How to Calculate Retention Rate: A Beginner’s Guide
If you want to evaluate how effective your customer service program is, simply take a look at your customer retention rate.
To put it simply, the definition of retention is keeping your customers. More broadly, it includes the actions brands take to reduce customer churn.
The retention rate meaning, therefore, is a measure of the effectiveness of those actions. Calculating your retention rate is the quickest, simplest and most accurate way to track how healthy your current customer base is, and it’s a good way to predict future growth.
But why should you learn how to calculate customer retention rate when there’s a whole world of new potential customers out there waiting for your next brilliant advertising campaign?
For starters, it’s on average 7x less expensive to keep your existing customers than it is to find, nurture and convert new ones. Plus, loyal customers are worth up to 10x the value of their first purchase.
What’s more, the percentage of customer acquisition is low, only around 5%-20%, whereas the likelihood of converting an existing customer into a repeat customer is much higher at 60%-70%. Not only are strategies focusing on retention efficient, a 5% improvement in retention can lead to an increase in profits of 25%-95%.
How to Calculate Retention Rate
Now on to how to calculate retention rate. Jeff Haden, a business and investing specialist, recommends the following customer retention rate formula as an easy way to accurately calculate your unique customer retention rate. If you’re not a numbers person, it’s not too complicated. You just need to locate a few key data points and plug ’em in.
Here’s how to calculate retention rate Jeff’s way…
Retention Rate = ((CE‐CN)/CS)) x 100
CE = number of customers at end of period
CN = number of new customers acquired during period
CS = number of customers at start of period
Here’s a retention rate calculation example:
You started the (week/month/year/other period you choose) with 200 customers.
You lost 20 customers, but you gained 40 customers. At the end of the period you have 220 customers.
Now here’s how to calculate customer retention rate in this case in 3 steps.
- 220 ‐ 40 = 180
- 180/200 = 0.9
- 0.9 x 100 = 90 (This step is just making it a percentage.)
Your retention rate for the period was 90%.
Note that customer retention rate is the inverse of attrition (or churn) rate. A 90% retention rate would mean a 10% attrition rate.
It’s worth mentioning that some people, especially those within B2B SaaS companies, find it more helpful to calculate dollar retention rate (DRR), which looks at the dollars that renew as opposed to the customers who renew.
How do we calculate DRR?
According to Revenue Wire, DRR can be calculated as follows:
[DDR] is best calculated on a cohort basis, with each month or year representing a new customer cohort. For example, if a group of your customers renew their subscription, but downgrade from a $100 per month package to a $50 per month package, the revenue generated by this group of subscribers will decrease dramatically, despite customer retention remaining consistent.
To expand on this further, a company achieving a 90% CRR may have 50% of their customers’ downgrade from a $100 subscription to a $50 subscription at their renewal date. After which, half the customers remain at the original value (45%) while the other half are now only producing half of the value (22.5%), making the company’s NDR a mere 67.5%.
What’s a Good Retention Rate?
Now that you know how to calculate customer retention rate, how do you know when you’ve got a strong one? The rule of thumb says that a customer retention rate above 85% is acceptable while retaining 90% is solidly healthy and stable.
In terms of dollar retention rate, it can vary by industry. For B2B SaaS enterprises seeking venture capitalist support, for example, a DRR of 110% per year is a good target.
But one of the most important steps is simply figuring out your internal benchmark. It’s important to calculate your retention rate so you know if you’re gaining or losing ground. What’s a good retention rate? In some ways, it’s a significant increase from your retention rate for the previous period.
What To Do After Calculating Retention Rate
If after calculating your retention rate, you don’t like what you see, fear not. Improving a poor retention rate isn’t as complicated as you may think.
Like most relationships, preserving a positive relationship comes down to communication. Are you communicating clearly, personally and in an engaging way? Do you meet and exceed customer expectations?
Here’s one example of going above and beyond when it comes to customer retention. See how Vodafone helped VeryMe Rewards members understand the value of their loyalty program. The personalized data, from the customer’s first name to the number of treats they enjoyed on #FeelGoodFriday, takes things up a notch.
It’s meaningful and fun interactions like these that let you surprise and delight your customers, and that paves the way for reduced churn and better brand loyalty.
We wrote a whole blog post on tips for improving retention: 6 Little Changes That Will Make a Big Difference in Your Churn Rate. You can click the link for the full article, but here’s a quick rundown:
- Understand that customer happiness starts from within. Happy employees usually mean happy customers.
- Transparency is king! Communicate clearly and frequently when internal changes might affect external operations.
- Personalized communication can be your strongest ally in creating loyal customers.
- Keep an eye on how your competitors are innovating and what new perks they’re offering consumers.
- Never stop adding value to your brand and to every touchpoint with consumers — even customer service.
- Customers are going to leave — it happens — but ask them why before they go so you can improve going forward.
Interested in optimizing your customer retention strategy? Find tips for driving engagement, reducing churn at key points in the customer lifecycle and more in our Download Center.
You can also learn how to reduce churn by industry. We have retention use cases for insurance, banking, telecommunications, hospitality and more. Get in touch and we’ll show you how Personalized Video can help your business.