How to Define and Calculate Retention Rate

Retention rate is one of the many metrics you should be tracking as an entrepreneur. 

Metrics like this serve two key functions: they’re essential for comparing your progress with other companies in your industry and inform how well you’re keeping customers happy and engaged.

You can also use retention rates to gain insight into how often customers churn out of your business and why they do so.

A high retention rate indicates that your customers are satisfied with your products or services and are likely to remain loyal. Conversely, a low retention rate indicates it’s time to reconsider some aspects of your business strategy. 

What is Retention Rate?

Retention rate is the percentage of customers who stay with your company and continue to buy over a specific period. 

It’s an essential metric because it measures customer loyalty and helps you understand how likely a customer will return to your business. This info can also help identify areas where your company could improve customer satisfaction.

Keeping existing customers longer is an excellent way to increase lifetime values (LTV). The higher your retention rate, the higher your LTV, and the more likely you will be profitable.

Why Does Retention Rate Matter?

Every business relies on its customers to survive. They determine your business’s success or failure, and for a profitable business, profits increase as the number of customers increases. 

A business owner must understand the importance of improving customer retention and reducing churn:

• Helps boost profits and growth: A high retention rate means people stick around and continue to use your product or service — which means more money in your pocket! In addition, companies with higher customer loyalty can often charge higher prices for their products or services than those with low retention rates.
• It gives an idea of customer satisfaction: Customer satisfaction plays a crucial role in winning repeat customers. They will most likely return if they are satisfied with their experience at your store (or website). On the other hand, dissatisfied customers will likely not return, even if they like what you offer.
• Retaining customers is cheaper than getting new ones: For a business to grow, it needs to increase its number of customers and bring in more revenue. You can do this through various means – advertising campaigns, SEO, content marketing, etc.  However, this approach isn’t cheap and requires constant maintenance, monitoring, and investment from the company. Replacing unsatisfied, one-time customers can get expensive and block your growth.

How Do You Calculate Retention Rate?

As a business owner, it’s essential to understand your profit per customer. Calculating your customer retention rate can help you in this regard. 

Below are the exact steps to take and what you need to get started calculating the retention rate. 

What you need:

• A timeframe (a month, quarter, or year are good starting points)
• The number of existing customers at the beginning of the period
• How many customers you have at the end of the period
• The number of new customers

To calculate your customer retention rate:

• Subtract the number of new customers (N) from the total customers at the end of the period (E)
• Divide the result by the number of customers at the start of the period (S)
• Multiply by 100 to get the percentage.

The formula looks like this:

(E-N)S 100 = Customer Retention Rate (CRR)

For a practical example, suppose your business had 1000 customers at the start of the period (S), ended the period with 1000 customers (E), and added 100 new customers (N) over the same period. You would have a customer retention rate of 90%

(1000-100)1000100 = 90% CRR

How Do You Improve Customer Retention Rate?

A central goal for most business owners is to increase customer retention. 

Here are some tips to improve your customer retention rate (and increase your sales and profit).

Try cross-selling and upselling

Cross-selling is when a salesperson (or checkout tool) tries to sell additional products or services to existing customers. It can lead to increased sales and profits. Upselling is similar but involves selling a more expensive version of something the customer has already bought. 

Implement a customer loyalty program

Businesses that offer loyalty programs see higher customer retention levels than those that don’t. Depending on your business model and target audience, loyalty programs can be simple or complex. Some examples include discounts if customers spend over a certain amount or points that are redeemable for products or services at later dates.

Understand your customer and their wants and needs

You can’t offer what your customers don’t want or need. Improving customer retention requires understanding your customers’ wants and needs and providing products and services that fulfill those needs.

Regularly engage with your customers

You can do so via email, texts, phone calls, or all three! Listening to them is the best way to ensure they’re getting what they want. Once you’ve identified their needs, you can use this information to create a better experience for them.

Need Help Improving Your Customer Retention Rate?

It’s easy to get caught up in the excitement of gaining new customers, but don’t forget about your existing ones! Customer retention rate is a crucial metric that every company should track. It’s a good indicator of how well you’re doing with customer service, product, and overall satisfaction. Remember, the costs to replace an existing customer are considerable.

While businesses must strive to improve these KPIs, they can be difficult to track. Founder’s can help you implement systems that help you improve this metric and many others through our services. Contact Founder’s today and see how our experts can help you grow your business.