What is customer retention?Last edited: Aug 24, 2022
Customer retention is the sum of all strategies companies use to prevent their customers from abandoning their products. Companies aim to retain as many of their customers as possible because doing so generally takes less effort and is more productive than acquiring new ones. When executed properly, higher retention can lead to tremendous profit.
Why do companies want to increase customer retention?
Customer retention is low-hanging fruit for company growth. Compared to new customer acquisition, retention requires less effort and often has a much higher dollar-for-dollar payoff. According to the White House Office of Consumer Affairs, “It is 6-7 times more costly to attract a new customer than it is to retain an existing customer.” Customer retention efforts also pay dividends. Bain & Company found that a mere 5 percent increase in customer retention could lead to a 25 to 95 percent increase in overall revenue. While you can’t completely replace acquisition with retention — new customers must come from somewhere — a customer retention strategy can make you far more profitable.
Why is retention easier than acquisition?
Reaching out to customers with whom you already have an established relationship requires less effort. They’re more agreeable because they already like you, understand the value you provide, and have chosen to buy from or engage with you. This makes their customer journey brief and simple.
Why don’t companies focus more on retention?
Despite the advantages of retention, many companies still focus far more heavily on new customer acquisition. Adding brand new customers is exciting and these activities often receive the lion’s share of attention, budget, and resources. Companies also tend to overestimate their ability to retain customers naturally through customer service, which according to Forbes, they dramatically overrate:
- 80% of companies rated their customer service as superior
- 8% of customers rated companies’ customer service as superior
Companies that believe they provide excellent service tend not to invest in it, which leads to poor customer experiences and low retention. In aggregate, poor customer service of this sort cost brands $1.6 trillion worldwide in 2016 according to Accenture. To shore up your share of customer service-related retention loss, it will help to know how to calculate your retention rate.
Don’t be the emperor who has no clothes: Use product analytics to measure customer service. As many as 97 percent of customers who churn do so without providing feedback. With a product analytics platform you can skip the guesswork and see precisely what factors lead to churn, test solutions, and increase customer retention.
How do you measure your customer retention rate?
Customer retention rates are most often reported as a percentage of total customers. For example, a mobile app company might say “we have a 96 percent retention rate,” which in many industries, would be quite high.
Retention is critical for apps, social networks, and media brands: For companies that rely on large, mostly unpaid customer bases, user retention is critical. Users often have many alternatives, a low cost of switching, and may change their minds daily. Many of these companies leverage a product analytics platform to proactively engage users and avoid runaway churn.
To calculate your retention rate, you must determine how you plan to measure it. Will it be based on your total number of customers or your total revenue? Will you measure it by month, quarter, year, or all-time? Take a moment to record your definition. Once you decide how you will measure your product’s retention, calculate these three numbers:
- The number of customers at the start of that period
- The number of customers at the end of that period
- The number of customers acquired during that period
You can measure your customer retention by plugging those numbers into the following equation.
The customer retention equation:
((# of customers at end of period – # of customers acquired during period) / # of customers at start of period ) x 100 = retention rate
For example, if you had 120 customers at the end of the period, 104 at the beginning, and acquired 20 during that time, your equation would look like this:
((120 – 20) / 104) x 100 = 96% customer retention rate
Are your customer retention rates high or low?
The answer to that question will depend heavily on your industry, company, and revenue model. A dating app might have a naturally low app retention rate because its users churn the moment they find love, whereas a financial services app might have an incredibly high retention rate because banking services are sticky. Benchmark yourself against similar companies but, most importantly, benchmark against your own past performance.
Customer retention is easier with product analytics: Calculating your customer numbers month after month and quarter after quarter can grow cumbersome. A product analytics platform allows companies with technology offerings to automatically track everything that happens within their app or site and automatically take action.
You can calculate customer retention by revenue as well
The equation above shows how to calculate retention by total customers, but there are also other variables you can use. If the dollar value of each of your customers greatly varies, it may make more sense to measure retention by revenue. For example, a software company that has a handful of large, high-paying clients and a great number of small, low paying ones. The impact of retaining five small clients might be very slight compared to retaining the same number of big clients. You can highlight this difference by measuring retention by revenue. If you wish to calculate your customer retention by revenue, simply use the equation above and substitute the term “number of customers” for “revenue.” It is possible for your customer retention rate to be over 100 percent if you’re measuring it by revenue.
Unlike measuring by number of customers, where each customer can only ever be worth “1,” your current customers can grow in revenue. They can go from being worth “1” at the start of the period to being worth “1.2” or even “2” by the end. When this customer base growth more than offsets any losses from churn, you end up with a number over 100 percent. Take the time now to calculate your customer retention rate. Is it higher than you expected? Lower? How does it compare to others in your industry? If it’s not what you had hoped, there is plenty you can do to fix it. Need to improve your retention? Read What Are Customer Retention Strategies?