How to Calculate Customer Retention Rate?

Have you ever wondered how many customers come back and use your services or buy your products? This metric is called customer retention rate, and it helps businesses satisfy their customers and grow.

Measuring customer retention is necessary for brands in competitive markets. If you want to know how to calculate customer retention rate or what is the customer retention rate formula for your business, read this article carefully.

How to Calculate Customer Retention Rate

The retention rate is the percentage of customers every company keeps over time. It is one of the most important metrics to measure a business’s success.

If measuring customer retention leads to a high percentage, it shows a low turnover rate for a company.

Customer retention rates also allow businesses to track the progress of their objectives and initiatives over time.

The retention rate of more than 85 percent is satisfactory for most businesses, while 90 percent is considered the best and healthiest rate.

Assessing customers’ interest shows how effective brand planning is and how well new products and service improvements are at maintaining old customers.

If you want to calculate the customer retention rate for your company, divide the number of active customers or users who renew their subscriptions at the given time by the total number of active users at the beginning.

The customer retention rate formula is straightforward. For example, the number of active users who continue to subscribe divided by the total active users at the beginning of a period equals the retention rate.

How to Calculate Customer Retention Rate in Other Ways?

There are many ways to calculate customer retention rates in companies, of which we described the most common one above.

The following are other ways to measure customer retention that you may find more suitable for your situation.

Calculate Customer Retention Rate by Cohort Analysis

Behavioural analytics is used in cohort analysis to track customer behaviour and interaction over time. For example, it separates customers into different segments or cohorts to assess their behaviour individually.

Cohort analysis can study customer lifetime and how well a new product or service has brought them back to the brand using comparative periods.

Product quality, a positive customer experience, and the diversity of options available can all contribute to reasonable retention rates over time.

Customer Retention Rate Formula

There is a simple way to learn how the customers feel about the brand or company and what type of impression the business has made on them.

This strategy entails asking customers a simple question: How likely do you suggest the brand to your friends on a scale of 1 to 10?

Detractors are those who react with a score of 1 to 6, while promoters are those who reply with a score of 7 or more.

You can even interview detractors and advocates separately to understand better why they had the given ratings.

Measuring Customer Retention by Repeat Purchase Rate

The repeat purchase rate estimates the number of customers that engage with a brand more than once.

This odd number denotes a previous positive experience that inspired the customer to engage with the business again.

For different sorts of businesses, repeat purchases might indicate different things. For example, depending on the nature of the business, the number of times the brand classifies them as repeat customers may vary.

The companies should comprehend the customer pain point that leads to their systematic strategy.

It helps develop loyal consumers and understand the brand’s advantages and disadvantages from their perspective.

How to Calculate Customer Retention Rate

Churn indicates how many customers a company has lost, which is the opposite of the retention rate.

It identifies customers who have departed or moved their preferences to other brands because of bad service or a better alternative supplied by a competitor.

The churn rate is derived by multiplying the total number of customers at the start of the period by 100 and dividing the number of customers lost over time by the total number of customers at the start.

The churn rate indicates the percentage of customers leaving the company, negatively influencing revenue.

Calculate Customer Retention Rate by Customer Lifetime Value

Customer lifetime value predicts how much a customer from a specific category spends on the brand’s offerings.

You may estimate how much to expect to make from a particular customer category.

It is an excellent technique to determine the primary target consumers, create targeted customer profiles, prioritize segments, and allocate resources based on expected returns.

Business owners and analysers use this metric to evaluate and compare potential customers based on the amount of money they bring in.

Source: Scorebuddy