Retention Rate
What is retention rate?
Retention rate definition
Retention rate is used to describe the number of customers that continue to use or subscribe to a product during a specific time. And, as such, it’s a vital indicator of a business's success.
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.
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