Customer Retention Rate Calculator
Customer retention rate is the percentage of customers who continue to be paid customers of the organization after a certain period. It is a significant metric to understand how your customers view and use your product, and helps plan your customer engagement initiatives accordingly.
What is customer retention?
Customer retention is an organization’s ability to hold on to a customer for a period. Organizations estimate this percentage-based metric at the end of a defined time interval to compare the number of new customers acquired at the beginning of the period with the number of customers retained over the same period.
How to calculate the customer retention rate?
You can calculate customer retention rate by using the following formula:
Customer Retention Rate = (( Number of customers at the end of a time period - Number of customers acquired during that time period)/ Number of customers at the beginning of that time period)) * 100
For example, let’s say you had 100 customers at the beginning of the month, you acquired 10 during the month but 15 customers churned, implying that you have a total of 95 customers at the end of the month.
In that case, your customer retention rate will be:
Customer Retention Rate = ((95-10)/100)) * 100 = 85%
This means that 85% of the customers are happy and continue to use the product.
A high customer retention rate has a positive impact on the company’s revenue and profits, as it reduces the need to constantly acquire new customers to grow, and the current users can be leveraged to gain new customers by word of mouth marketing, testimonials and other such initiatives.
How to calculate customer retention value?
Businesses need to calculate customer retention value to know the amount of money that they can expect to earn over the customer’s lifetime.
Customer Retention Value [CRV] is calculated by multiplying the average purchase value by the number of purchases per year, and then multiplying that number by the average customer lifespan.
Here is the formula:
CRV = Average Purchase Value x Number of Purchases per Year x Average Customer Lifespan
For example, if a business has an average purchase value of $150, customers make an average of 2 purchases per year, and the average customer lifespan is 5 years, the CRV would be calculated as follows:
CRV = ($150) x (2 purchases/year) x (5 years) = $1500
This means that the business can expect to earn $1500 from each customer over their lifetime.
How to calculate customer retention rate improvement?
Merely estimating the customer retention rate is not enough. Businesses also need to identify the appropriate strategies to know how they can improve their customer retention rate.
To do that, businesses need to be able to determine the customer retention rate improvement, to know if their customer loyalty programs and service strategies are delivering the required results.
To calculate the improvement in customer retention, you will need to compare the customer retention rate at two different points in time and determine the difference between them.
Here is the formula:
Improvement in customer retention rate = ((Current retention rate - Previous retention rate)/ Previous retention rate)) * 100
For example, if a business has a retention rate of 80% over the past year, and their retention rate was 70% the year before, the improvement in customer retention would be
Improvement in Customer Retention = ((80 - 70) / 70)) X 100 = 14.3%
This means that the business was able to improve its customer retention rate by 14.3% over the course of the year.
Why should you care about customer retention rate?
Many times organizations are so busy chasing new customers that they miss out on a major aspect - focusing on the existing customers. Once you know the customer retention rate of your company, you can identify how your customers view your product and adopt suitable strategies to improve retention.
Numbers can give you a lot of visibility. Knowing the customer retention rate can help you improve your customer service and ensure that you set practical expectations.
You should care about customer retention rate because:
- Retaining existing customers is 5 times more cost-effective than acquiring new customers.
- Higher customer retention, the better chances to cross-sell and upsell your services to existing customers. This means greater opportunities to boost revenue.
- Retained customers are satisfied with a brand’s services. Hence, with proper loyalty initiatives, brands can easily generate new business opportunities by leveraging these customer relationships.
5 Tips to improve customer retention rate in your organization
Now that you understand the importance of customer retention rate, here are a few tried and tested tips to improve it:
1. Don’t just preach, show results during sales calls
Successful brands start their customer retention initiatives right from the sales process. Before a rep can convert a lead into a customer, they need to determine if the prospect is the right fit. If a brand can prove that its services are exactly what the prospect needs, the chances of retention already double up.
The question is how?
During sales calls, sales reps should not just preach about their achievements. Instead, they should opt for the “Show, don’t tell” framework. That means presenting previous customer stories and explaining how your brand has successfully dealt with similar pain points for other customers.
Sales reps can also share testimonials of current customers to build reliability. The aim is to provide as much information as possible to the customers so that they can make an informed buying decision.
Office365, a cloud-based productivity software from Microsoft, uses several customer stories and testimonials in its sales deck to win prospects’ trust:
2. Create a clear plan for customer relationship management
As soon as you onboard a customer, make sure to create a customer relationship management plan for them. It is evident that customers would want in-depth visibility into your services and what you’re working on next to make their lives easier.
The same old routine doesn’t always help. Suppose you have a very good relationship with the customers, have a strategy in place, and are taking the right steps to help the customer resolve all the challenges.
However, all these may not be sufficient to retain a customer. One fine morning, the customer may realize that all these activities are monotonous, and they may opt for another service provider simply because they want fresh new perspective.
To avoid such challenges, businesses need to allocate a dedicated customer success manager for each customer who will work closely with their team, understand their challenges and build a customer relationship management plan with lots of new ideas.
An ideal customer relationship management plan should include the following:
- Strategic and tactical approaches to address customers’ pain points.
- Goals and objectives to achieve within the scheduled time period.
- Weekly/bi-weekly review of results.
- Regular brainstorming sessions to identify and fix bottlenecks.
A balanced customer relationship management plan motivates the customers and shows them the efforts you put into retaining them.. This can be a key decision-making factor for the customers when deciding whether to move ahead with your brand.
3. Build a strong customer feedback loop
How can you help the customers if you don’t know what they think about your brand?
Organizations need to build a powerful feedback loop to communicate customers’ feedback with their internal team. A customer feedback loop can automate the process of feedback collection, communication, and feedback distribution to speed up your operations.
Here are a few tips for creating your first customer feedback loop:
- Start with collecting customer feedback across different channels. Some of the easiest ways to collect customer feedback are - survey software, review portals, live chat tools, and social media monitoring tools.
- Analyze customer feedback to identify patterns. These patterns will help you identify what works for the customer and what doesn’t, which pain points have been addressed, which still require attention, and so on.
- Once the organization lists the major customer feedback, the next step is to successfully communicate them with your product team and take actionable steps.
- Finally, when the changes are implemented and tested, you must communicate the same with the customers. This will make the customers feel valued and build their interest to engage with your brand for a long time.
4. Execute customer retention campaigns
Customer retention campaigns are highly valuable. A successful customer retention campaign is a mix of various marketing strategies to develop long-term customer relationships.
Australian clothing brand Barney Cools launched a creative retention campaign a while back.
Apart from all the men’s clothing items, you can also find an entire section dedicated to lifestyle in this store. You can find many user-generated content, articles, and events under this section. This strategy is to retain the customers by projecting that Barney Cools has more to offer than just trendy clothing.
5. Engage the customers with the company newsletter
Customer retention doesn’t have to be costly. An affordable way to retain customers that never goes wrong is to send a newsletter. With an email automation tool, you can easily automate the whole process.
Your weekly/monthly customer newsletter can include product updates, the latest news, and any other detail that might be relevant to the customers. The newsletter will help the customers remember your brand and its contribution when they open their inboxes. This is indeed a long-term nurturing strategy.
This is the time to focus on customer retention and create a plan for your customer retention initiatives, which should be implemented at the earliest. An effective customer retention plan can make a lot of difference for your brand and help you derive long-term results
Use this Google Sheet template to calculate your customer retention rate. With this easy-to-use calculator, you'll have the power to track your retention rate and identify areas for improvement.
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