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How To Calculate Customer Retention Rate
Originally Published:
June 29, 2022

How To Calculate Customer Retention Rate

Customer retention rate (CRR) is one of the most vital metrics for any small business that hopes to flourish long-term. This economy revolves around customers, and if you are to scale your revenue the healthy way, you must continue to prioritize your customers.

After all, developing a customer retention strategy is much cheaper than figuring out how to win new ones.

Maximizing your CRR and minimizing your customer churn rate comes down to two primary factors:

1. Improving customer experience.
2. Ensuring your customers continue to see the value in your product or service.

The idea is to keep your customers happy. As the business landscape continues to evolve, this means you will need to look for necessary adjustments to your strategies constantly. Would you like to learn more about how customer retention impacts a company and how you can boost your CRR?

What Is Customer Retention Rate?

While tracking and managing customer retention rates can be complex, the concept is straightforward: your customer retention rate will tell you how many customers your business retains over a specific period.

In other words, it is the percentage of your customers who stay loyal within the given period. So, if you begin 2022 with 28 customers and keep 23 of them throughout the year, your retention rate will be 82%.

Though it is simple enough to figure out how many customers are sticking around, the retention rate involves a little more. For example, you must factor in new customers that you acquire throughout the year so that your data remains accurate.

To work with our previous model: Losing five of your 28 customers but gaining six doesn't put your retention at 104%. Some business owners make the mistake of assuming they can offset churn by simply adding new customers, and doing so can prevent you from recognizing severe problems in the company.

You want your business to grasp customer lifetime value, know how to monitor customer service success, and develop effective marketing strategies. But to do that, you must have a firm understanding of how you are retaining customers.

How Do You Calculate Customer Retention Rate?

You can find your customer retention rate by using a simple formula:

CRR = ((E-N)/S) X 100

S is how many customers you have when the given period starts. Most companies benefit from approaching the calculation annually, as monthly and quarterly approaches may not provide sufficient data to evaluate.

E is how many customers you have at the end of the period, and N represents the number of new customers you acquire throughout the year.

Attrition (losing customers) tends to vary widely across different industries. SaaS companies, for instance, experience an average annual churn of about 6%. At the same time, enterprises that sell higher-priced products often see lower churn rates because the products require a higher level of investment from customers.

When reviewing your company data, keep in mind that there is a big difference between your annual and monthly churn rates. A 4% monthly churn rate can pose severe consequences on your company's success, while a 4% annual churn rate is quite manageable.

It takes a lot of time and money to find potential customers, connect with them, and nurture leads. All the hard work pays off after bringing them through the sales journey, signing the dotted line, and delivering your product or service. Building these relationships means that your business must focus on sales, but you also have to keep customers happy. Customer attrition can cost your business dearly, ultimately leaving your marketing and sales efforts fruitless.

Monitoring your customer retention rate is the best place to start when assessing customer satisfaction. If you're not retaining as many customers as you need, having that information will help you figure out how to keep your customers more engaged, so they stick around.

In the simplest terms, CRR is the customers you are maintaining versus the percentage of those leaving. Keep up with your customer retention rate, and you will have valuable data to strategize your sales and service improvements.

What’s a Good Customer Retention Rate?

Ideally, your business would never have to deal with customer attrition. But we all know that isn't possible, so your team should focus on keeping your retention rate as high as possible. As discussed, low retention is a red flag because it indicates that your customers are not staying satisfied. With that in mind, constantly push for your CRR to be as close to 100% as you can muster.

The first step towards improving your customer retention rate is to begin tracking it, which provides you with an important metric to measure the efficacy of your retention strategy.

Otherwise, you will essentially be relying on guesswork and intuition for your perception of customer loyalty. You can use your CRR as a foundation for your goals and benchmarks and determine whether to replicate your current tactics or develop new ones.

Maintaining a healthy customer retention rate can do wonders for your company because it means you keep your customers on board, which translates to higher profitability. A 5% increase in your CRR can increase profit by 25% to 95%.

How Can I Improve My Customer Retention Rate?

Once you determine that you need to boost your customer retention, it's time to get to work—plan to do plenty of research and evaluation to identify the problems impacting your retention efforts. While you want to be proactive, know that this process will also require patience and perseverance.

Try Cross-Selling and Upselling

One of the most practical methods of boosting your CRR is to cross-sell and upsell your products or services. Cross-selling refers to selling supplementary or related products or services to meet customers' needs.

For example, if you sell a desktop computer, you may offer the customer a discount on additional computer accessories (e.g., mouse, mousepad, cords, etc.).

On the other hand, upselling is the practice of selling a more advanced or more expensive product or service than the customer originally intended to purchase.

Say, for instance, you build websites. If a customer came to you for a basic plan, you could convince them to go up to the premium plan, which would be upselling.

Cross-selling and upselling can work in tandem, but you can also use distinct practices with existing customers.

Offer Subscription Programs

Another way to increase your customer retention rate is to provide subscription programs. Typically, this means that a customer pays your company a fee each month in exchange for a recurring product shipment or service.

As long as you continue to prove the value of your offering, running subscriptions can keep your customers around for the long haul. This model is especially beneficial for eCommerce companies.

Have Stellar Customer Service

No matter what type of business you run, the bulk of your success will revolve around the customer experience. And the customer experience centers on customer service.

Make sure your customers can easily reach you if they have an issue with your product or service. Offer various communication channels, such as email, phone, and live chat.

Moreover, ensure that your team responds to customers as quickly as possible. Gone are the days when consumers were satisfied when they got a response within three days.

Now, people want answers within hours, if not immediately.

Is there a learning curve attached to your product or service? If so, think of ways to make it easier for new customers to get the most out of your product or service.

First impressions matter, and you don't want your customers to have negative experiences trying to learn how to use your offering. Suppose your customers can learn how to use your product or service relatively quickly, and they have the resources necessary to navigate issues. In that case, they are more likely to keep coming back.

Update Your Website and Social Media

Building your online presence is critical in this day and age. If you are going to grow your brand, you must keep your website and social media channels up to date. Ensure all your pages provide valuable information about your industry and engage customers on various levels.

Many customers will first connect with your company online, whether purchasing from you or learning how to fix a problem. Keep your website and social media pages clean, attractive, and easy to access.

Remember to respond to customers quickly via your site’s chat features and social media page direct messaging platforms. Some companies benefit from hiring a professional social media manager.

Conclusion

Maintaining your existing customer base is much less expensive than employing resources to acquire new customers. That's why your company should be prioritizing the monitoring and managing of your customer retention metrics.

Keep learning everything you can about CRR, and consider the tips above for improving your rate while minimizing your customer churn rate. Before long, you will notice your business keeping more of your customers satisfied, and your sales will benefit.