Customer Retention Rate: How To Calculate and Improve

Customer Retention Rate: How To Calculate and Improve
Updated date:
Apr 21, 2022

Table of Contents

Why is it crucial to monitor your customer retention rate? 

Because it is not only the most important indicator of product value and product/market fit, it is also the most critical driver of monetization and acquisition. Consider these factors:

Customer Retention Rate

Now, you wouldn't want to be among those who stagnate or fail in their ventures because of not giving importance to CRR.

What is a Customer Retention Rate?

This strategy, CRR, is a metric that assesses how many customers a company keeps over time. It measures the percentage of customers that buy something or utilize a service and return over time. The CRR is tallied at different periods depending on each company's policies. Perhaps on a monthly, quarterly, or annual basis. 

However, it is usually determined by the purchasing cycle and the frequency with which the purchase is made. According to Gartner, only 20% of a company's existing clients will account for 80% of future income. Isn't this amazing?

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Meanwhile, Marketing Metrics estimates that selling to a current customer has a success rate of 60-70 percent. In comparison, only 5-20 percent of new prospects will likely purchase it.

Customer retention is critical for all businesses since the number of loyal customers is the sole source of consumers that must be maintained. Retaining a client and allowing them to continue purchasing items saves a lot of money for firms, especially:

  • There are considerable expenses associated with advertising.
  • Employing human resources to make phone calls and introduce services is expensive.
  • Meeting and consulting with customers costs money.
  • Negotiating and signing a contract takes time and money.

But why do clients leave?

Customer Retention Rate

Because of the above, a lot of companies prioritize customer service. Aside from attracting new consumers, keeping old ones is also essential. So how do businesses calculate CRR?

It's simple to calculate the CRR: Total the number of clients you have after a specific period (week, month, or quarter). Deduct the total number of new clients you've gained within that period. Subtract the number of customers you had from the total at the start of the period. Then multiply that by one hundred.

Here's how it appears in terms of a business scenario: If you started the quarter with 1,000 customers and concluded it with 1,200 customers after winning 300 new ones, your CRR would be 90%.

Because that's a mouthful, let's simplify it into a formula:

Customer Retention Rate

What is a Good Retention Rate?

There is no one-size-fits-all solution. Each product's retention rate is distinct and unique per industry. Ideally, though, your CRR should outperform similar enterprises and industries.

This is why product teams are under a lot of pressure to find the correct retention rate for their company because a poor retention percentage might ruin a business. CRR helps businesses devise appropriate strategies for retaining consumers and growing their operations quickly.

What is a Good Retention Rate for SaaS?

The size of your company's target audience determines what constitutes an "excellent" retention rate. The higher the number of clients, the higher the retention rate. That's all there is to it. 

According to some estimates, SaaS companies selling to SMBs should have a net retention rate of 90 percent, whereas SaaS companies selling to enterprises should be 125 percent. 

According to another survey, over 35 percent of retention is regarded as elite in the SaaS business. Finally, keep in mind that your retention rate is a good indicator of your current and future revenue. It's also worth noting that the better your retention rate, the lower your churn rate.

CRR benchmark

Is there a good or lousy retention rate? - It's usually a nice thing to have a 100% retention rate. Meanwhile, a 15% retention rate is considered poor. The in-between varies depending on the industry. 

What may work for a particular niche may not work for another, and vice versa. That's why, rather than aiming for a specific number, you should compare your retention rate to that of similar companies and industries. You can make inferences about retention benchmarks to work with by looking at average client retention rates by industry.

Side note: You may be interested in reading our article on employee retention

Average CRR by Industry

To assess the preservation of benchmarks, you might look at yourself and other businesses in your field. It's crucial to understand the industry's average retention rates and how they affect the retention plan before making changes.

Let's have a look at some of the best examples from various industries.

1. Retail: 63%

In comparison to other top examples, the retail industry has an extremely low retention rate. Heavy rivalry and a lack of complexity are the causes behind this. A plethora of possibilities surround customers in retail stores. 

Companies are enacting a lot of effort to move between brands. Meanwhile, this industry has a large number of leaders. The difference between acquisition and retention costs is not significant for certain businesses.

2. Banking: 75%

An average American has had the same primary account for 16 years. The most common reasons for clients switching banks are relocation or other living circumstances. Consumers have been loyal to banks for decades. In 2019, for example, only 4% of consumers moved banks.

This is due to a high level of client satisfaction. In terms of customer service, banks are in a strong position. They get along fine and contribute to their client's success.

3. Telecom: 78%

The high retention rate in the American telecoms business accounts for the "difficulty to leave" element. These companies focus on providing client loyalty services and expanding reward chances. Meanwhile, they negotiate long-term contracts that make it harder for customers to turn a blind eye.

There is less competition in other sectors of the telecommunications industry, such as cellular carriers. Each top firm receives the same services and perks, so there's no purpose in switching.

4. Services in IT: 81%

The emphasis on customer success among top organizations is responsible for the strong retention rates in the IT industry. In general, IT services produce outcomes quickly. On the other hand, the absence of the desired consumer result can cause a high turnover rate and a ruined image. 

5. Insurance: 83%

A variety of factors determine the retention rate of insurance companies. A high prevalence isn't always a good indicator of health. The time people spend as customers with the company, and the retention rate is crucial factors to consider during the acquisition cycle.

An insurance company can be severely harmed by a loss of 17 out of 100 customers. Let's say it's a lot more than a retailer being affected. That is why insurance companies are raising their clients' "difficulty to quit" and boosting their piece of pocketbook.

6. Professional services: 84%

Professional services organizations are dedicated to maintaining tight relationships with their clients. This ensures that a high level of retention is maintained. 

They emphasize each client's unique individuality while emphasizing the importance of the services offered. With the correct approach to personalization, these businesses make their services a part of the customer's daily routine.

7. Media: 84%

Media companies, like retailers, focus on a wide range of clients. Despite their difficulties in tailoring their offerings, their marketing and retargeting budgets have a strong retention rate.

Retention rate vs. churn rate

The inverse of your client retention rate is your customer turnover rate. For example, if you have a 90 percent retention rate, your churn rate is 10%. 

The easiest way to compute your churn rate is to divide the total number of customers at the beginning of a particular period by the number of churned customers within that same period, then multiply the result by 100.

Let's imagine a company had 100 customers at the start of the year, but it had lost ten by the end of the year. 

The company's turnover rate would be 10%: (10/100) x 100 = 10%

Determining the number of churned consumers can be more complicated than it appears at first glance, as the term "churn" has different definitions. When a customer cancels a subscription or expires without being renewed, you can consider them churned. 

However, a client may have canceled their Disney+ subscription after finishing WandaVision but then decided to renew after seeing The Falcon and the Winter Soldier before their subscription expired.

Similarly, firms must determine which categories of clients should be counted as churned. Assume a corporation gives a free trial of its product, with some customers opting out at the conclusion. Should those customers be considered churned even if they had no impact on revenue?

Issues like these are why using several customer retention measures can help you gain a more detailed view of why specific customers stick around while others leave. Here is an example of why customers leave:

Customer Retention Rate: How To Calculate and Improve

In any industry, maintaining above-average retention rates is critical to success. Although tactics differ per sector, the majority remain the same and focus on influencing issues.

CRR KPI 

Various KPIs are used to measure the impact of customer retention. The essential KPIs for retention are listed below.

1. Customer Churn

Customer churn, or customer attrition, is a metric that tracks how many customers drop your products and or services over time. The higher your turnover rate, the more likely your brand will not reach the correct audience or provide the right products and services.

2. Revenue Churn

The loss of revenue over time is measured by revenue churn. Revenue churn is a sign that your consumers aren't making as many new and repeat purchases as they should be. This could mean your customers are dissatisfied with your products.

3. Repeat Purchase Ratio

The repeat purchase ratio is a metric that indicates how many customers return to your brand. A 100 percent repeat purchase ratio means that all customers make repeat purchases on a scale of 0 to 100. The 0% repeat purchase rate implies that none of your clients have purchased from you before. An excellent repeat purchase ratio should lie between 25% and 35%.

4. Rate of Product Returns

The rate of product return is a retention metric that compares the number of times a product has been purchased but later returned or canceled to the total number of purchases.

5. Time Between Purchases

The time it takes users to make another purchase is the "period between purchases." You can use this opportunity to work on your timely marketing strategies.

6. Loyal Customer Rate

The loyal customer rate is the percentage of consumers who have purchased more than four times divided by the total number of first-time customers for the same period.

7. Customer Lifetime Value

Customer lifetime value is the amount of total revenue that a consumer generates for a brand over the entire period of the customer-brand relationship.

8. Outstanding Days of Sales

Days sales outstanding (DSA) is a measure that indicates how long it will take a business to collect all of its sales payments. Months, quarters, and years are commonly used to calculate days sales outstanding.

9. The Net Promoter Score (NPS) 

The Net Promoter Score (NPS) is a metric for determining how likely a consumer is to suggest your products and services to others. It assesses consumer satisfaction and loyalty in general on a scale of -100 to 100.

ALSO READ - 10 Strategies A Lead Generation Consultant Should Offer

The Final Note

What should any company do to boost client retention, reduce churn, and lower customer acquisition costs? - Get a grip on your customer retention statistics! 

When a company understands the relevant KPIs, marketing and customer service are easier to match with a more extensive client retention plan. Make sure that client feedback is incorporated into your retention plan. 

Listening to the people who give you their time and money may not be as easy to quantify as a retention rate or a KPI, but it will help you build a richer customer experience and lead to more repeat customers.

Indeed, you can learn a lot from this guide we are providing you. However, you may want to discuss this topic more deeply. Please feel free to contact AI-bees, and we will be glad to give you quality time.

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