HOW TO CALCULATE CUSTOMER RETENTION RATE

How to calculate customer retention rate

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Customer retention is a measure of how loyal your customers are with your brand. Customers tend to stick to brands that create a high end customer experience tailored to the specific needs that they have. Customers, today, have a plethora of choices when it comes to choosing the right product or service for them. Brands need to put in extra effort to gain a set of loyal customers that prefer their offerings over their competitor’s.

High customer retention means that the brand is doing something right and so this brings in a consistent flow of revenue and word of mouth promotions leading to expansion. This is better than acquiring new customers as it becomes a relatively difficult task to gain their trust. Companies are, thus,  pressured with the objective of coming up with new ideas, offers and ensuring a seamless customer experience in order to make sure that customers don’t lose interest in their products. 

With the highly volatile changes in customer needs and preferences, companies need to constantly keep a check on customer retention rates to identify positives and negatives as to how is the brand performing. Although customer retention calculation don’t specify the reasons behind the figures obtained, it helps in gaining a ballpark of customer interest and satisfaction levels with the brand.

Improve Customer Retention

What is customer retention rate?

Customer retention rate is a percentage measure of the customers that a particular company managed to retain as a result of superior customer service and good quality offerings. The answer to this calculation varies from company to company depending on the type and nature of business they are engaged in. This also means that your customer retention can boom during particular seasons when your product has high demand and can even become dull for long time periods. 

Customer retention rates help brands measure the success of their plans and strategies implemented over a time frame. It indicates efficacy in brand planning and how effective new products and service modifications have been in retaining previous customers by gauging their interest.

How to calculate customer retention rates?

Customer retention helps in rigidly defining what percentage of customer stuck with your brand over a given time frame. This time frame varies from one company to another depending upon the regularity with which they measure it. For example: some companies prefer calculating customer retention rates quarterly or half yearly while others look at it as an annual overview of their strategy impact.

Here are the steps needed to calculate customer retention rate:

  • Take the number of customers your company had at the beginning of the time period(E)
  • Subtract the new customers that your brand has acquired during this time frame(N)
  • Divide the resultant number by the total umber of customers at the beginning of the time period(B)
  • Lastly, multiply this fraction by 100 to obtain the final percentage

Customer retention rate:((E-N)/B)*100        

Let’s understand this though an example: 

A fashion brand intends to calculate their customer retention rate after they’ve launched a new clothes line. They use an annual approach of calculating customer retention and gather the following information about their customer numbers:

Customers at the beginning of the year (B)= 10,00,000

Customers at the end of the year (E)= 12,00,000

New customers acquired over the year(N)= 4,00,000

Using the above formula:

Customer retention rate = ((12,00,000-4,00,000)/10,00,000)*100=80%

The brand has a customer retention rate of 80%

Alternative methods to measure customer retention

Cohort analysis

Cohort analysis uses behavioural analytics to measure customer behaviour and engagement over a set period of time. It divides the customers into segments or cohorts to separately evaluate behaviour. 

Using relative time frame, cohort analysis can be used to assess customer lifetime and how a new product or service has performed in terms of bringing them back to the brand. Product quality, good customer experience and variety offered can be some of the reasons for goof retention rates over a time period. This is also useful in understanding the average limit to the time period for which brands appeal to multiple segments. For example: A website analysis of a gaming company may show that customers visited their site on a regular basis for 3 months after the release of a new version to check on updates and gain elaborate knowledge on the changes made in this version as against the previous one.

User Experience

Net promoter scores

This is an easy method of getting to know how your customer feels about you and what kind of impression does your brand have on their mind. This method comprises of asking your customers one simple question:

On a scale of 1-10, how likely are you to recommend the brand to your friends and other connections?

People who respond within the range of 1-6 are known as detractors while others who rank above 6 are known as promoters. Detractors and promoters can eve be interviewed separately to ponder over the reasons behind their choice of ratings. 

Repeat purchase rate

Repeat purchase rate measures the number of customers that come back to engage more than once with a brand. This peculiar number represents a previous positive customer experience which prompted a repeated interaction from the customer.

HOW TO CALCULATE CUSTOMER RETENTION RATE 2

Repeat purchase rate: Quantity of repeat customers/ Total number of customers

Repeat purchase may mean different things for different types of companies. The number of times after which the brand categorizes them as a repeat customer may vary depending upon the nature of the business. It is very important for any company to understand what is the customer pain point that lead them to their repeated approach. This helps in developing a loyal customer base and knowing the brand positives and flaws from their perspective to make the product well suited for them.

Churn rate

Churn is a depiction of the customers that a company has lost. It is a direct opposite of retention rate and shows those customers who left or switched their preferences to other brand either to current poor service or a better alternative offered a competitive entity. Churn rate is simply calculated by dividing the number of customers lost over a period of time by the total number of customers at the beginning of the time period and multiplying it by 100. 

Churn Rate= (Number of customers lost/Original number of customers)*100   

Churn rate shows the percentage of customers lost which has an adverse impact on company revenue. Customers might not be happy with the kind of solutions offered by the brand or simply were no longer in need of the product. In any case, it is imperative from the company’s perspective to understand where did they go wrong in order that they can avoid repeating the same mistakes in the future.

Customer lifetime value

Customer lifetime value is a prediction based quantitative measurement of the amount that a particular customer belonging to a certain segment is expected to spend on your brand offerings. This figure provides you with an estimation of the amount of money that you can expect to generate from a customer segment. This acts as a useful way of deciding your major target customers, building focused customer profiles, prioritizing segments and invest resources based on expected ROI. 

Customer lifetime value : Average value per purchase x Number of orders per year x average length of customer relationship

This calculation can be used to analyse and compare potential customers based on the financial benefit they will bring in. In case of limited resources to invest, such analysis helps in targeting and designing brand messaging to suit the specifics of the more profitable customers.

Customer experience

Some easy tips for improving customer retention

1) Improve customer service : Make sure that your customers are satisfied with the kind of services and engagement they are offered. Survey your customers from time to time to stay up to date about the brand’s image from their standpoint. To know more about the survey options available and deciding the right kind of research for you, visit Voxco

2) Interact with your audience: No customer enjoys a one sided brand relationship. Personify your brand, monitor social media activity, be prompt in replying to queries and gather regular feedback. These actions make your customer feel valuable and improves loyalty.

3)Tailor your offerings: Customers only buy your products when it fits their requirements just right. Figure out your customer needs and wants and modify your products to create the ideal options for your customers. The better you know your audience, the more appealing your products will become for them.

4) Reward loyalty: Offer incentives and offers for customers who’ve been with you for a long time. This is a great way of showing appreciation for your loyal customer base and increasing satisfaction levels.

5) Know your competition: Compare and contrast your brand with those of your major market competitors. Maintaining a good market share is a tug of war played by multiple entities. It’s important for brands to know what their competitors are good at and where they lack to effectively target pain points.

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Fast Insights
Best-in-class ROI

Voxco’s platform helps you gather omnichannel feedback, measure sentiment, uncover insights and act on them.

Join 500 + global clients across 40+ countries