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How to Calculate Customer Retention Value

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Last editedDec 20222 min read

How well does your company keep its customers over time?Customer retention gives you a clear metric of how well you’re doing when it comes to keeping existing customers satisfied. While many small businesses place their focus on acquiring new customers, high value customer retention strategies can really pay off. In this guide, we’ll look at the customer retention value and how it’s calculated. You can use these figures to fine-tune the customer experience and generate more profit over time.

What is customer retention rate?

Customer retention rate is used to measure the number of customers a business retains over a predefined period. With this calculation, you’ll see a quick percentage of customers that stick with the business over time. Used together with metrics like customer churn and customer lifetime value, measure how effective your customer service and marketing teams are.

What is the customer retention value to your business?

It’s a popular saying in business: acquiring new customers costs five times as much as retaining existing ones. While the exact figure varies widely by industry and business size, generally customer retention costs less than customer acquisition. Attracting a new customer not only requires grabbing their attention, but also manoeuvring through all the various stages of the sales and marketing funnel. By contrast, an existing customer has already been guided to the end stage and merely needs to be convinced to stay there. They’re more likely to become repeat customers, generating higher profits over time.

Beyond conversion rates, loyal customers offer additional value to a business. They provide referrals, free word-of-mouth marketing, and positive reviews. They’re more willing to promote your brand online and are receptive to trying new products. The customer retention value is important on numerous levels.

Why is it so valuable to retain customers?

According to research from Invespcro, increasing your business’s customer retention rate can increase profit by anywhere between 25% and 95%. This is a huge return on investment in comparison to customer acquisition. Repeat buyers spend a third more than new customers, according to this same source. Research collected by Annexcloud shows that it costs up to 16 times more to bring a new customer up to the same level of profitability as an existing one. As you can see, it would be a mistake to underestimate the value of customer retention.

How to calculate the cost of retaining a customer

To calculate customer retention rate, you’ll need to first decide the period that you’ll be measuring. This might be the previous financial quarter, a month, or a fiscal year. In addition to the timeframe, you’ll also need to gather:

Number of customers at the start of the period (S)
Number of customers at the end of the period (E)
Number of new customers acquired during the period (N)

To calculate customer retention rate, you can then use this formula:

Retention Rate = E – N/S x 100

In terms of the cost of retaining a customer, there’s no singular formula to use. However, one way is to look at the total cost of marketing and customer service outreach, dividing this by the number of retained customers during the period.

How to retain customers more effectively

If most of your budget is currently going to customer acquisition, it’s well worth diverting some funds to retention instead. Technology plays a strong role in customer retention modelling, using data to predict future buyer behaviour. You can also ask for feedback both related to your products and services as well as the customer experience. With a combination of customer feedback and data analysis, it’s possible to create a more personalised shopping experience.

Don’t forget the importance of a seamless checkout to the overall buyer experience. Improve retention rates by catering to payment preferences. GoCardless helps improve customer retention rates at the final step. We offer a convenient Direct Debit solution that takes payment directly from customer bank accounts, eliminating any uncertainty or awkward conversations surrounding invoicing. Our Success+ tool reduces involuntary churn by automatically retrying failed payments at the most optimal time, recovering up to 70% of payments the second time around.

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.