Analyzing customer retention can be a tricky business.
- What matters most? Retained customers or retained dollars?
- How much do losses matter if they are offset by acquisition?
- Who is being churned — your best customers or those who might make room for more valuable customers?
While understanding customer attrition is often complex, no matter what your business model, almost every organization can benefit from tracking and attempting to understand customer retention and churn.
First let’s begin with the definition of the customer retention rate.
Retention Rate Definition
The customer retention rate is the percentage of an organization’s existing customers that are kept or retained during a measured period.
The retention rate measures how a company is doing generating loyalty among its customer base; however, like any single metric, it is only one piece of a more complex view of an organization’s success in retaining customers.
Before we look at that complexity, let’s first look at the formula for calculating the Customer Retention Rate (CRR).
Customer Retention Rate Formula
To calculate CRR, you simply use the following formula:
CRR = ((E-N)/S) X 100.
Now, this formula might look a bit “mathy,” but it follows a very simple logic.
Take the number of customers you had at the END of the period (E), subtract the NEW customers you gained during the period (N); that leaves you with the number of customers you would have had if you hadn’t added any — in other words, the number of customers you retained out of what you started with.
Then, you simply divide that number by what you STARTED with (S). The “x 100” just makes it a percentage, not a decimal.
So, you started with 1,000 customers, ended with 1,100, and added 200 during the period. Here’s what it looks like:
((1100-200)/1000) x 100 = 90%
You can also use Churn Rate, which is simply the inverse of CRR. In other words, CRR is the percent you retained, Churn Rate is the percent you lost. So that formula would be…
CR = L/S x 100.
This is customers LOST divided by customers at the START.
(100/1000) x 100 = 10%
In other words, one tells you that you kept 90%, the other that you lost 10%. Tomato, tomahto.
Customer Retention Rate in Perspective
The most important aspect of measuring customer retention is actually knowing what retention means to your business — which is where revenue retention and other metrics come into play.
For example, look back at the questions at the beginning of this post. Just determining that you lost customers, doesn’t let you know how problematic that loss is. Here’s a few examples of how the CRR and Churn don’t give you the full picture:
- If you’re replacing lost customers with more valuable customers, then the attrition is less concerning, particularly in the short term.
- If your customer acquisition costs are extremely low, retention is less concerning than if it costs a great deal to replace those lost customers.
- If you’re retaining customers but the customers are worth less (perhaps they are downgrading packages or spending less), then a high CRR might be misleading.
Looking at revenue helps complete the picture; just knowing you’re losing or retaining customers is not enough.
However, these concepts can also be applied to non-SaaS businesses that have recurring revenue dynamics.
Retention Rate Is Only Part of the Picture
Understanding and knowing how to calculate your customer retention rate and customer churn are important to understanding how well your organization is performing in generating customer loyalty.
Just remember, these metrics only show part of the picture, and you need to dig deeper to understand the root causes of churn and the demonstrable impacts it may have on your organization in the long term and short term.
For more on customer retention, check out these customer retention statistics.
To see how the retention rate plays a part in understanding customer lifetime value, make sure to check out this post.