Retention Rate

What is retention rate?

Customer retention rate in business is shown as a percentage of customers who continue with a service within a certain period. The rate is affected by churn rate, which refers to the percentage of customers who discontinue a service.

How do you calculate retention rate?

There are three pieces of information needed to calculate a company’s retention rate:

• The number of customers at the beginning of a defined time

• The number of customers acquired during the period

• The number of customers at the end of the time

From there, it’s a very simple formula:

Number of customers at end of the period - new customers during time frame ÷ customers at the beginning of the period x 100.

By way of a customer retention rate example, say your software startup enters Q1 2022 with 5000 users. Over the quarter, you acquire 250 but you lose 90. By April, you can calculate your Q1’s retention rate as (5160 - 250) ÷ 5000 x 100 = 98.2%. Nice!

What does retention rate mean in a business?

It can cost 5 times as much to generate new customers as monetizing existing customers. And, loyal customers are far more likely to spend on brands they like and already use.

That’s why retention rate is so important in business — many companies are missing a trick by focusing purely on getting new business in.

A business needs to know its retention rate to gauge whether its customers are getting value. If customers discontinue a subscription after a trial period, for instance, the company needs to understand why so they can improve.

Why is a high customer retention rate so important?

A high customer retention rate is vital for business because:

• It can show where your business is performing well.

• It can reveal areas of customer service that need improvement.

• Loyal customers will refer other customers to you

• Satisfied customers leave positive reviews and share on social media.

• It boosts return on investment as more continuing customers mean higher future growth.

• Helps to attract new customers because the company has a good retention rate.

What is a good or bad retention rate and how do you improve it?

A business with a 90% retention rate would be considered very healthy — this indicates high customer loyalty and widespread satisfaction. A business with a 50% retention rate, on the other hand, has some work to do.

So how do you improve retention rate?

Understand why and when customers are leaving your business

Customer feedback is vital. If you’re losing customers at any stage of their lifecycle you need to know why, when and how many (i.e. the churn rate). To get a proper sense of your business’s health, you need to understand retention vs churn rate. 

Manage your customer’s expectations

When a customer signs up to a service, they want to know exactly what they are paying for and when they will get it. If you promise results in the first month, then the customer expects results in the first month. If they don’t get results until 6 months later, well, you can guess where they’re going.

Use a marketing strategy to engage your customers

Cross- and up-selling to existing, loyal customers is a great way to improve retention and revenue. When you develop products that solve your existing customers’ problems, you grow retention rates.

Ask for feedback

Customer feedback is the key to improving rates of retention. Asking customers for reviews, suggestions, and opinions will uncover areas for improvement. Common complaints and compliments provide vital clues to what is and isn’t retaining customers.

Examples of industry-specific retention rates

A “good” retention rate depends on the business context. For example, what’s considered good for retail would be a poor retention rate in IT services. Here are some of the average retention rates you would expect to see within specific industries:

• Hospitality, travel, and restaurant - 55%

• Retail - 63%

• Consumer services - 67%

• Manufacturing - 67%

• Banking - 75%

• IT and software industry - 77%

• Telecom industry - 78%

• Financial services - 78%

• IT services - 81%

• Media companies - 84%

• Professional services - 84%

Companies that have great strategies to improve their retention rates

Customer retention is a crucial factor for any successful business, so it comes as no surprise that some companies have focused a lot of time and effort on it. Let’s look at some of the customer retention strategies from the companies that do it best.

Starbucks

We already know the value of loyalty programs, which is why so many stores and food chains offer them. Starbucks knew they had to go above and beyond the classic free drink now and then. 

With their 2016 redesign, Starbucks Rewards sought to incentivize customers, especially the big spenders. With the star system, customers gain two stars per $1 spent, meaning the more you spend, the more rewards you earn. Combining that with added convenience, such as ordering in advance, paying by phone, free rewards on your birthday, and more, you can see why Starbucks Rewards is such a popular and effective tool for customer retention.

Amazon

Amazon Prime has become essential for millions of customers worldwide thanks to its vast range of benefits.  Amazon Prime offers faster shipping and exclusive deals. As the company grew, so did the Prime offerings. It now includes video, music, and audiobook streaming at no extra charge, absolutely packing value into the low monthly price. They’re also partnering with other businesses to offer exclusive deals and delivery services.

What seems like a simple loyalty program is a multi-faceted service that offers incredible value to customers and makes Amazon a one-stop shop for all their needs.

Factors that influence retention rate

There are many ways to increase retention rates. Some obvious, some less so. The most important factors to pay attention to are:

• New features: You shouldn’t assume that the response to a new feature will be entirely positive. Make sure to monitor customer feedback when implementing new features.

• Updates: Even something as simple as a UI refresh can deter customers if it doesn’t meet their standards. Again, make sure to monitor customer feedback to ensure success.

• Product-market fit: Is your product solving anything your target market requires?

• Customer onboarding: How easy is it for your new customers to get used to your product? This is the first and often most significant factor in retention. (Here's an article on how to build an adoption strategy)

Tips for setting realistic retention rate goals

Here are a few quick tips for setting appropriate retention rate goals.

• Use SMART goals: Using SMART goals will help you set realistic, measurable retention rate goals you can track over time.

• Know your ideal retention rate: Choose your target retention rate based on several different factors, including your industry, your business model, and market conditions. 

• Be realistic: Make sure you're setting a realistic goal for your industry or sector. Check out some good industry-specific retention rates listed above. 

• Identify blockers and drivers: Identify elements that might be decreasing your retention rate and elements that consistently increase it.

• Monitor your progress: Regularly check in on your progress toward your retention rate goal. This helps you stay on track.

• Make changes as needed: If you notice issues during your regular check-ins, make changes to your strategy to ensure you stay on target to reach your ideal retention rate.

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