Customer Retention Rate

Customer Retention Rate helps determine how well the business is doing with its current returning customers at a given time period ₁. It consists of 3 main variables:

1. Number of customers at the end of a given period
2. Number of new customers acquired during the same period
3. Number of initial customers at the start of that period

Importance of Customer Retention

Understanding your Customer Retention is important for a number of reasons, such as:

• Retaining existing customers is much cheaper than acquiring new ones. This is because new customers will need to learn your business and learn why your products and services are superior, which takes a lot of time and effort. Whereas for existing customers, they already know the features and benefits of your services.
• Customer Loyalty and retention are highly linked together. Loyal customers tend to return to the business, and customer retention generates loyalty. Loyal customers are much more likely to receive upselling and cross selling offers than others.
• Calculating customer retention rate is an essential sales and finance metric that is used to differentiate between healthy and unhealthy businesses for investments and business deals.

Calculating Customer Retention Rate

Customer Retention Rate can be easily calculated using the following equation:

Customer Retention Rate example:

Let’s assume that ABC is a business that sells photo frames, and at the beginning of the January it had the number of total customers=100.
During January, it had attracted a brand new 20 customers, but due to several business reasons it managed only to keep 5 out of those additional 20 customers on the 1st of February.
This means that the total number of customers at the end of January was:

So, ABC’s Customer Retention Rate is:

The result is 0.85 (85%). This means that only 85% of the customers remain while 15% (100%-85%) leave for competitors.

Churn rate vs. Customer Retention Rate

Chrun rate is a core metric that complements customer retention, which is identified as the rate of lost customers of the business (i.e. customers who have stopped doing business with the company). Churn rate can be calculated using the following formula:

Chrun is also another important metric to measure in order to keep it at a minimum. In normal business environments, customers come and go to some degree. New customers coming through the doors contribute to customer retention, while customers leaving the door contribute to churn.

Customer Lifetime Value vs. Customer Retention Rate

Customer Lifetime Value (CLV) is another retention metric to consider, and one that is especially popular among tech businesses. In CLV, revenue is measured as it is generated by a single paying customer. In other words, CLV meassures how each customer contributes to the base line, and how sustainable the business is.
 
In order to address CLV, we need to know the average revenue expected from a single customer over one year. Afterwards, we need to estimate how many years a customer stays with the business. Then, the equation becomes as follows:

Revenue Growth Rate

Revenue Growth Rate is yet another metric that is directly correlated with customer retention. Normally, a business wants to grow its revenue as it grows in customer numbers. The revenue growth rate metric helps determine how much the revenue has grown over a given period of time.
 
Understanding the Monthly Recurring Revenue (MRR) can help calculate the growth rate easily via applying the following equation: