Customer retention rate is a calculation which enables organizations to work out what percentage of customers they are keeping versus what percent they are losing.
Customer retention is the number of customers doing business with a company at the end of a given period (or specific financial year), expressed as percentage of those who were active customers at the beginning of that period/year. Your customer retention rate will therefore essentially be the opposite of your customer churn or customer defection rate.
When measuring your customer retention rate, make sure that you choose a period that works for your business and the way your customers buy.
For example, it makes no sense for a car manufacturer to measure retention rate within a year, because hardly any new car buyers will buy another car after just 12 months.
However, for an online business selling toys, books and consumer goods like Amazon, 12 months is probably too long to measure retention rate, and they are likely to want to see their rate month on month.
This is why it can be useful to split retention rate calculations down into 3 more granular measures:
Raw retention rate
Literally the retention rate as described above – customers remaining at the end of a given period of time, expressed as a percentage of the total you started with
Profit adjusted retention rate
To calculate this, take the profit earned from the retained customers and express it as a percentage of the profit earned from all customers at the start of the timeframe you wish to measure
Sales adjusted retention rate
To calculate this, take the value of sales made from the retained customers, and express it as a percentage of the sales achieved from all customers at the beginning of the timeframe you want to measure
Whichever method you choose, it’s really important to track customer retention rate in a way that works for your business because, if you don’t, you can often miss the early signs that that your customers are leaving you for a competitive product or service.
By regularly tracking your retention rate, you can spot both dips and improvements, and investigate the causes quickly.
It’s also critical to measure customer retention rate if you are actively undertaking any customer retention activity, because you will need to work out if you are generating a return on that investment. For example, if you’ve started a new welcome pack program and it’s costing $17 per new customer, you need to measure over time to see if it is having any discernable effect on your retention rate. If it isn’t you could consider redeploying that spend to other elements of the program that are working. Or you could switch off the welcome pack program altogether.