Customer Retention Rate: Calculation & Importance of Retention Rate

How long can you really count customers as active customers? This is what the retention rate measures – the rate of how many customers have remained loyal to a company as active buyers over a given period of time. Customer retention rate is a key indicator of a company's stability and an important metric to track in any business.

Because many companies spend a lot of time, money and energy finding new customers, when in reality it is much more economical to keep existing customers happy and sell to them repeatedly.

Loyal customers contribute to a healthy company, give recommendations and positive reviews, comment on social media channels and give valuable feedback. Existing customers are the foundation of every successful company.

It is therefore important to always keep an eye on the customer retention rate and customer churn rate. Understanding the reasons for churn or loyalty is important so that a company knows what it is doing right and what resonates with customers – and what needs improvement. The primary retention and churn metrics are important to understanding customer loyalty and should definitely complement any retention strategy, analysis, and other metrics.

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• Why does the retention rate matter in a business context?
• Customer retention vs. churn
• Only satisfied customers bring more profit
• What is a good retention rate?
• Don't give too much credit to the industry average
• How do you calculate the retention rate?
• Customer retention rate doesn't stand alone
• Active customers are not automatically lucrative
• Act healthy and stable in the long term
• Improve the customer retention rate
• Create customers, not quick sales
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Why does the retention rate matter in a business context?

The customer retention rate measures the number of customers that a company retains in a given period of time. The metric is expressed as a percentage of a company's existing customers who remained loyal during that period. Example: a company starts with 100 customers at the beginning of the year and loses 20 of them - this results in a customer retention rate of 80 percent.

This must not be mixed with new customers - if the company starts with ten customers, loses two, but gains four new ones - this still does not result in a customer retention rate of 120 percent. Basically, it is a strategic mistake to assume that you can replace lost customers with new ones - because this would mean that errors in the processes, etc. are ignored and never improved - and also the new customers for this reason migrate again.

That's why it's so important to look at customer retention rate separately and consistently in context. The customer retention rate allows to understand the customer life cycle, the value that existing customers bring and to correctly evaluate and plan marketing strategies and customer service.

Customer retention vs. churn

For many companies, customer retention rate and customer churn rate are key metrics, because a company’s ability to retain existing customers is fundamental to short-term as well as long-term success: it is cheaper to keep existing customers satisfied than to acquire new ones – mainly because of marketing costs for them the acquisition of new customers.

Loyal customers, on the other hand, make repeat purchases: Customer loyalty can thus increase sales and, above all, profits. It is more effective to rely on upselling or cross-selling to existing customers, since a customer relationship and a basis of trust already exist here.

Only satisfied customers bring more profit

So it's not just a number, but rather a core goal of a company, strategy and long-term sustainable sales. Data can help with customer retention rates by using it to learn more about customer preferences and personalize interactions. Retaining customers is cost-effective and therefore a priority.

A white paper by Frederick Reichheld of Bain & Company (the inventor of the Net Promoter Score) shows that a company's profits can be increased by 25 percent by increasing customer retention rates by just 5 percent.

What is a good retention rate?

Existing customers buy more often, more often and recommend to friends and family - without the company incurring any costs as a result. A high customer retention rate should therefore be part of the business strategy. There is nothing wrong with wanting to win new customers – but a healthy base of existing customers also brings many advantages. Evaluating the number, tracking it, etc. can identify problems and make it easier to calculate future sales.

But what is a good retention rate? This is not easy and clear to answer. A SaaS company with a monthly subscription model, for example, generally has a different customer retention rate than a law firm. A shop that has a lot of walk-in customers in a central location also has a different business model and composition of customers.

Don't give too much credit to the industry average

Companies should strive for the highest possible customer retention rate, logically. In reality, companies aim for more than 85 percent, but are well below that: in most industries, the customer retention rate is below 20 percent. In the "media" and "finance" sectors, the customer retention rate is over 25 percent. E-commerce and SaaS companies often have a customer retention rate of over 35 percent.

These numbers are a broad average, so companies shouldn't get too excited about comparing their customer retention rates to the industry average. It is better to track your customer retention rate as far back as possible and then compare your own annual figures.

How do you calculate the retention rate?

Customer retention rate measures the number of customers a business retains over a given period of time. The customer retention rate is calculated using the following formula:

[(EN)/S] x 100 = CRR

First decide which period you want to look at. Some companies look at customer retention rates annually, others monthly or even weekly. Some companies with high turnover may even look at the data on a daily basis.

Then collect the following information:

The number of existing customers at the beginning of the time period (S)

The number of all customers at the end of the time period (E)

The number of new customers who have been added in this time period (N)

Then the formula can be applied as follows:

E – Number of customers on December 31 – at the end of the period under consideration. Subtract from this the new customers of the time period to be considered - N Divide the result by the number of customers at the beginning of the time period - January 1st

Multiply by 100.

The result is a percentage:

If a company had 100 customers at the beginning of the period (S), and ended the period with 100 customers (E), and had 10 new customers (N) - this would give a customer retention rate of 90.

[[100-10)/100] x 100 = 90 percent.

Customer retention rate doesn't stand alone

Conversely, there is the customer churn rate, the counterpart to the customer retention rate. If the customer retention rate is 90 percent, the customer churn rate is 10 percent. However, it can get more complicated - because it is also a matter of definition and closely linked to the business model.

You want more comparison values? The so-called dollar retention rate gives even more insight into the reality of the company. The customer retention rate is an important indicator of how healthy the customer base is. But of course it is just as interesting for a company as it looks economically - do existing customers spend more or less money?

The aim is to retain 100 percent of customers and to increase their lifetime value (value over the customer life cycle).

But even companies with the greatest competitive advantage lose customers. When losing customers, however, the dollar retention rate can also indicate a trend towards a healthy business model. How can this be? Very simple – you also don’t want to just keep any customers who only buy the cheapest special offer once, which was a lure offer for new customers – and then wait for the next offer.

Active customers are not automatically lucrative

For example, a company can grant extremely high discounts over three months, which keep new customers over this period. The customer retention rate is high during the promotional period. However, the profit of the company is narrowed at the same time. After the end of the campaign, those customers who came as bargain hunters will leave.

The improved customer retention rate over three months would only be a real advantage if the bargain new customers stay long-term and are also willing to pay "normal" prices.

At the same time: If the churn rate of customers who buy as cheaply as possible increases, the dollar retention rate can still increase at the same time - the remaining existing customers attach more importance to the price-performance ratio, even at higher prices, and spend more, allocated to the number of customers.

The art lies in finding a healthy and long-term balance between offer, price and the right customers.

Act healthy and stable in the long term

It is important to learn from this: The customer retention rate should be healthy and stable – in the long term. Ongoing analysis should indicate negative and positive trends that should be acted upon promptly to ensure long-term success. Reacting in time means - before it's too late and only then you look around and wonder where all the customers have gone.

The advantages of long-term customer loyalty are not always visible immediately, but only in the long term. Especially young companies, which for the first time have more focus on existing customers than on acquiring new customers, can be discouraged when they see that the new customer rate has fallen, while the benefits of maintaining existing customers are not yet visible.

In fact, this is a long-term effect over 12 to 24 months. This is another reason why continuous analysis over a long period of time is so important. Various studies have found that the long-term effect outweighs short-term benefits of new customer acquisition when it comes to long-term market share. Main advantages are:

Improve the customer retention rate

Do you want to improve the customer retention rate, reduce the customer churn rate and lower the cost of acquiring new customers? Customer Retention Rate Metrics are key - with the right metrics it's easier to align marketing and customer service - namely by tying them into an overall customer retention strategy.

Make sure to incorporate customer feedback into the customer retention strategy. It is important to listen to those who invest time and money in your business and in the purchase of your products. There are many reasons why customers migrate. It can be so simple that they simply no longer need the offer (product or service).

Or it's complex and there's an issue that can negatively impact the business that management isn't even aware of. That is why analysis and ongoing overview are so important.

Create customers, not quick sales

However, a major reason for customer churn is undoubtedly poor customer service. Above all, it should be easy for customers to get in touch with customer service - and then good customer data management should ensure that the customer service agent is as informed as possible and customers are aware of their concerns or experiences don't have to repeat.

Multichannel customer service and the availability of real people in customer service should be a matter of course.

In addition to flawless products, processes or services and good customer service, of course, optimized communication, services, etc., at the level that customers expect today - up-to-date website and online presence, automation where it makes sense, customer relationship management and of course the best quality and optimal value for money through and through.

Products should be easy to use and extra services should be available around usage.

More tips:

With the right tools, communication management for customer communication can be made easier and aligned.

Even the best company loses customers sometimes - sometimes it's just out of our control. But tracking customer retention rates helps correct and optimize what is within our control. With a data-driven customer retention strategy you are on the right track and maximize customer retention. A CRM solution can also make a significant contribution to this.

With Flixcheck you can positively influence the customer retention rate by creating digital, personalized offers and surveys in just a few steps with Flixcheck and simply sending them to your customers via email or message.