How to Calculate Retention Rate: A Beginner’s Guide
If you want to evaluate how effective your customer service tactics are, simply take a look at your customer retention rate. Retention is defined as “the activities and actions companies and organizations take to reduce the number of customer defections.” Your retention rate is a measure of the effectiveness of those activities and actions. It’s the quickest, simplest and most accurate way of seeing how healthy your current customer base is, and it’s a good way to predict future growth.
But why should you care about your retention rate when there is literally a whole world of potential customers right outside the door?
For starters, it’s on average 7X less expensive to keep your current 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 likelihood of converting a new lead into a customer is low, only about 5-20%, whereas the likelihood of converting an existing customer into a repeat customer is much higher at 60-70%. Not only is 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 formula as an easy way to accurately calculate your unique customer retention rate. I like it because, if you’re not a numbers person, it’s not too complicated. You just need to locate a few key numbers 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 an example:
You start the (week/month/year/other period you choose) with 200 customers. You lose 20 customers, but you gain 40 customers. At the end of the period you have 220 customers.
Now do the math:
220-40 = 180; 180/200 = .9; .9 x 100 = 90. Your retention rate for the period was 90 percent.
Note that customer retention rate is complementary 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 do calculate DRR?
According to Revenue Wire, DRR can be calculated as such…
“[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 your retention rate, how do you know when you’ve got a strong one? Rule of thumb says that a customer retention rate above 85% is acceptable while 90% is solidly healthy and stable.
In terms of dollar retention rate, “If your company is Enterprise B2B SaaS, many VCs are saying that DRR of 110% per year is ideal and the more meaningful ‘churn’ metric for companies like yours.”
If you’ve calculated your retention rate and don’t like what you see, fear not. Improving a poor retention rate isn’t as complicated as you may think. We wrote about it in our blog, 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:
- Customer happiness starts from within. Happy employees usually = 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 what shiny new things your competitors are offering consumers
- Never stop adding value to your brand
- Customers are going to leave – it happens – but ask them why.
Are you interested in optimizing your customer retention strategy? Find tips for driving customer engagement (especially within the much-coveted millennial market), reducing churn at critical lifecycle junctures and more in our eBook, “The Insider’s Guide to Customer Retention”, available for download here!