Productivity

How to Calculate Customer Retention Rate (and Improve Yours)

Customer Retention Rate
Dan Virgillito

Top management thinker Peter Drucker once said: “what gets measured gets managed.”

Along with measuring your revenue and profits, success also relies on your company’s ability to retain customers. You may be able to attract eyeballs and turn visitors onto buyers, but are you able to keep people around for months, or even years? Or do they switch to a competitor after one transaction?

You won’t know the answer if you don’t have a method for calculating your customer retention rate.

For those unfamiliar with the term, the customer retention rate (CRR) refers to the percentage of a company’s existing customers that stay put or loyal during a measured period.

In other words, it shows how well your company is performing when it comes to retaining/keeping its customers.

Why measure customer retention?

For most businesses, it’s easy to focus on customer acquisition and set aggressive goals. But if you keep losing customers as fast as you’re acquiring them, then your business isn’t growing. It’s like a hamster on a hamster wheel.

Growth isn’t just about tracking how good of a job your sales and marketing departments are doing. When you measure customer retention, you know when you’ll need to switch gears or ramp up your efforts to keep current customers around to meet your growth objectives.

Here are a few more reasons why you should measure customer retention:

  • Predict revenue: Your existing customers (aka the lifeblood of your business) are 50% more likely to buy a new product. Also, they typically spend 67% more on average than a newly acquired customer. As a result, measuring customer retention is a good predictor of whether your business will enjoy a higher or lower revenue in the upcoming quarter.
  • Analyze customer service: Tracking the % of customers you retain monthly, annually, or for other durations such as every two weeks (or even weekly if you want a quick overview) is one of the most useful ways to determine if your customer service department is thriving or performing subpar. A low retention rate could indicate a customer service situation that's making your customers unhappy, giving you time to act or re-strategize before disaster hits in the form of reputation damage or profit loss.
  • Re-strategize loyalty programs: Your loyalty programs will have a significant impact on your customer retention rate. If your CRR takes a dip, it could be that your loyalty programs aren’t working. You might want to make appropriate changes to your tier-based/reward partnership/gift card loyalty program to encourage loyalty and repeat purchases. Besides, measuring CRR will indicate how long you’ll be able to retain your customers if you continue with your existing loyalty programs.

So... it makes sense to take the time now to measure your CRR.

How to calculate your customer retention rate:

To calculate your CRR, specify the period in for which you measure customer retention. Is it a month? A year? A quarter?

Once you determine the period, add up the number of retained customers at the beginning of that period, the number of customers retained at the end of that period, and the number of new customers your company gained during that period. Then, use the formula below to find your customer retention rate:

x existing customers at the end of the period ( – ) x newly acquired customers during that period ( / ) x existing customers at the beginning of the period ( * ) 100

For example, if you started the month with 50 customers, gained 30 new customers during that month but lost 10 customers by the month’s end, you’d finish the month with 70 customers. Your customer retention rate would be:

70 - 30 / 50 * 100 = 80%

Tip: It's a best practice to express CRR as a percentage.

What’s a good customer retention rate?

The ideal % is 100; this would imply that you managed to retain all your existing customers. Obviously, this isn’t a figure you should expect to achieve.

To understand whether your CRR is good or bad, you need to set customer retention benchmarks.

There are two ways to go about benchmarking: against yourself, and against other companies.

Measuring against your own CRR month after month and year after year reveals trends. For example, if CRR is trending up, you should try to determine the loyalty campaigns, cohort behaviors, and customer service that may have led to this trend (and capitalize on those implementations).

To compare CRR against other businesses, you need competitors’ CRR figures which generally are not available publicly. The next-best resources are industry benchmark studies like Windsor Circle’s retention marketing report that anonymize data from several unique companies to reveal CRR trends.

Three ways to improve your customer retention:

1. Rise above expectations as a standard, not an exception.

The first step toward improving your customer retention rate is to deliver more than your customers expect, which means going beyond the call of duty to please existing customers.

This can be as easy as a feedback request after a satisfactory experience, or as complex as developing a series of educational webinars for one of your offerings. Either action on your part can take your customers’ experience to the next level.

Depending on the size of your business and your industry, the tactic you use will vary, but here is a basic rule of thumb: what else can you do to let people know that you value them as a customer beyond the purchase?

There’s plenty you can do with a whole world of choice at your disposal: try something different.

For example, Nest, the company that came up with the self-learning digital thermostat, went out of its way to delight one of its customers. Scott Barbour bought one of the company’s thermostats and faced an issue: the vents were only blowing cold air even though he adjusted the settings to give off heat.

He called Nest’s customer support number on a Sunday at 9 pm and incredibly was able to talk with a real service rep. The specialist was knowledgeable and friendly, but the company went a step further to improve Scott’s experience.

While diagnosing Scott’s problem, the support discovered that his house had abnormal wiring that needed a technician to organize. This is where Scott’s experience could have taken a nosedive, but instead, Nest reimbursed him for the cost of hiring a skilled technician and also apologized for the trouble.

scott barbour nest story

The takeaway? If you can afford it, go above and beyond to exceed people’s expectations, whether they get in touch with you via email, phone, or by walking into your brick-and-mortar store.

2. Set up a customer loyalty program.

Loyalty programs are an effective way to increase CRR. People understand that by signing up for a loyalty program, they can get more value every time they shop. In fact, 44% of consumers join loyalty programs in search of automatic discounts, while 55% participate for discounts of any nature.

The numbers make it clear that customer satisfaction hinges on the value a company can offer through its loyalty program.

While there are multiple ways to start a loyalty program, offering reward points for buying a product or signing up for a service can provide an immediate incentive that helps highlight your program’s value.

Allow customers to redeem these points for an actual reward, which could be anything from a free night at a hotel to 50% off on their next purchase. Reward points also accelerate a shopper’s path to the reward, motivating them to take further action to re-cherish that point-earning experience.

Dunkin’ Donut’s DD Perks program is an excellent example of this tactic at work. Members get five points for every dollar spent on eligible purchases at Dunkin’ Donut’s locations when they pay using an enrolled DD card, either through the Dunkin’ Mobile app or a credit card.

dunkin donuts rewards app

Members also get a one-off bonus of 200 points when they enroll. As for the actual reward, Dunkin’ Donuts offers a single-serve beverage of any size for every 200 DD Perks Point earned. When the value is this clear, customers will quickly enroll and start earning right away. You can't buy love, but this is pretty close.

3. Collect customer information.

Customer experience is slated to overtake product selection and price as a reason to pick one business over another by 2020. Personalizing the customer experience, therefore, is a viable way to increase customer retention through more relevant experiences with the company. One way to do this is by collecting customer information.

Gather details of the actions your visitors take such as the content they read, the products they add in the checkout cart, and the things they share, and then use that information to deliver a personalized experience. For instance, you can use “customer accounts” to aid retention by giving visitors instant access to previously bought items, suggested upgrades, and pre-filled billing information. However, customer accounts can sometimes be viewed as too much of a commitment.

So how do you set up customer accounts and encourage buyers to opt in without disrupting their experience? The trick is to wait for the visitor to make the initial purchase and then provide the option to create an account. After that first order, you’ve already earned some trust and the buyer has proven they're interested in developing a relationship with your brand.

If you’re using a content management system like Squarespace or Shopify, you might be able to send direct invitations that encourage your customers to make an account after they’ve bought something from your website. This approach will help you stand out from the deluge of forced one-size-fits-all customer account creation requests.

customer account activation email example

The more you make it convenient for customers to place orders (as long as your customer account set up request is timely), the more business you’re going to get from your loyal customers.

Your existing customers are your best asset.

They already know your brand, they appreciate your products, and they’re enthusiastic about your service. Spending your time and energy on improving your customer retention rate and consequently, the experience of this group can be a powerful way to both ensure a sustainable future and avoid a surprise downfall—as long as you act when it matters the most. After all, metrics like customer retention rate as only as powerful as your response to them.