To Get a Pulse on Your Business, Start With Customer Retention Rate

If you’re a newer customer service leader looking for the best way to monitor churn and maintain your customer base, you’ll want to add customer retention rate (CRR) to your list of key performance indicators. CRR is the percentage of customers who stay customers over a given period, giving you a clearer picture of how your business stacks up.

Customer retention rate is fairly straightforward. A CRR of 75%, for instance, means you kept three-fourths of your customer base for the period you calculated for. If your CRR increased, that’s great news! But if you don’t shift your focus to the 25% of customers you lost—and why they left—then knowing your CRR isn’t going to do much for your retention efforts.

We’ll discuss how to work out customer retention rate (with a bonus downloadable calculator) as well as other metrics to gauge your business’s health. Along the way, we’ll add findings from a GetApp survey[*] of 306 retailers as well as an interview with Ruth Wright [1] from run specialty retailer Fleet Feet so you can feel confident dialing in your next customer retention strategy.

Your first step in calculating customer retention rate is to decide what time frame you’d like to calculate for. Fifty percent of business leaders in our survey said they measure their customer retention rate on either a monthly or quarterly basis.

How frequently you measure your retention rate is up to you. Other than not measuring it at all, there’s no wrong answer here. If you have a customer management tool, you may already receive a monthly report that includes your CRR. See below for an example of this feature.

Customer retention dashboard from membership management platform Mindbody [2]

A good rule of thumb is to calculate your customer retention rate ahead of leadership or all-company meetings so it can be added to the agenda along with any other KPIs you typically discuss. If you’re trying to monitor the effects of a change such as a new marketing campaign or customer service strategy, you may want to measure your retention rate more frequently.

From here, you can proceed in calculating your customer retention rate. The customer retention rate formula involves:

1. Taking the number of customers you have at the end of a certain time frame

2. Subtracting the number of new customers acquired over the course of that time frame

3. Dividing it by the number of customers you had at the start of that time frame

4. Then, multiplying that number by 100

Our free downloadable customer retention rate calculator can do this for you, but to provide an example, let’s say your business had 100 customers at the beginning of Q2 this year, and 60 customers at the end of Q2. You acquired 12 new customers. Calculations for your CRR will look something like this:

Customer retention rate formula

What this also reveals is a customer churn rate of 52% for Q2. This is important—we’ll come back to it later. Still, a 48% CRR is about on par for retail, as over a third (37%) of respondents in our survey clocked theirs at 50% or lower. Travel and hospitality hover around 55%, while media and professional services see an average rate of 84%, according to Forbes [3].

While you want your customer retention rate to be as close to 100% as possible, it’s best to use your own performance as a benchmark, as well as your industry average. That said, don’t get discouraged if your retention rate is on the low end for your industry. You might find that you exceed your industry average in other metrics, such as net promoter score or redemption rate.

While customer retention rate is important to calculate, you’ll want to measure other metrics as well to get a more complete and accurate picture of your business’s health. Ruth Wright, Senior Manager of CRM at run specialty retailer Fleet Feet, said their CRR is lower than the retail industry average at 50%; however, their net promoter score exceeds the industry average at 94.

Ruth Wright, Senior Manager, CRM, Fleet Feet [1]

“Both [CRR and NPS] are measured annually,” Wright explains. “The majority of our products are not exclusive to Fleet Feet, so we continually focus on providing our customers with expert advice and community, offering a transformational experience versus a transactional one.”

Understanding your customers’ experience with your brand is a big part of customer retention, but it can’t be conveyed by a single metric. Together, the following metrics can provide a more complete picture of customer success, as well as where you should focus your efforts to improve retention.

Customer churn rate

Customer churn rate tells you how many customers your business lost within a given time frame. The easiest way to calculate it is to find the inverse of your customer retention rate. You can also take the number of customers lost within a given time frame, divide it by the number of customers at the start of that time frame, and multiply it by 100.

If the ideal customer retention rate is 100%, then the ideal customer churn rate is 0%. This number will vary by industry, as it does with customer retention rate. You can measure it in tandem with customer retention rate, since it’s easy to calculate both metrics at once.

Customer lifetime value (CLV)

Customer lifetime value is the average revenue brought in by a customer relationship over a lifetime. A customer who makes multiple purchases from your business over their customer lifespan, or the total number of years that they purchase from you, will have a higher CLV than a one-time customer.

You can calculate CLV by multiplying customer value by average customer lifespan. This will give you an estimate of how much revenue you can expect from your average customer over the course of their relationship with your business.

Net promoter score (NPS)

NPS helps measure customer satisfaction through loyalty parameters. It’s calculated based on responses to the question, “On a scale of 1 to 10, how likely are you to recommend our product or service to a friend?”

NPS survey from customer feedback platform Survicate

Based on responses, you can divide your customers into three groups: promoters, passives, and detractors. NPS is the difference between the percentage of your promoters and detractors.

Redemption rate

Redemption rate refers to the number of points, coupons, or promotional codes redeemed over a certain time frame. It is typically measured to gauge the performance of a rewards program. You calculate it by dividing the number of offers redeemed by the number of offers distributed.

Repeat purchase ratio

Your repeat purchase ratio (also known as repeat purchase rate, loyal customer rate, or repeat customer rate) calculates the percentage of customers who came back to buy from you again within a certain time frame (usually a year) after their first purchase. This helps you understand a few different things:

• The success of your marketing and retention efforts

• The rate at which customers consume your product, or need your service again

• Whether your product or service is a good fit for your target customer

• How much customers like and value your product or service

Calculate your repeat purchase ratio by dividing the number of customers who have purchased from you more than once by the total number of customers over the same time frame.

As we mentioned earlier, simply calculating and knowing your customer retention rate or any of the above metrics will not help your business if you don’t shift your attention to retention efforts.

For example, even a customer retention rate of 75% implies a customer churn rate of 25%, meaning a quarter of your customers showed themselves out for one reason or another. Even if 75% is a win in your book, it’s important to look at exit surveys (if that’s something you offer) or reasons provided by customers for cancellation of a service or subscription.

If customers indicate that, for example, they had trouble using your product or navigating your website, you can follow up for details and use that information to revisit your customer onboarding process, or make improvements to your website with user experience in mind.

Expand your customer retention toolkit with GetApp resources

Now that you know how to calculate your customer retention rate, you have a better idea of how successful your efforts are at keeping customers happy.

But don’t sit back when you’re satisfied with your customer retention rate. Continue to seek ways to improve customer retention, such as net promoter score surveys, improving your customer loyalty program or referral program, and revisiting your customer service strategy.