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Customer retention rate: Definition, formula and how to calculate it

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What is the customer retention rate?

Customer retention rate measures the company’s customers that stayed with the company. This measurement is done within a particular time frame depending on the organization and how authorities want the time span to be. Customer retention rate tells you how many of your customers (existing ones) did not leave the company and kept being loyal to it in a given time period. 

Example: if a company at some point of time had 100 customers, and now at the time of measuring customer retention rate, there are only 70 active customers. This means that the company’s customer retention rate is 70%.

One thing to be careful about while measuring retention rate is the new customers. Acquiring new customers has a higher chance of polluting your data and throwing off the business corrections needed for your organization. The reason being, if you lost 30 customers but acquired 40, that does not mean you have 110% customer retention rate. Those 40 customers have just landed on your business, and you cannot call them the “loyal customers” yet.

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How to calculate customer retention rate?

Formula for customer retention rate:

[(E-N)/S] x 100

Where, 

S: The number of existing customers at the start of the time period.

E: The number of total customers at the end of the time period.

N: The number of new customers added within the time period

Step 1: Start with the customers you have at the end of the time period. 

This is denoted by E. now, various organizations can have their own time period, there is no such standard time every firm should follow. Some may carry out retention rate measurement quarterly, 6-months or even annually. If you are measuring retention rate annually, you will do the calculation on December 31.

As an exception, company’s with customers flowing in and out every day might take a look at these measurements on a daily basis. 

Step 2: Subtract the new customers that came in within the time period. 

This is denoted by N and to get an amount of active customers with no new customers interrupting your data, you need to subtract the new customers gained in that time from the amount of customers you had on December 31. 

Step 3: Divide the result by the number of customers you had at the start of the time period.

In this case, it is denoted by S and the start of the time period would refer to the customers you had on January 1 of the previous year. 

Step 4: Multiply by 100

This is to convert the result into percentage.

Example of customer retention rate

Let’s say a company had 100 customers at the start of the year (S).

At the end of the period, it had 150 customers (E).

Added 70 customers (N). 

The calculation would be: [(150-70)/100] x 100

Meaning, you have an 80% customer retention rate.

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What are customer retention key metrics?

  • Revenue churn 

Given by the formula: (MRR lost within the time period / MRR at the beginning of the time period) x 100

Customer churn rate measures your customers whereas revenue churn rate measures their effect on your revenue. Revenue churn rates help you identify whether the lost customers are really a loss to your business.

There might be a case that you have lost customers that were not adding to your value, even worse, downgrading it. In such cases a low customer retention rate does not sound so bad. 

  • Net Promoter Score® 

NPS® tells you how loyal your customers are based on one question. This question is asking them how likely they are to recommend your business to their family and friend circle.

Customers with low response are detractors, medium response are passives and those with high scores are promoters. Your goal is to convert detractors and passives to promoters. The average result of this survey is said to be the NOS score of the company. 

  • Repeat purchase rate

Denoted by the formula: Number of return customers / Total number of customers

As the name suggests, repeat purchase rates can tell you how many of your new customers decided to come back to your brand for a repeated purchase. 

Also working along with the loyal customer rate, which tells how many of your customers keep buying from you rather than defecting to the competitors. 

  • Customer lifetime value

Calculated by a formula: (Average order value x Repeat purchase rate) – Customer acquisition cost

Customer lifetime value refers to how much profit is contributed to your business by the average customer in their lifetime. Doing so will help you take the next step which could be retaining the customers, acquiring new ones or investing in some other marketing strategies. 

Net Promoter®, NPS®, NPS Prism®, and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld. Net Promoter Score℠ and Net Promoter System℠ are service marks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld.

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