Customer Retention Rate Explained For Dummies

In sport, we like to say, “you’re only as good as your last game”. In business and customer service, I like to live by, “you’re only as good as your last customer”.

Your customer retention rate is the key factor to determining how good your customer service is and how quickly you can grow your business. If you can get the formula right, you can start retaining more customers, which will lead to strong business growth.

 

How do you calculate your customer retention rate

The best way to track customer retention is by calculating your customer retention rate. There’s no one formula, but here’s what I use, taken from Jeff Haden’s post on Inc.com.

Customer 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

At first glance, you might think, “Whoa, Ross! I’m not a math genius!” But… when you break it down, it’s actually not that complicated.

Let me break it down for you with an example.

You start the month with 100 customers. By the end of the month, you have 105 customers (15 have cancelled their contracts and you brought on 20 new customers). Let’s do some math using the formula above and it looks like this:

((105-20)/100)) X 100 = 85%

So that means that 85% of your customers are continuing to use your services, thus a customer retention rate of 85%. Pretty easy huh?

 

Why measure your customer retention rate?

I was talking to one of our customers last week, let’s call him Ted, and was so surprised with what he said, I wanted to share it with you. He told me…

 

“Our customer retention rate is 75%, but I don’t care about retaining customers, as long as the sales guys keep meeting their quota’s… our business keeps growing.”

 

Now to give you an idea of this man, picture this. He drives a Lamborghini, wears $5,000 suits and carry’s self-confidence as if he’s James Bond. It’s almost like you have to believe everything his says!

Ted has a very successful business which he has grown on the back of strong online advertising campaigns and a kick-ass sales team. But in the last 12 months his customer retention has really taken a hit. He’s been making a lot of customer retention mistakes, which has really affected his customer retention rate.

Ted never considered customer retention to be an important part of his business. Unfortunately, Ted isn’t alone, most small business owners I talk to have the same views on customer retention.

 

 Many business owners know their acquisition rate, because getting new customers is fun. Relatively few know their attrition rate; losing customers is no fun. – Jeff Haden

 

Here are three cold hard facts on why customer retention is important.

  • It is 5-7 times more expensive to acquire a new customer than to keep an old one
  • It costs a company $234 every time they lose a customer
  • Loyal customers are worth up to 10 times as much as their first purchase

 

Additionally, it is a great indicator of how good your customer service is and how loyal your customers are. I recommend businesses calculate their customer retention rate because it gives them a good, hard metric that they can measure. By measuring this metric, you can benchmark your performance and identify areas where you can increase customer retention.

 

What is a customer retention rate?

Customer retention rate can be defined as a metric that indicates the proportion of customers that have stayed with you for a while. The retention rate can be calculated annually, monthly or weekly.

My thoughts are that your customer retention rate is calculated by measuring the percentage number of customers that you have retained over a given period.

Sometimes customer retention rate is confused with attrition rate. Attrition rate is the compliment of retention rate. If a company has a 20% attrition rate it will have an 80% retention rate. Your attrition rate can be defined by the percentage number of customers you have lost over a given period.

 

Benchmarking customer retention rates

The next question I get asked by our customers is, what is a good customer retention rate? What should I be striving for? And I tell them, that’s a bloody good question!

Like a lot of metrics, you need to remember it differs per industry. For some businesses, 85% is awesome, others – it’s quite low. So you need to realize it is relative to your industry and market.

In saying that, the majority of the industry’s I’ve worked with, you should be aiming for a customer retention rate of above 90%. Ideally you’d love 100%, but as businesses close and change their strategies or markets, you are bound to lose some customers along the way. So remember, a good ball park to be aiming for is anything above 90%.

 

So.. what about Ted?

Now that we’ve covered customer retention rates and how you can calculate them, where does that leave our friend Ted, the high-rolling baller? Well, keeping in mind that a high customer retention rate is the key to growing a business, I told him that he should start taking customer retention serious and implement some of these customer retention strategies. He’s a successful businessman with an even more successful sales team, but he’s leaving a lot of growth on the table. By not measuring customer retention and implementing strategies to retain customers, he’s missing out on the opportunity to grow his business at an even faster rate.

 

Some other posts on customer metrics:

Gordon Tan

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Gordon Tan is an entrepreneur based in Australia who has started and sold multiple technology companies with a combined value of $150m. This included a client satisfaction benchmarking platform which gave him first hand insight into the best practices of over 6,000 businesses. After retiring at 35 he is now a recognised thought leader on winning and retaining clients - His two passions: making clients the heartbeat of a business no matter what the product or service and this blog.

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