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How to Measure Customer Retention

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Last editedAug 20212 min read

You want to grow your business. To do so you need to keep acquiring new customers, right? Well, sure – but that’s only half the battle. In your zeal to convert new customers and gain new leads, don’t fall into the trap of neglecting the customers you already have. Sacrificing customer retention at the altar of acquisition could hobble your growth rather than fuelling it. However, if you try to retain more customers, they can help you build a solid foundation for growth. 

But how do you know how many of your customers are staying with you? Here we’ll look at some metrics that will help you to measure customer retention. Once you know your customer retention rate, you can make active efforts to improve it. 

What is a customer retention rate?

Your customer retention rate is the number of customers that your business retains over a period of time. It is expressed as a percentage of existing customers who return to you or remain with you within that time frame. If your business has 100 customers in a month, and 20 take their business elsewhere, you have an 80% retention rate.

Exact definitions of a good customer retention rate vary by industry. Obviously, the higher the better. Retail rates are typically around 60% while insurance retention rates are often over 80%. If your customer retention rate is less than 15%, you need to be doing more to address the matter of retention.

Calculating your customer retention rate

First , you need to determine how regularly you want to measure. Retailers, for instance, may find it pertinent to measure customer retention on a monthly or quarterly basis. Businesses that use subscription models (like SaaS providers), however, may want to measure retention daily.

There’s a formula that you can use to calculate your retention rate. To use it you need three sets of data:

  • The number of existing customers at the beginning of the time period (B)

  • The number of customers remaining at the end of the time period (E)

  • The number of new customers added within the time period (N)

To calculate your retention rate the formula is:

[E-N / S] x 100= Customer Retention Rate (CRR)

Key customer retention metrics

Now you know how to quantify your customer retention rate. But your CRR is by no means the only metric that can paint a picture of your customer retention. These other metrics can help you to better ascertain customer loyalty.

  • Churn rate. This is the opposite of your retention rate. Churn refers to customers you have lost. You can calculate churn rate for customers, revenue or both.

  • Existing customer revenue growth rate. This measures how much existing customers spend with you. If it stagnates or drops, this may be a precursor to churn. 

  • Repeat purchase ratio. This measures how motivated customers are to return to you to buy more products.

  • Product return rate. This is how often customers return tangible goods to you.

  • Customer lifetime value. How much a customer contributes to your profits throughout their relationship with you.

  • Net promoter score. This measures how many of your customers refer others to your business.

Customer retention strategies that work

Now that we’ve looked at ways to gauge customer retention, we need to look at what actions you can take if your retention rates are found to be wanting. While much of this is simply a matter of maintaining best practice, effective retention strategies include:

  • Removing barriers to sales / onboarding (e.g. embracing alternative payment methods).

  • Being proactive in communications with customers. You can use CRM automation to your advantage here.

  • Actively solicit customer feedback on platforms like Trustpilot.

  • Implement a customer rewards programme. 

  • Incentivise customer referrals.

We can help

If you’re interested in discovering more about customer retention rates, reducing churn, or any aspect of managing your business and its finances, then get in touch our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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