Last editedJan 20233 min read
As a small business owner, you probably work hard to generate new sales leads – but do you have a customer retention strategy in place? It’s vital to track churn rate and retention rate to understand how well you’re keeping your customers. In this guide, we’ll look at the differences between churn rate vs. retention rate and give a few tips to improve both metrics.
What is churn rate?
A business’s churn rate measures the percentage of customers who stop making purchases. They might choose to purchase future items from a competitor, cancel services, or decide not to renew subscriptions. A low churn rate indicates a business is doing well with customer retention. A high churn rate means it’s failing to hold onto its existing customer base.
Churn rate can be measured over any length of time. To calculate this percentage, you’ll need to determine the period being measured. This could be weekly, monthly, quarterly, or annually. You can then subtract the number of customers at the end of the period from the customers at the start of the period, and divide it by your start-of-period customers. Multiply the result by 100 to calculate churn rate. Written as a formula, it looks like this:
(Starting Customers – Ending Customers) / Starting Customers
For example, imagine you began the month with 300 customers and ended it with 250.
(300 – 250) / 300 = 0.17
Your churn rate would be 17%, meaning 17% of your customers ended their service during that month.
What is a good churn rate?
Average churn rates vary by industry and company size. Markets with lots of competition will naturally lead to higher churn rates as customers weigh their options. It’s always best to aim for the lowest possible churn rate and retain your customers. A churn rate of 5% or less is generally considered optimal for small businesses.
What is retention rate?
We’ve now covered the basics of churn rate, but what is retention rate in comparison? A business’s customer retention rate describes the percentage of customers a business keeps. Like churn rate, it gives you an idea of how well your business is doing when it comes to keeping customers satisfied.
To calculate retention rate, you’ll need to choose the period you’ll be using. Most businesses will calculate a quarterly or annual retention rate. Subtract the number of new customers at the end of the period from the total number of customers at the end. Divide this number by the starting number of customers. Multiply this by 100 to convert it into a percentage.
(Total Ending Customers – New Customers) / Total Starting Customers
For example, imagine your company began the year with 20,000 customers and ended it with 18,000. You also added 3,000 new customers during the year.
(18,000 – 3,000) / 20,000 = 0.75
Your retention rate for the year is 75%.
What is a good retention rate?
Naturally, businesses want to retain as many customers as possible which means you should be striving to get that rate close to 100%. This isn’t realistic for most, but as with churn rate the average retention rate can vary widely by industry and size. Fresh start-ups will have lower retention rates in comparison to larger, established brands. This is because new customers will want to try out their services as well as those from competitors.
Churn rate vs. retention rate
Churn rate and retention rate are two sides of the same coin. While churn rate shows you the number of customers a business loses during a period, retention rate shows how many it keeps. You should aim for as close to 0% as possible with churn rate, and as close to 100% as possible for retention rate. Both reflect customer satisfaction and are useful when formulating new strategies.
How to reduce churn and improve retention
What can you do if your churn rates are high and retention rates low? Here are a few tips to help you improve both metrics.
Offer discount incentives and loyalty rewards to existing customers
Ask customers for regular feedback and listen to reviews
Adjust your products and services according to feedback
Provide a high level of customer service
Use personalized messaging in customer communications
You can view our guide to churn for a more in-depth look at ways to improve churn rate. While the tips above apply to what’s known as voluntary churn, sometimes customers cancel services involuntarily. Involuntary churn takes place when payment details expire or there is some error that takes place during processing.
GoCardless helps reduce involuntary churn by automatically pulling payments from customer bank accounts using ACH debit. Our Success+ feature uses the latest AI technology to automatically retry payment at the most opportune time, successfully recovering up to 70% of failed payments on the next try. It’s a simple way to improve churn and retention rates automatically.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.