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Customer Retention Rate
Customer retention rate is a metric by which an organization is able to determine whether it’s growing or shrinking. Over a specific period, the number of customers brought in and retained is measured against the number of customers lost. While customer retention metrics are simple on the surface, they can become quite complex. It isn’t just about how many customers are retained, but about why customers are leaving, and how customers can be kept.
The importance of customer retention is vast. Customer retention statistics give a broad overview of the health of a business. Despite this, many businesses struggle with how to analyze customer retention within their business. Customer retention is highly specialized. Depending on the company’s industry, location, and size, retention rates may strongly differ.
Consider that customer retention for a laundromat is going to be very different from customer retention for a gym. Customer retention can be used to compare business performance within an industry and also business performance over time.
Investors always want to see good customer retention. Not only does it mean that customers are happy, but it also means that the business is thriving. Customer retention is cheaper than customer acquisition. Companies with high levels of customer retention have better bottom lines, and have a proven business model. But to figure out how to improve upon customer retention, businesses need highly developed strategies and processes. Often, this requires an experienced partner, as well as the right technology.
Churn rate and retention rate are essentially the same thing, but they are terms used in different businesses. Churn rate is more frequently used in B2B software, where the emphasis is on how many customers are coming in and out. With B2C industries such as fast food and tourism, retention rate is more often used. So churn rate vs retention rate comes down to emphasis.
Consider: a software company may have 10,000 customers, lose 5,000 customers, and gain 6,000 customers over a month. Its net retention rate is going to be 11,000 customers, with 1,000 customers gained. But that doesn’t show the full picture: While 1,000 customers have been gained, 5,000 customers have been lost. Software industries operate with high churn, which means that they need to be constantly bringing new customers in. If a software company sees our customer retention rate has decreased 10 percent, this could be devastating. If the company stops gaining new customers, it would have no customers within two months.
Alternatively, consider a restaurant chain with 10,000 customers, which loses 1,000 customers and gains 2,000 customers a month. Its net retention rate is also 11,000 customers. But the churn here is far less significant: It only loses 1,000 customers at a time. Its “burn down” would be 10 months even if it wasn’t gaining any additional customers. It’s more stable even though the net retention is exactly the same.
It’s important to look at customer retention rate vs churn rate because it’s important for a business to know just how stable it is and how many customers it needs to continually gain to keep up its growth.
Customer Retention Strategies
Let’s say you recently decreased your average number of products and you’ve seen your customer retention go down. Those are the metrics you’re working with, but you still need to draw conclusions. This is where the customer retention process comes in. The customer retention process is built to ensure that you can identify the root causes of changes in your metrics, rather than just having the data available. It ensures that you’re able to respond to these changes in metrics.
Going back to the example, it could be that customers liked to see a variety of products. But it could also be that you removed products that your customers liked. Or, it could be that the products you removed were making the other products more appealing. While the data gives you some information, it doesn’t give you all of the information. Customer retention strategies involve a lot of split-testing and back-and-forth analysis to determine the right answers.
Under the scope of customer retention, the customer retention rate KPI (key performance indicator) isn’t the only KPI that’s important. While you need to know your year-over-year customer retention, you also need to understand it within the scope of your past performance. Better retention is a goal that needs to be hit, but it’s not enough to have that goal, you need to know how to get there.
Since customer retention is a process, and often a long-term strategy, teams need milestones in place and need to celebrate their little wins. The team can shoot for a specific MRR retention rate (monthly retention rate), and celebrate certain goals. Likewise, if they’re looking at MRR retention rate rather than quarterly or year over year customer retention, their strategies could differ.
In the above example, it’s important for strategies to change. Whenever a company makes a major shift, such as reducing their products, the company has to reassess their retention and react according to the data given.
Calculate Retention Rate
Developing better customer retention starts with the standard customer retention rate formula. You can calculate retention rate through the following:
- A=Customers at the end of a period
- B=New customers acquired during that period
- C=Customers at the start of the period
- ((A-B)/C)*100=Retention Rate
That’s the basic customer retention. But it can be more complicated than that. Some industries and types of businesses will add other variables into their calculations. They may need to see customer churn rather than just raw retention. Tools such as Excel, or a customer relationship management suite (CRM), can help calculate the retention rate for bigger businesses with a lot of metrics.
At the end of the day, an organization’s analysis is only as good as its data. While the net retention rate formula may tell the company a lot about its general performance, it may need a more specific retention rate formula Excel sheet or customer retention KPI formula to determine why the rates are shifting. The SaaS retention rate calculation is going to vary significantly from a brick-and-mortar retention rate calculation as well; it’s all based on the company’s industry and the type of business it’s in.
Many modern CRM solutions come with retention rates that are tailored for them. Services such as Shopify or Square will compare a company’s retention rates to other businesses within its industry and tell it how it is performing both compared to them and compared to itself month-over-month or year-over-year.
Both these types of metrics (comparison with other companies, and comparison with the company itself) are incredibly important to see what the trends are, whether the company is improving, and whether it could be left behind by the competition. Machine learning suites are also increasingly able to derive new patterns, such as seeing that customer retention may be better on a seasonal basis.
Average Customer Retention Rate by Industry
What is a good retention rate? There’s no one answer. The average customer retention rate by industry can get you close, but even that won’t tell you the full story. The SaaS retention rate, for instance, could vary depending on size of business. Smaller businesses may in fact have much higher retention rates than larger businesses, but larger businesses might have better profit margins due to economies of scale. So when asking what is a good customer retention rate, you must first make sure that you’re performing an apples-to-apples comparison.
Consider: customer retention statistics 2019 might show that customer retention overall went down throughout all industries. So, you would need to consider this. Perhaps a recession occurred in a specific industry, and therefore all businesses within that particular industry were impacted. These broad trends are important, but more important are the trends unique to the business.
eCommerce retention rate is often going to be lower than traditional brick-and-mortar because of the fluidity with which customers can change their minds. But that’s not true in every industry: online banks, for instance, have been able to develop some spectacular loyalty, and people don’t change banks often. The customer attrition rate by industry is therefore the most important thing to look at.
But it’s also about the model that the company uses. Subscription retention rate tends to be high because people forget to cancel their subscriptions. Website retention rate tends to be low because people can be fickle about using websites. The average customer retention rate restaurants enjoy is usually quite high; people are creatures of habit and will go to a restaurant that’s close. The average customer retention rate SaaS depends on the SaaS solution. Businesses don’t change their minds frequently, but they do audit their solutions from time to time.
Organizations looking to improve their customer retention rate have to consider that the customer retention rate in retail industry stores will be different than the restaurant customer retention rate or the insurance retention rate formula. A Salesforce attrition rate will have to be compared with similar businesses if any analysis is going to be done, and a Salesforce customer retention rate also needs to consider the size of the business as well as its stage in development.
Consider that the retention rate in digital marketing is likely to go up significantly as the company grows. A startup company is not going to have a high amount of customer retention; the average customer retention rate e-commerce for stores that just started is quite low. Ways on how to calculate customer retention rate in ecommerce might also change over time as the business grows. So expect a number like this to fluctuate over time.
Apart from the Salesforce net retention rate and the net retention ratio insurance formula, there’s another type of retention rate companies might want to consider: employee retention KPI. The employee retention KPI shows how happy employees are at a business, and it’s a good sign of stability. When companies have high employee churn, they aren’t able to make the most out of their budgets, and they aren’t able to provide good continuity of service.
Customer Retention Examples
Customer retention examples give key insights into the process of developing a customer retention strategy. Customer retention KPI examples go beyond the ideas behind customer retention and put them into practice. Not only can a customer retention rate calculation example give a company an idea of how their industry calculates retention, but general retention rate benchmarks can show how companies can expect their retention rates to improve over time.
Customer retention examples show you:
- How other businesses like yours are calculating their own KPI. Take a look at businesses that are in your industry and that are your size. Many companies publish this type of information especially when they are looking for rounds of funding.
- What action businesses like yours took to improve their customer retention. Did they run sales and discounts? Did they host events for their customers, such as digital seminars, or even in-person conferences? What are they doing to make themselves special?
- What the growth patterns are for a business like your business. Are companies growing 20% year over year? Or 5% year over year? What is the average for your industry and your size? Are you doing better or worse than them?
The best way to build a strategy and retain customers is to pay attention to what works for other companies similar to yours. Whether you have a SaaS solution business or you have a dog grooming salon, you’re going to need to perform an apples-to-apples comparison within your industry.