and keep your business on an upward track. Retained customers will offer you the greatest customer lifetime value possible.
We’ll guide you through what retention rate is, why it matters, and how your strategy can keep it growing.
What Is Customer Retention Rate?
Customer retention rate (CRR) is the measurement used to determine how many customers a business is able to keep over a given period of time. Usually expressed as a percentage, this rate is a key signal of how likely your company is to thrive in the future. By knowing your retention rate, you can make changes to your business strategy as soon as a drop occurs.
Retention rate can be helpful to measure in any industry, as it helps gauge the level of loyalty among buyers. It’s particularly helpful for companies that offer subscriptions or memberships. This is because their profit is more heavily affected by how many users are sure to return in any given month or year. Some common users of customer or user retention rates are software-as-a-service (SaaS) brands, gyms, meal kit services, and app developers. Community colleges and state universities also use retention rates to measure how many college students stay enrolled.
How to Calculate, Measure & Interpret Customer Retention Rate
The first step to improving your customer retention rate is to know how to calculate it. The good news is, there is a simple formula you can use to accomplish this.
Customer Retention Rate Formula
In order to measure your customer retention rate, use the following formula:
CRR = ((EC – NC) ÷ SC)) x 100
Simply plug your numbers into each of the variables as follows:
- EC: The total number of customers at the end of a period
- NC: The number of new customers gained within the given period
- SC: The total number of customers at the start of the period
The average company will have a 20% retention rate over eight weeks. Hitting a 30-35% retention rate in the same time frame is when you’ll know you’re in excellent condition. Due to the nature of the formula, this rate tends to be much higher when you measure over a short period of time and lower for first-year analyses. Because of this, many business owners will keep track of several retention rates (e.g., monthly, quarterly, or yearly rates) to get a clear look at their performance.
How to Interpret Customer Retention Rate
While calculating your customer retention rate is important, it is not enough to get you across the finish line—you need to fully understand your rate and what it means. You have to consider the context and be willing to make adjustments to how you do things. So, once you’ve calculated your CRR, be sure to follow the steps below.
1. Analyze Your Business Context
The first step in interpreting customer retention rate is to analyze your business context. This means that you need to assess your offerings, your competitors, your marketing strategy, and even your customer feedback. By analyzing your business context, you can pinpoint any weaknesses or inefficiencies that may be impacting your customer retention rate. For instance, if you notice that customers are abandoning your service after a short period of time, you may want to examine the quality of your product or the accuracy of your marketing claims. This information will help you take corrective actions and improve your customer retention rate.
2. Set Your Goals Accordingly
The second step is to set your goals accordingly. It’s important to have a clear idea of what you want to achieve with your customer retention rate. Are you looking to increase it? Maintain it? Or are you aiming for a certain percentage increase? Depending on your answer, your next steps might differ. With well-defined goals, you can monitor progress or make course corrections if the results don’t meet expectations. Goals are key to mapping out a business strategy to improve the quality of your offerings, marketing approach, and your customer service standards.
3. Determine a Benchmark
The third step is to determine a benchmark. This is where you establish a metric for a standard level of performance or for comparing performance with other companies. One way to find a benchmark for your customer retention rate is by researching similar companies in your industry. This will give you a sense of how well you’re performing compared to your competitors. Moreover, it will help you assess whether the industry standard is viable for your business or if you need to set a higher bar for better performance. A good benchmark will provide you with context to determine realistic goals for your business’s customer retention rate.
4. Monitor the Data Over Time
Once you’ve established benchmarks and goals, it’s critical to monitor the data over time. This means tracking your customer retention rate on a regular basis—whether that’s weekly, monthly, or quarterly—and analyzing any changes or trends that emerge. By consistently monitoring and analyzing your retention rate, you can identify areas that need improvement, and make data-driven decisions to address those issues.
5. Adjust if Necessary
The final step is to adjust if necessary. After setting goals, determining benchmarks, monitoring data, and analyzing business context, it’s time to adjust your strategy if necessary. If your customer retention rate is not where you want it to be, you may want to identify and address the root cause. Sometimes you may need to improve your services or product designs, offer better deals or discounts, adjust your marketing strategy, or provide better customer service. The adjustment strategy will depend on the kind of improvements or corrections that need to be implemented, and can be informed through setting new and realistic performance goals, revisiting the benchmarks, re-analyzing the business context, monitoring new data, and iterating towards better customer retention rates.
Interpreting your customer retention rate is crucial if you want to make a real difference in your business. Analyzing your business context, setting clear goals, determining a benchmark, monitoring the rate over time, and adjusting if necessary are all critical steps to understanding and improving your company’s retention activity. By following these steps, you can identify opportunities for growth and build a loyal customer base that will drive your business toward success.
Retention Rate vs. Churn Rate: What’s the Difference?
So…what about churn rate? While churn rate and customer retention rate are related, they measure different things and have different implications.
As we’ve already discussed, retention rate is the percentage of existing customers that a business retains over a certain period. Churn rate, on the other hand, is the percentage of customers that leave a business over a certain period. It’s essentially the inverse of customer retention rate—the higher the churn rate, the lower the retention rate. Calculating this metric can help you retain more customers and improve the profitability of your business.
How to Calculate Customer Churn Retention Rate
Calculating churn rate is fairly straightforward. The formula for churn rate is:
(Number of customers lost during the period / Total number of customers at the start of the period) x 100 = Churn rate.
For example, if a business had 1,500 customers at the start of the year and lost 300 customers during the year, the churn rate would be:
(300 / 1,500) x 100 = 20%.
In summary, tracking churn rate and CRR helps businesses retain existing customers, acquire new ones, and improve overall profitability. The longer customers stay with a business, the more profitable they become, as the business doesn’t have to spend additional resources to find new customers.
→ Ready for more? Learn how to calculate customer retention cost here.
Additional Customer Retention Metrics
Retaining customers is critical to building long-term success, but customer retention rate and churn rate are just two of many metrics to consider when assessing the health of your business. If you want a more holistic overview of how your business is performing, here are a few other metrics you should track.
1. Repeat Purchase Rate
This metric tracks the percentage of customers who return to do business with your company after making their first purchase. A high repeat purchase rate indicates that your customers are satisfied with your products or services and willing to come back for more. To calculate the repeat purchase rate, simply divide the number of return customers by the total number of customers.
2. Net Promoter Score
Net promoter score (NPS) is a measure of customer satisfaction and loyalty. It asks customers how likely they are to recommend your business to others on a scale of 0-10. Customers who give a score of 9 or 10 are considered “promoters,” while those who score 0-6 are considered “detractors.” To calculate the net promoter score, subtract the percentage of detractors from the percentage of promoters.
3. Product Return Rate
This metric tracks the percentage of products that are returned by customers. A high return rate can indicate issues with product quality or customer satisfaction. To calculate the product return rate, divide the number of returned products by the total number of products sold.
4. Time Between Purchases
This metric can help you understand how frequently your customers make purchases from your business. A shorter time between purchases indicates that your customers are engaged and loyal. To calculate the time between purchases, simply divide the time elapsed between two purchases by the number of purchases made.
5. Loyal Customer Rate
This metric tracks the percentage of customers who have made multiple purchases from your business. A high loyal customer rate indicates that you have a strong base of repeat customers who are invested in your brand. To calculate the loyal customer rate, divide the number of customers who have made multiple purchases by the total number of customers.
By tracking these metrics in addition to customer retention rate and churn rate, you can gain a better understanding of your business’s strengths and weaknesses. Then, you can use that information to make informed decisions and drive growth and success for your business.
Why Customer Retention Rate Matters
It pays to keep your customers coming back. When you increase your retention rate by as little as 5%, you can directly increase profits by 25% to 95%. Consumers are driven to buy from brands they trust. Over time, existing customers will begin to spend 67% more than new ones.
It’s also important to recognize that customer acquisition is expensive. It costs 5-25 times less to retain customers than to acquire new ones, so if you’re constantly needing to spend on marketing to maintain the size of your user base, you won’t be as productive as you could be. Keeping retention rates high will help you improve your bottom line.
In terms of business data, your retention rate can also give you a closer look at your churn rate, so you can be more proactive about finding solutions. While churn rate measures how many people have canceled their memberships or stopped buying your products or services, focusing on customer retention can help you win customers back before they choose a competitor brand.
Retention rates also give you insight into how long a first-time user will stay with your brand, so you know where your customer growth rate needs to be within any given time period.
How to Improve Retention Rate
Getting higher retention rates depends on your ability to provide a consistently great customer experience. No matter how long a customer has been with you, they want to be treated well—or they’ll choose a competitor who treats them better.
Below, we’ll provide three ways you can easily treat each of your customers like royalty to ensure they stay with your brand.
1. Improve Your Customer Service
Poor customer service can kill your retention rate and costs businesses $75 billion per year. When your customers are unable to get answers or resolve issues with you in a timely manner, they’ll be discouraged from returning because they don’t feel like you care.
Customers appreciate having multiple ways to reach you—for example, via email, phone, SMS, and social media—so they can reach out through whichever avenue is most convenient for them. They also want to know that you can respond in a timely manner, usually within 24 hours. Businesses can improve customer satisfaction by openly displaying and sticking to set customer service hours. This way, no one ever feels like they’re left hanging.
By implementing Podium Feedback into your strategy, you can get a proactive pulse on what customers are thinking about your business. When a bad experience occurs, you’ll immediately receive an alert. This way, you can resolve the issue through a purposeful one-on-one conversation that turns a potential churned customer into a retained customer.
2. Show Your Gratitude
Customers want to feel like they matter to your business. In order to build customer loyalty and retention, you need to show them that your business can give them more than a product in return for their investment.
You can keep customers happy by sending your loyal customers special offers and educational content that truly helps them get more out of your products or services. While focusing on customer service may improve your relationship with people who reach out, this strategy can help you reach all existing customers with ongoing benefits.
Of course, this doesn’t mean you shouldn’t continue listening to what your customers are saying online. You can encourage customers to love and show appreciation for your business online by thanking them for their social media posts and online reviews.
If you want to ensure you never miss a review, take advantage of Podium Reviews to respond to incoming feedback all on one platform. Whether you want to increase gym member retention rates or keep users subscribed to your software, this is a great way to show both positive and negative reviewers that you care about what they’re saying.
3. Personalize the Customer Experience
In 2018, 33% of all churned customers ended their relationship with a company due to the lack of a personalized experience. Showing your customers that they’re one in a million, rather than just a part of a million, can be all the difference they need to choose to stay.
An effective personalized experience starts from day one through the simple act of collecting your lead’s name, phone number, and inquiry through a tool like Podium Webchat. As your lead becomes a customer, you can gather further data to send gifts on birthdays, membership anniversaries, and more.
→ Love what you see? These retention stats will change the way you do business.
Improve Your Customer Retention Rate With Podium
Happy customers make for a happy business. The better the customer experience, the more likely customers are to stick around for a while. In order to keep customers happy, you need a retention strategy.
This is where Podium comes in.
Podium helps local businesses like yours personalize customer communication, organize interactions, simplify payment processes, and improve the overall customer experience.
Interested? Start a free 14-day trial today—it’s risk-free, no strings attached.