Customer retention rate is one of the most critical metrics for measuring your company’s success and growth potential. We’ll explain how to calculate it, what other metrics to evaluate alongside it, and how to use those insights to maximize the retention rate of your brand. However, before you evaluate your customer retention rate, it’s important to clarify how your company defines customer retention in its particular line of business.
According to crazyegg.com, the company co-founded by digital marketing guru Neil Patel, “The customer retention definition in marketing is the process of engaging existing customers to continue buying products or services from your business.”
But, your criteria for retaining those customers will vary based on your company’s industry or vertical. A car dealership will need to measure their customer retention long-term, as most people don’t buy or lease vehicles more often than every 3-4 years. At the same time, if a quick serve restaurant were to only measure their retention yearly, they would miss a number of important trends and opportunities. Some SaaS companies even measure their customer retention daily to catch any and all fluctuations.
Your customer retention rate measures what percentage of your existing customers are continuing to do business with you over a given period of time. It is one of the most important metrics to determine customer loyalty and should be a key performance indicator (KPI) of whether your loyalty marketing strategies are working. Your customer retention rate is the opposite of your churn rate, which measures how many of your customers left for another competitor—or stopped purchasing all together—over the same time period.
1. Customer Retention Rate is the most straightforward metric for understanding your customer loyalty and how much repeat business you are generating. There are several other metrics that can be tracked along with it to give you a deeper understanding of how your brand or business is performing.
2. Churn Rate - As mentioned above, churn rate measures what percentage of your customers have stopped doing business with you over a given period of time. Some churn is normal for any company, but if your churn rate is above 5%-7%, it’s time to examine what’s impacting your customer satisfaction.
3. Existing Customer Revenue Growth Rate - In essence, this metric looks at how much revenue you are generating from your customer success, retention and loyalty efforts. If your loyalty marketing team is able to upsell, cross sell, increase purchase frequency and so on, this rate will continue to climb. If not, your numbers will flatten or fall.
4. Repeat Purchase Ratio - Also known as Loyal Customer Rate, RPR measures what percentage of your customers return to make purchases in a given period of time. This metric can be a strong indicator of customer loyalty, but customers’ individual behaviors can also skew it. Take the example of a clothing retailer, where some customers may only make one or two large purchases a year based on seasons or sales, while other customers may make smaller purchases every month in an effort to stay on trend. To quote Hubspot, “If your customer success team is really on its A-game, they'll also benchmark purchasing frequency for each individual customer in addition to the overall repeat purchase rate.”
5. Daily, Weekly, and Monthly Active Users (DAU, WAU, MAU) - Disengagement is usually a key predictor of churn, so you want to make sure your users stay engaged with your website and mobile app. This is where behavioral analytics comes into play. Start by setting activity benchmarks for your users, and monitor whether they meet them. If they don’t, begin immediate re-engagement efforts.
Most of the metrics in the section above have simple formulas for customer retention rate calculation. One of them is much more contested, with different formulas favored by different marketers and companies.
This formula is reflected as a percentage, and is calculated for a specific time period, such as by week, month or year.
Churn is a hotly debated topic in marketing and data science, so it actually has several formulas, the simplest of which is the one shown above. But as many experts point out, this formula lets your growth, or new customer acquisitions, skew your churn rate. So several organizations have developed alternatives—for example, Hubspot recommends eliminating newly acquired customers before you calculate to avoid this issue: Churn Rate = (NCES - NCEE) / NCES
To browse several other churn formulas, including a predictive churn formula from Shopify, check out this post.
This metric is typically measured monthly. To calculate it, you’ll need to find out your monthly recurring revenue amount (MRR), then plug it into the formula. Once again, because you’re measuring customer retention, you should calculate MRR numbers from existing customers only, and exclude any revenue generated by new customers.
This simple formula can be calculated by week, month, year or any other time period you choose.
Any quick Google search of “improve customer retention rate” will yield dozens of listicles with anywhere from 5-15 suggestions for increasing your retention. But the reality is, focusing on all those tasks at once will spread your team so thin that you may accomplish very little. Instead, try to concentrate your efforts where they are likely to make the most impact.
If your brand is looking to increase its customer retention rates, Neil Patel recommends focusing on the following 3 areas:
Now that you’ve calculated your retention and churn rates, you understand how many of your customers are coming back vs. leaving—but do you understand why? If not, consider sending automatic email inquiries to customers who have canceled their subscription or stopped shopping with you after a given time period. Solicit feedback about why they left and what would persuade them to return.
You can also try sending feedback surveys to churned customers, and A/B test your questions to improve your response rate. A marketing solution that can analyze, and act on, customer behavior is also helpful in this regard, because it can catch early indicators of potential churn and act to re-engage the customer before it happens
A positive customer experience goes a long way toward retaining customers. Detailed customer feedback should give you some good starting points for what to improve. But if you don’t have any yet, start taking steps to encourage brand loyalty:
We’ve said it before, and we’ll say it again: today’s customers are looking for personal relevance and brand relationships they find valuable. One of the best pathways to delivering that value is a customer loyalty program. Loyalty programs build a continued relationship with your customers, with repeat purchases earning them repeat rewards. This helps to keep your customer retention rate steady, and can even increase it.
According to Patel, a loyalty program can lead as much as 54% of your customer base to do more business with you. And if you can add 1:1 personalization to your loyalty program, you’ll increase your relevance to the customer even further.
Customer retention rate is an important metric for evaluating the success of your overall loyalty marketing strategy, but to get the full picture, you need visibility into why your customers are choosing to return—or not. By getting a deeper understanding of their motivations and preferences, you’ll be able to create customer relationships that last.
To learn more about fostering customer loyalty, check out our white paper, “How to Uplevel Your Customer Loyalty Program.” You can also contact us to see how Formation can help improve your marketing results.
Read more about customer retention: