Any business that wants to find success and short-term and long-term security needs to keep a close eye on key metrics, including their customer retention rate (CRR). However, calculations that will transform you back to your high-school algebra days might discourage you from calculating your retention rate, an essential indicator of business health.
In this article, we share:
- Why retaining customers is important
- What is the customer retention rate?
- A straightforward customer retention rate calculation
- The difference between retention and churn rate
- Other key business metrics
Why Retaining Customers Is Important
Why you should keep the customers you win comes down to one crucial fact; it is significantly cheaper to create and retain loyal customers than it is to acquire new ones.
“Acquiring customers costs up to 25 times more than retaining existing ones.”
According to a Harvard Business Review Study titled The Value of Keeping the Right Customers, acquiring new customers costs anywhere between five and 25 times more than retaining existing ones. There are additional business health benefits as well, with loyal customers becoming advocates that promote your brand on social media, post reviews, provide referrals, and give you product and service feedback.
Alongside your business’s churn rate, you have two essential metrics that will help you recognise if your business is doing well. However, two KPIs alone cannot tell you everything about how and why customers leave or return. You will need other key business metrics to paint a complete picture that enables you to see how to cultivate a loyal customer base.
What Is The Customer Retention Rate?
Expressed as a percentage, customer retention rate is a measure of the customers your business retains over a specified period.
Customer retention rate example: If your company begins the year with 100 customers and loses ten of them during the year, you have a customer retention rate of 90%.
However, there is more to making a customer retention rate calculation. For example, you may acquire ten customers during the year, and while you may start and end with 100 customers, your retention rate is not 100%.
“You can’t offset your churn rate with new customer acquisition.”
It is clear that your data could throw your figures ‘out of whack’, which might cause a failure to recognise a severe business flaw, that will damage your short and long-term success.
A Straightforward Customer Retention Rate Calculation
Before you start, you should determine the time period you wish to calculate your retention rate over. For example, fast-paced companies may want to calculate the rate for a given week. Others perform the CRR calculation monthly, quarterly, or yearly.
The customer retention rate equation is: [(E-N)/S] x 100 = CRR. Okay, this doesn’t look very easy, but we will walk you through it step-by-step.
“The customer retention rate formula is [(E-N)/S] x 100 = CRR.”
Before you grab your calculator, it helps to understand what each letter in this equation means:
- S – is the number of customers you have at the start of the time period
- E – is the total number of customers at the end of the time period
- N – is the number of new customers acquired during the time period
To perform the calculation:
- Take E (end number of customers) and subtract N (number of customers gained)
- Divide the result by S (start number of customers)
- Multiply the result by 100
Taking our scenario from earlier, we have 100 customers at the end of the time period and subtract the ten customers gained, equalling 90. We divide 90 by the 100 customers we began the year with, equalling 0.9. We multiply this by 100, giving a CRR of 90%: [(100-10)/100] x 100 = 90%.
The Difference Between Retention and Customer Churn Rate
Whereas the customer retention rate is the percentage of customers you have kept, the churn rate is the percentage of customers you have lost. So, for example, if your CRR is 90%, your churn rate is 10%.
You can also calculate your churn rate using the customer churn rate formula:
Customer churn rate formula: (Lost customers / original customers) x 100 = customer churn rate.
The calculation is straightforward but can become more complex when considering your data. For example, do you want to include customers who left after a one month trial? Or, do you want to know the churn rate of customers who did not renew a subscription compared to those who cancelled one? And, what if your customers have different values to your business, such as those on high and low tariffs?
From this lens, and as you dive into your data deeper, it is clear that you might want to calculate other key business metrics and gain greater insight.
Other Key Business Metrics
Other key business metrics you may want to calculate include:
Revenue Churn Rate
Revenue churn shows you the amount of monthly recurring revenue (MRR) you lost as a percentage over a given time period. The figure shows the impact on your bottom line and is useful when you have customers on different tariffs.
Revenue churn formula: (MRR lost in the period of time / MRR at the start of the period of time) x 100 = revenue churn.
Repeat Purchase Rate
The repeat purchase rate is the number of customers who make a second purchase, shown as a percentage. If you are an e-commerce company that sells products, not subscriptions, this figure provides valuable insights.
Repeat purchase rate formula: (number of return customers / total number of customers) X 100 = repeat purchase rate.
Customer Lifetime Value
The customer lifetime value (CLV or LTV) shows the profit an average customer contributes to a company over their complete lifecycle. The figure may help your company determine if it should invest more heavily in customer retention or customer acquisition. Two popular formulas include:
Customer lifetime value formula 1: (average transaction number in a period of time x average order value x average gross margin x average customer lifespan) / total number of customers.
Customer lifetime value formula 2: (repeat purchase rate x average order value) – customer acquisition cost.
Getting to grips with your customer retention strategy means getting familiar with your business metric formulas. Then, coupled with customer feedback, you will be able to create an approach that aligns your marketing activities and investments. As a result, you will reduce your churn rate, increase your customer retention rate, boost profitability, and secure short and long-term business health and profitability.
“These metrics are critical for identifying how we optimise the customer journey at The Super Marketing Group. Understanding this data enables us to make improved decisions that further enhance our products and so we can continue to deliver a best-in-class customer experience.”
The Super Marketing Group