Editor’s note: This article was last updated on 29 May 2023 with more strategies and examples of how to calculate and improve customer retention rate.
Retention is a crucial metric that influences a company’s growth and profitability. In the simplest terms, your retention rate shows how many customers continue to use your product or service over a specified period.
While many product managers focus on gaining new customers as fast as possible, it doesn’t do much for overall business growth if they leave as quickly as they arrived. Simply offering an excellent product is usually not enough to gain new customers and retain existing ones. Other factors, such as customer support, UX design, and competitors, may affect your ability to have a high retention rate.
In this guide, we’ll provide a comprehensive overview of what retention rate means, how to calculate it, and a few tips to help you increase your retention rate.
What is retention rate?
Retention rate measures the percentage of customers who continue to use a product or service within a defined period.
A high retention rate indicates that customers are sticking with the product, which often goes hand-in-hand with a high acquisition rate. These two factors combined set the company on an overall growth trajectory. Conversely, a low retention rate can signal problems that need to be addressed.
Retention vs. churn rate
It’s important to note that customer retention rate is different from churn rate (also known as attrition rate). While retention rate tracks users who continue to use the product, churn rate refers to the rate at which users stop using the product.
These two metrics are closely related and affect each other. For example, a high churn rate indicates a low retention rate.
Why is customer retention rate important?
Every company strives to increase its revenue, and measuring retention aids in this pursuit. But the importance of the retention rate goes beyond just tracking and predicting a company’s revenue. It helps a company monitor other essential factors, including customer loyalty, customer satisfaction, product value, and product profitability.
Because every product aims to attract and retain customers, product managers need to understand what keeps customers using the product and what drives them away. Retention rate is a significant metric to determine whether a product is resonating with customers.
While losing some customers is inevitable, product managers need to establish a baseline retention rate. Understanding where your customers currently stand allows you to set goals to improve retention.
How to calculate retention rate
Calculating retention rate begins by choosing a relevant time frame, which could range from 30 days to a year. Once you’ve selected your time frame, follow these steps to determine the retention rate:
- Subtract the number of customers gained within the time frame from the number of customers at the end of the time frame
- Divide the resultant figure by the number of customers at the beginning of the period
- Multiply by 100 to get a percentage
Based on the steps above, the formula to calculate retention rate is:
( (CE – CA) / CS ) * 100
Where:
- CE = customers at the end of the period
- CA = customers acquired during the period
- CS = customers at the start of the period
How to calculate churn rate
Calculating the retention rate also produces the churn rate. The churn rate is simply the inverse of your retention rate:
For a simple example, if your retention rate is 90 percent, then your churn rate is 10 percent.
The formula to calculate churn rate is:
Churn rate = (Number of customers who churned during the period / Total number of customers at the beginning of the period) x 100
Let’s look at a slightly more complex example. If you had 1,000 customers at the beginning of the month and lost 30 customers during that month, the churn rate would be:
Churn rate = (30 / 1,000) x 100 = 3%
This means that you lost 3 percent of your customer base during that month.
Important customer retention metrics
The retention rate provides insight into what is happening, but not why it’s happening.
To understand the nuances that may cause some customers to leave and others to stay, product managers should also evaluate other metrics, such as:
- Cross-sell and upsell
- Positive insights
- Cohort analysis
- Retention rates based on time
- Revenue churn
- Net Promoter Score (NPS)
- Repeat purchase rate
- Customer lifetime value (CLV)
Cross-sell and upsell
Evaluating whether existing customers took offers with cross-selling and upsells is a significant part of expanding your company’s growth and revenue.
Positive insights
Product managers can learn what positively impacted conversion and retention rates by evaluating positive metrics. This approach often provides a fuller understanding of customer behavior as it goes beyond focusing solely on what causes churn.
Cohort analysis
A cohort analysis groups customers with similar characteristics and analyzes their behavior. This analysis can help you understand various interactions a cohort has with customer support and other product features.
Retention rates based on time
Product managers should also evaluate metrics based on time. A popular metric is the N-day retention rate, which measures how many users are retained after a specific day from the time they signed up.
Revenue churn
Revenue churn reveals how much revenue your company lost in a given time frame. It is useful in understanding how user churn might be impacting your revenue.
The formula is to take the monthly recurring revenue (MRR) within a time frame and divide it by the MRR at the beginning of the time frame. Then, multiply by 100 to get a percentage.
Net Promoter Score (NPS)
A Net Promoter Score is usually a one-question survey asking a user how likely they are to recommend a product or service.
Average NPS score can help identify specific users who are not satisfied and then address their problems. Additionally, NPS useful for gauging overall customer satisfaction.
Repeat purchase rate
Repeat purchase rate is a metric that measures the number of customers who buy more than once. This metric is particularly important for ecommerce, retail, and restaurant companies.
The repeat purchase rate is calculated by dividing the number of repeat customers by the total number of customers.
Customer lifetime value (CLV)
Knowing the customer lifetime value for different user segments and understanding how much they contribute to the company’s bottom line through their product usage is also important.
Once you have a high CLV, you may be able to afford to spend more money and time on acquisition.
What is a good retention rate?
Understanding what constitutes a good retention rate can be a bit complex because it greatly depends on the specific industry and the nature of the product or service. However, a rule of thumb is that a higher retention rate is generally better. It indicates that a large proportion of your customers find your product or service valuable enough to continue using it over time.
Retention rates can vary widely across different industries. For instance, in the SaaS (Software as a Service) industry, an average retention rate might be around 80–90 percent. In contrast, for ecommerce industries, a good retention rate might be significantly lower due to the nature of customer behavior in those markets.
In other words, there is no one-size-fits-all answer to what a good retention rate is. Each company must understand its industry standards, evaluate its unique customer base, and establish its own benchmarks for success.
While these numbers provide a rough guideline, the most effective way to understand whether your retention rate is good is to benchmark it against your past performance and against your direct competitors. Continually tracking and comparing these metrics will not only show you how well you are doing but also provide insights into how you can improve.
For example, if you notice that your retention rate is significantly lower than the industry average or has been decreasing over time, it might be a sign that you need to investigate and address potential issues with your product or service.
Remember, the ultimate goal is to keep as many customers as possible from churning so they continue to find value in your product and contribute to your revenue. Therefore, even a small increase in the retention rate can have a significant impact on your company’s bottom line.
Strategies to improve retention rate (with real-world examples)
A period of decline is every company’s worst nightmare, but it does happen. Fortunately, there are ways to manage product decline.
- Pivot
- Solicit customer feedback
- Streamline onboarding
- Enhance your value proposition
- Catch users before they leave
Pivot
It’s often advisable to take the pivot approach, which may mean entering a new market or re-engaging inactive users.
Netflix is a prime example of a company that successfully managed a decline period. Long the reigning champion of streaming services, it found itself with fierce competition and, subsequently, declining subscriptions.
Netflix elected to pivot and enter a new market. It’s currently in the process of adding a new subscription tier that will offer a cheaper rate with ad-supported streaming. The goal is to re-engage previous subscribers with an affordable subscription and also maintain their current customer base.
Solicit customer feedback
Gaining new customers is often more expensive than retaining existing customers. So while marketing to potential customers is an important part of growing your business, don’t neglect your current customer base. Your current customers are a gold mine for valuable feedback on what does and doesn’t work for them.
By injecting customer feedback into your retention strategy, you may find ways to improve the user experience.
SaaS companies especially may also want to consider investing in analytics software with session replay and performance monitoring features. This is a valuable tool to determine whether UX design, customer support, or other factors are causing users to stay as customers or cancel their subscriptions.
Streamline onboarding
The onboarding process plays a significant role in customer retention. A smooth and efficient onboarding process helps customers understand the value of your product from the beginning.
Creating a smooth user onboarding process can involve sending onboarding emails, providing checklists, or offering onboarding tooltips. Onboarding emails can introduce features and benefits, checklists can guide users through setup or typical workflows, and tooltips can provide in-app guidance and support.
Enhance your value proposition
Your value proposition should clearly articulate the unique value that your product provides. This could involve solving more customer pain points, or solving them more effectively than competitors.
Regularly revisiting and updating your value proposition can help ensure it remains relevant and compelling to customers.
Catch users before they leave
Implementing strategies to catch users before they leave can help to reduce churn. Common strategies include allowing customers to pause their subscription rather than cancelling and showing them the value they’d lose by leaving.
You may be able to plug any leaks in your retention rate by offering incentives to stay, such as discounts, special features, or personalized messages that show you value their business.
How to do a retention analysis
Retention analysis refers to comparing your current retention rate with past performance. This can help isolate the causes of what is causing it to increase or decrease.
Retention analysis is a critical tool for understanding your customer base and optimizing your strategies to increase customer loyalty and profitability. It involves studying customer behavior over time to understand how many customers continue to use your product or service and why.
To conduct a thorough retention analysis, take the following steps:
- Identify your timeframe
- Calculate the retention rate
- Examine other relevant metrics
- Perform a cohort analysis
- Benchmark against past performance and competitors
- Implement strategies to improve retention
1. Identify your timeframe
The first step in conducting a retention analysis is to determine the period over which you will evaluate customer retention. This could range from a few weeks to a few years, depending on your business model and customer lifecycle.
2. Calculate the retention rate
The next step is to calculate the retention rate for your chosen timeframe, as detailed earlier.
Remember, the retention rate is calculated by subtracting the number of customers gained within the timeframe from the number of customers at the end of that timeframe, dividing the result by the number of customers at the start of the period, and then multiplying by 100 to get a percentage.
3. Examine other relevant metrics
While the retention rate provides a useful overview, a comprehensive retention analysis should also consider other metrics. These might include cross-sell and upsell rates, revenue churn, Net Promoter Score (NPS), repeat purchase rate, and customer lifetime value (CLV), among others.
4. Perform a cohort analysis
A cohort analysis can offer deeper insights into your customer retention by grouping customers with similar characteristics and analyzing their behavior. This can help identify patterns and trends that might not be apparent when looking at your customer base as a whole.
5. Benchmark against past performance and competitors
To understand how well your business is doing in terms of customer retention, compare your current retention rate with past performance and the performance of your competitors. Identify areas where you are doing well and where there is room for improvement and create a plan to become more efficient in the next iteration.
6. Implement strategies to improve retention
Based on the insights gained from your retention analysis, implement strategies to improve customer retention. This could involve streamlining the onboarding process, enhancing your value proposition, or catching users before they leave.
Conclusion
While focusing on acquiring new customers is important, retaining existing customers should also be a priority. A good retention rate means that customers continue to use the product, which can lead to business growth. That seems simple enough, but the definition of a “good” retention rate can vary depending on the product and industry.
Understanding why customers leave or stay can take many forms. Key metrics to track include things like cross-sell and upsell, cohort analysis, N-day retention rate, revenue churn, Net Promoter Score (NPS), repeat purchase rate, and customer lifetime value (CLV).
Strategies to improve customer retention rate include streamlining the onboarding process, enhancing your value proposition, and catching users before they leave. It is important to continuously evaluate and improve these strategies to meet the evolving needs and expectations of your customers.
Customer retention rate is one of the most important measures of business success. It not only indicates the number of loyal customers but also provides insights into the effectiveness of the product or service in meeting customer needs. By tracking and improving customer retention rate, you can enhance customer satisfaction, increase revenue, and ensure sustainable growth.
Featured image source: IconScout
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