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How to calculate your customer retention rate

Churn happens. But a company shouldn’t run from its churn rate. Rather, consider it a key metric to guide and improve customer retention strategy and retention rate

By Bryce Baer

Published May 18, 2020
Last updated July 20, 2020

Loyal customers are the bedrock of any booming business. After all, loyal customers are repeat customers; they’re generally the most likely to promote a business on social media; they tend to report the highest levels of customer satisfaction; they have the lowest churn rate; and they can boost a company’s net promoter score. Customer retention is critical. But keeping customers happy and loyal for the long haul is easier said than done.

Companies that are interested in creating a loyalty program or want to understand what makes existing customers happy must consider retention simultaneously. And they often start with two key metrics: customer retention rate and customer churn rate. 

These intertwined metrics help a business come to grips with the ultimate measure of customer service and customer satisfaction—whether or not the customer continues to do business with the company. These metrics also give a business actionable insights into the good news and the bad news when it comes to metrics surrounding customer loyalty and satisfaction.

Let’s start with the tough news. Customer churn rate represents the pace at which a customer stops doing business with a company. Churn metrics are expressed as a percentage of a company’s total existing customers, and represents the number of customers that leave over a given period of time. While it’s often lumped in among negative metrics, churn is a powerful way for a business to understand what’s working well, and what needs to be improved when it comes to everything from its onboarding process and customer journey, to its marketing, social media, and customer service programs. A company shouldn’t run from its churn rate, but rather use it as one of its key metrics to guide its customer retention strategy and improve its retention rate.

And of course, on the flip side, is the good news: metrics about a company’s customer retention rate offer terrific insight into demystifying retention and creating loyalty and a healthy customer experience.

What is customer retention rate?

Customer retention rate metrics are a measure of the number of customers that a company continues to do business with over a given period of time. Customer retention rate is expressed as a percentage of a company’s existing customers that maintain loyalty to the business in that window. Customer retention focuses on loyalty and is the inverse of churn metrics. Monitoring retention metrics is critical for a business that wants to understand lifetime customer value and quantify the efficacy of its marketing strategy, customer service program, social media channels and other aspects of a customer retention strategy. One reason that companies are so focused on customer retention, retention rate, and customer churn rate metrics is that it is far less expensive to retain current customers and take care of a loyal customer than it is to find new ones. Customer acquisition campaigns are slow and expensive, while a strategy that increases customer retention and loyalty can have an immediate impact on lifetime customer value, and a company’s bottom line.

What data do you need to calculate customer retention rate?

Once a company has identified the period of time it wants to measure, to determine retention rate, it needs to collect three simple pieces of information:Number of existing customer at the start of the period (S)Number of total customers at the end of the period (E)Number of new customers added in the period (N)This data will help it measure customer retention and get a clear measure of customer loyalty and churn. Some companies evaluate this data on an annual, quarterly, monthly or even weekly basis. Fast-moving SaaS companies that offer software as a service may even look this data daily.Once a company has this data, it is easy to measure customer retention. 

Customer retention rate formula

  1. Calculate customer retention rate with the formula ((E - N) / S) * 100 = X

  2. Start with the number of customers at the end of the time period (E)

  3. Subtract the number of new customers added in the time period (N)

  4. Divide the result by the number of customers at the beginning of the time period (S)

  5. Multiply by 100

  6. The result is a percentage that represents the customer churn rate.For example, if a company had 100 customers at the start of the period (E), added 10 customers over the period (N), and ended the period with 100 customers (E), they would have a customer retention rate of 90%, or ((100 - 10) / 90) * 100 = 90%. 

    Improving customer retention rates

    The first step for any business that wants to improve customer retention, slow customer churn, and reduce the costs of acquiring new customers, is to get a handle on their customer retention rates. Once a company understands the right metrics, it is easy to create and measure marketing, social media and customer service campaigns to fit into a customer retention program focused on retaining customers. Make sure you build customer feedback into your retention strategy — truly listening to the people who share their time and money with your business may not be as concrete to calculate as retention rate or a KPI, but the actual customer relationship you establish will benefit the customer journey and help guard against a lost customer.