How to Calculate Customer Retention Rate
With 20% of customers producing 80% of your sales, it is undeniable that the customer retention rate is an important metric. In this blog post, not only will we show you how to calculate your customer retention rate, but we will also give you some tips on how you can improve yours and increase your customer loyalty and overall growth.
7 min read
Apr 27, 2021
Many businesses invest time, money, and effort into trying to attract new customers. While it is important to expand and gain new customers, in reality, customer acquisition campaigns take a lot of time and money. That is because the process of attracting, qualifying, and converting new customers into paying customers requires a significant amount of resources. As it costs more to acquire new customers than it does to keep them, businesses that thrive are those who have mastered customer retention.
A long-lasting business is built on customer loyalty; not only are loyal customers more likely to repurchase, but they are also likely to represent your brand and recommend you to family, friends, and colleagues. Customer retention rate (CRR) is an important metric to keep track of as it helps you measure customer satisfaction, enabling you to adapt your strategies to minimize churn and retain the customers you invested time, money, and effort to acquire. Along with helping you identify strategies to reduce churn, CRR can also provide a realistic overview of who your potential future clients may be.
For a company to slow churn, they need to keep their eye on their CRR; not only will it help you to hold onto your existing customer base, but it gives insight into what is working and what needs improvement.
What is Customer Retention Rate
Customer retention rate measures the number of return customers a business has over a given period of time. The inverse of the churn metric, retention rate, demonstrates the percentage of customers that stay loyal to the company.
Customer retention rate is a key indicator of the health of your business as it helps you to understand if your processes are keeping your clients happy and engaged. While customer churn is inevitable, measuring your retention rate highlights any issues you have with your business model, processes, and strategy. If you know that your customers are satisfied, you can optimize strategies for future customers, whereas if you find they are not coming back, you can reevaluate and make the changes necessary to improve customer satisfaction and extend lifetime value.
Along with being a great indicator if your clients are satisfied, CRR is a critical metric for business as it feeds into other important metrics such as customer lifetime value and helps you better understand the efficiency of your marketing strategy, customer service program, and client retention strategy.
How To Calculate Customer Retention Rate
In order to calculate the customer retention rate, you need to first identify the period of time you want to measure. Companies evaluate CRR weekly, monthly, quarterly, or annually; the time frame you choose will depend on your needs and goals.
Once you have decided upon the length of time you will measure, you need to collect three pieces of information:
- Number of existing customers at the beginning of the period (S)
- Number of total customers at the end of the period (E)
- Number of new customers acquired during the entire period (N)
Now using these numbers, you can calculate your CRR
Customer Retention Rate Formula
CRR = ((E-N)/S) X 100
Step 1: Subtract the number of customers of new customers in that period (N) from the number of customers at the end of the period (E)
Step 2: Divide the result by the numbers at the beginning of the period (S)
Step 3: Multiply the total by 100
Customer Retention Rate Example:
Let’s measure CRR over a quarterly period. So at the beginning of the quarter (S), you have 150 customers, during that period you gained 30 customers, but you also lost 5. This means your total gained customers (N) would be 25, making the total customers at the end of the period (E) 170.
CRR= ((200-50)/180) X 100
This would mean that your customer retention rate for that quarter was 83.3 percent.
Customer Retention Strategies
Loyal customers are a big asset; they are more likely to recommend you to friends, family, and co-workers, playing a pivotal role in building a company’s reputation. As a good reputation can open up a world of new business opportunities, having a strategy that increases client retention and, in turn, loyalty will significantly impact the company’s bottom line.
Here are four strategies to help you improve customer engagement, and turn them into loyal, repeat customers.
Provide Exceptional Customer Service
Poor customer service is one of the most common reasons for churn. One way to improve customer satisfaction is to make sure that you have effective communication channels for your customers to contact you should they have a question or need some assistance. You can also achieve exceptional results by setting and measuring KPIs; KPIs set incentives for your employees to go that extra mile. Along with incentivizing your employees, KPIs are a quick indication of where your customer engagement may be slipping, enabling you to catch it early and make any changes necessary.
Set Realistic Expectations
While you want to capture your customers’ attention, over-promising and setting unrealistic expectations always ends badly. Customers often will recall the negatives over the positives; even if you only underperform once, they are more likely to tell a friend. Your customers know what they are getting, and by setting realistic expectations, you are able to create trust, and in turn, loyalty as they know if they come back to you, they will get a reliable service. Setting realistic expectations is a great example of customer retention tactics, as it puts you in a position where you can overperform and impress them.
Introduce A Customer Loyalty Program
Loyalty programs are a great way to show your appreciation and improve client retention as they build on existing client relationships and provide incentives for them to keep coming back. It could be through discounts, gifts, freebies, or a buy one get one free program. Another way to reward customer loyalty is through a points system, where they get a chance to win a prize for sharing social media posts or referring a friend.
Personalize Your Customer Interactions
A personalized journey makes your customers feel valued and understood. It can be as simple as making their lives easier on the site with recommended shipping details, sending personalized emails on their birthday, to recommending blog suggestions based on their interests; when it comes to customer service, a personal touch really does go a long way.
You can also build more personal relationships through social media, showing your personality and interacting with your customers. Engagement builds loyalty, and having a presence on social media builds trust in your brand; they know they can quickly reach out to you, find any updates about your business and hear about any deals.
Ask Your Customers What They Want
Many businesses lose engagement when they don’t listen to their customers. It is important to tailor your strategy around your customers, and the best way to find out what will keep your customers engaged is to ask. By conducting feedback surveys, you can find out who they are, their challenges, and what they are looking for, enabling you to cater to your strategy to appeal to them. This information helps create content that resonates with your audience, resulting in more engagement and a high customer retention rate.
One of the secrets for growth is to keep your customers happy. While customer acquisition is an important piece of the puzzle, focusing on retaining your current customer base is a more cost-effective solution as it saves you having to acquire, educate and convert them. Customer retention rate is crucial for any company; it gives you insight into what is working and what isn’t, enabling you to adapt your processes and strategy to keep your customers happy and coming back time and time again.