Your Guide to Measuring Customer Retention
Your Guide to Measuring Customer Retention
Keeping your existing customers may not be as sexy as landing new ones, but it’s arguably more important for sustaining growth. In fact, increasing customer retention by just 5% could boost profits by anything from 25% to 95%.
And if you want to get a handle on your customer retention efforts, you’ll need to undertake some form of customer retention measurement.
This refers to the metrics you need to monitor to discover how well your business is performing at keeping your customers happy, engaged, and coming back for more. Metrics like customer retention rate (CRR), customer churn rate (CCR), and customer lifetime value (CLV) can shed a lot of light on consumer loyalty or “stickiness,” and here we share how (and why) to measure them.
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How to measure customer retention rate
Expressed as a percentage, your customer retention is the number of customers you retain over a certain period of time. For SaaS or subscription-based businesses, for example, you may want to measure the period from the initial sign up to the first payment renewal, or later.
Measuring customer retention is not interchangeable with measuring customer numbers, as that doesn’t account for those who’ve dropped off the system and been replaced by new customers.
Growing customer numbers will always look nice on a line graph; however, tracking existing customer retention will help you better understand user behaviour long-term.
To measure customer retention rate, use this simple formula:
[(E-N)/S] x 100 = CRR
Where:
- E = number of customers at the end of the period
- N = number of new customers gained within the period
- S = number of customers at the beginning of the period.
For example:
Let’s say a company had 200 customers at the start of the period in question. They then end the period with 180 customers, adding 10 new customers over the period. The formula would look like this: [(180-10)/200] x 100 = 85, giving them an 85% customer retention rate.
5 other customer retention metrics to measure
While the above formula will give you an overall figure, you may want to take some other metrics into account to get an even clearer view of customer loyalty.
Here are five more metrics worth tracking:
- Customer churn rate
- Repeat purchase rate
- Net Promoter Score
- Customer lifetime value
- Revenue churn
1. Customer churn rate
The churn rate is the opposite of your customer retention rate. It’s the percentage of customers who have fallen off the system. You can either work this out by simply subtracting your customer retention rate from 100, which will leave you with the churn rate or with this formula:
(Churned customers / Original number of customers) x 100
Determining your churn rate is essential, as many business models rely on that repeat custom, so it’s imperative to understand your churn rate and reduce it as much as possible. It can, however, be challenging to determine when a customer is churned.
It’s important to know your business and understand how customers use it to determine where churn rate comes into play. For example, a food subscription service might consider a customer churned when they haven’t placed a box order after six months.
Or, they may only consider customers active when they purchase a box each week and model business growth around these customers.
Using customer data, the subscription service could pinpoint that they get new orders from existing users in the summer holidays, where parents are more time-poor, or that if an order hasn’t been placed in two months, it’s unlikely that another one will come in. They can then use this information to respond with timely and targeted marketing campaigns.
2. Repeat purchase rate
The repeat purchase rate is the percentage of customers who make additional purchases after their initial purchase. While SaaS and subscription services may be more concerned with customer retention rates, measuring repeat purchase rates can be more valuable for traditional commerce without fixed contracts.
Measure your repeat customer rate by using:
Number of return customers / Total number of customers
3. Net Promoter Score
Net Promoter Score (NPS) helps you measure customer loyalty by sending customers a one-question survey that asks: “how likely are you to recommend [your business] to someone you know?”
NPS is a useful way of finding out what percentage of your customers are brand advocates and what percentage feel indifferent. You can also use it to spot churn before it happens — and reduce customer drop-off with targeted loyalty strategies.
4. Customer lifetime value
Customer lifetime value (CLV) is the amount of profit each customer generates over their whole lifecycle. It’s an important metric because it will help you decipher whether it’s more profitable to acquire new customers or retain existing customers.
Many subscription-based services will discover the latter, as the upfront user fee is just a fraction of their overall payments on a long-term basis.
Measure customer lifetime value with this formula:
(Average order value x Repeat purchase rate) - Customer acquisition cost
Or this formula:
(Average number of transactions in time period x Average order value x Average gross margin x Average customer lifespan) / Total number of customers
5. Revenue churn
Revenue churn is how much monthly recurring revenue (MRR) has been lost over a certain period. Instead of focusing on the number of customers, revenue churn considers their impact on profits as first priority. The revenue churn formula will help you understand how important it is to retain customers before investing in resource-intensive customer retention strategies.
So, when might it not be an issue to lose customers? Well, you may have certain customers paying discounted rates who aren’t actually affecting your bottom line that greatly.
For example, if you have a student discount rate and discover that users discontinue paying once they have to pay a full rate, it may not be so detrimental to lose them, and you might want to focus your attention on those who will pay the full fees instead.
Measure revenue churn with this formula:
(MRR lost within time period / MRR at the beginning of time period) x 100
Read More: B2B Marketing KPIs: How to Measure Success
Recap: the importance of measuring customer retention
The importance of customer retention can’t be understated — it cuts through just about every facet of a business. And if you track and understand the right metrics, you’ll have a far easier time aligning your marketing and customer service initiatives to keep your customers happy.
By supplying your sales, marketing, customer service, and product teams with clear and considered customer retention data, you can help them fine-tune their own activities. This, in turn, can improve the customer experience, slow churn, and reduce customer acquisition costs.
Are you ready to start tracking customer retention? Get some help with Traktion’s pre-vetted industry experts. Our platform is free-to-use to hire the very best freelance marketing talent.
