Also called: Customer Retention Rate, Repeat Customer Rate, and Loyalty Rate
See also: Churn, Monthly Recurring Revenue (MRR)
Relevant metrics: Conversion Rate, Customer Satisfaction, Average Revenue per User, User Engagement, Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), and Monthly Recurring Revenue (MRR)
How to calculate Retention Rate:
Retention Rate = (# Customers at the End of a Period - # New customers acquired during that period) / # Customers at the Beginning of a Period) x 100
What is a Retention Rate?
Retention rate is a metric that measures the percentage of customers or subscribers who continue to use a product or service over a specific period of time. It is a key indicator of customer loyalty and the overall health of a business. A high retention rate indicates that a company is able to retain its customers, which is essential for generating recurring revenue and achieving sustainable growth. Retention rate can be calculated for different time periods, such as daily, weekly, monthly, or annually.
How do you calculate the Retention Rate?
Retention rate is the percentage of customers or users who continue to use a product or service over a certain period of time.
Here’s an example of how to calculate retention rate:
Let’s say you have a total of 100 customers at the beginning of the month, and at the end of the month, 80 of those customers are still using your product.
To calculate the retention rate, you would divide the number of customers who continued using your product by the total number of customers at the beginning of the month, and then multiply that number by 100 to get a percentage.
Retention rate = (Number of customers at the end of the month / Number of customers at the beginning of the month) x 100
In this example, the retention rate would be:
Retention rate = (80 / 100) x 100 = 80%
So the retention rate for this month is 80%. This means that 80% of the customers who started using the product at the beginning of the month continued to use it at the end of the month.
Why is focusing on Retention and the Retention Rate so important?
Retaining existing customers is often more cost-effective than acquiring new customers. What good is getting tons of new customers if you’re leaving a giant barn door open to let them all churn the moment they have a chance? Acquiring new customers can be expensive, requiring marketing efforts and sales resources, while retaining existing customers typically requires less effort and expense.
A high retention rate indicates loyal customers
Loyal customers tend to spend more money over time and are more likely to refer new customers to the company. Retaining customers also provides the opportunity for upselling and cross-selling, increasing the revenue per customer.
Loyal customres contributes to building a strong brand and a positive reputation. Satisfied customers are more likely to leave positive reviews, refer others to the company, and become brand advocates. On the other hand, losing customers can lead to negative reviews and damage to the company’s reputation.
Customer retention is cost-effective.
One of the most significant reasons why customer retention is crucial is that it is up to five times cheaper to retain current customers than to acquire new ones. Acquiring new customers can be an expensive process involving marketing campaigns, promotions, and discounts. On the other hand, retaining existing customers involves focusing on building relationships and providing excellent customer service, which is less costly. When you retain customers, you can save money and allocate your budget towards other important areas such as product development and customer experience.
Customer retention leads to higher profits.
A higher customer retention rate leads to greater profits and lifetime customer value (LCV). According to research by Bain & Company, a 5% increase in customer retention generates more than a 25% boost in profit. This is because existing customers are more likely to buy additional products or services from your company, increasing their lifetime value. Additionally, long-term customers are more likely to recommend your products or services to others, providing free advertising for your brand.
Customer retention measures product success.
Customer retention also tells you whether or not your product is continuing to solve your customers’ problems. Retention rate represents one of the best ways to measure how well a product solves problems and adds value for its target personas. When customers continue to use your product over a long period, it indicates that the product is still providing value and meeting their needs. On the other hand, if the retention rate is low, it may signal that the product needs improvement or that customers are not finding it useful. By monitoring retention rates, companies can adjust their products or services to ensure they continue to meet the needs of their customers.
Strategies for increasing Retention Rates
There are many stratgegies to encourage continuous engagement with your existing customers and in turn increase the profitability of both each customer and your business. Here is a list of popular proven retention strategies:
Provide value throughout the customer lifecycle
One of the most effective customer retention strategies is to provide value with every interaction throughout the customer lifecycle. This means implementing a strong customer service strategy that focuses on creating memorable experiences for customers. It’s important to map out customer journeys, establish a customer service vision and goals, and involve everyone in optimizing each step. Collecting feedback is also crucial to measure results and improve as needed. By providing a positive customer experience, businesses can keep their customers happy and loyal.
Personalize your interactions
Tailoring and personalizing interactions with customers can lead to a better customer experience, as well as increased loyalty and retention rates. Automation can help to efficiently route emails and provide personalized responses. By listening to customers, showing empathy, and creating memorable experiences, businesses can create brand advocates who will spread positive word-of-mouth recommendations.
Reward brand advocates
Word-of-mouth recommendations from brand advocates are valuable for any business. Creating conditions that encourage and reward brand advocates can help to increase loyalty and retention rates. Businesses can engage with customers through social media, give personalized gifts, and create exclusive offers or events. Involving brand advocates in new product planning processes and featuring them in testimonials and case studies can also help to foster loyalty.
Collect and implement customer feedback
Collecting and implementing customer feedback can help businesses understand what’s working and where there is room for improvement. Gathering feedback proactively through polls, surveys, and reviews can help businesses improve their products or services. By understanding customers’ needs and concerns, businesses can improve customer experience and increase loyalty and retention rates.
Resolve customer issues quickly and effectively
Resolving customer issues in a timely and effective manner can turn a negative experience into a positive one. Research shows that customers are more likely to stay loyal if their issues are resolved during their first support interaction. Empowering teams to offer creative solutions and proactively reducing customer complaints can also help to increase loyalty and retention rates.
Create a loyalty program
Building customer relationships and inspiring loyalty can be achieved through a loyalty program. Repeat customers spend more, more often, and those with an emotional connection to a brand have a higher lifetime value. By creating a customer loyalty program and automating it, businesses can keep customers happy, increase referrals, and improve profitability.
Provide self-service tools and resources
Empowering customers to solve their problems quickly without needing to reach out for support can improve customer experience and increase retention rates. A knowledge base that’s easily searchable and accessible to customers and employees can handle common and repetitive questions and problems, making customers happy and improving team productivity.
Set clear expectations and follow through on promises
Setting clear expectations and following through on promises can help to avoid customer complaints and increase loyalty and retention rates. Regular, clear communication is key, involving all departments involved in customers’ experience. Tracking customer satisfaction metrics such as Net Promoter Score (NPS) and Customer Effort Score (CES) can help businesses be proactive in re-engaging customers.
Meet customers where they want
Engaging customers in omnichannel experiences can increase spending and retention rates. Understanding which touchpoints matter most to customers can help businesses optimize each chosen support channel. Surveying customers can help businesses understand their preferences and optimize their support channels accordingly.
Frequently asked questions
What is the difference between churn rate and retention rate?
Churn rate and retention rate are two related but opposite metrics used to measure customer behavior and loyalty.
Churn rate measures the percentage of customers who have stopped doing business with a company over a given period of time. It’s a negative indicator, indicating the rate of customer loss or attrition. A high churn rate suggests that a company is struggling to keep its customers happy and engaged.
Retention rate, on the other hand, measures the percentage of customers who continue to do business with a company over a given period of time. It’s a positive indicator, indicating the rate of customer loyalty and engagement. A high retention rate suggests that a company is doing a good job of keeping its customers satisfied and committed to its products or services.
While churn rate and retention rate are opposite metrics, they are related in that a high retention rate can help reduce churn rate. By focusing on customer retention and improving the customer experience, companies can increase the likelihood that customers will remain loyal and continue to do business with them. This, in turn, can lead to a lower churn rate, which can help improve a company’s overall profitability and growth.
Amazon is a great example of a company that has mastered retention. With its Amazon Prime membership program, the company has been able to keep customers engaged and coming back for more. By offering free shipping, exclusive deals, and access to streaming content, Amazon has created a powerful incentive for customers to stick with the company.
Netflix is another company that has made retention a priority. By investing heavily in original content and developing algorithms that recommend shows and movies to users, the company has been able to keep customers engaged and coming back for more.
Spotify has become one of the leading music streaming services in the world in part due to its focus on retention. The company has developed a highly personalized experience for its users, recommending new music based on their listening habits and keeping them engaged with playlists, podcasts, and other features.
HubSpot is a marketing software company that has built its business around customer retention. By offering a suite of tools that help businesses attract, engage, and delight customers, HubSpot has been able to keep customers on its platform for years.
What is the time period for which the retention rate is being measured?
Hint The time period for which the retention rate is being measured can vary depending on the company or organization, but is typically measured over a period of months or years.
What is the population size of the group being measured?
Hint The population size of the group being measured is the total number of customers or members that the company, organization, or service has.
What is the desired outcome of the retention rate?
Hint The desired outcome of the retention rate is to have a high percentage of customers or members that remain with the company, organization, or service over a given period of time.
What are the factors that could affect the retention rate?
Hint Factors that could affect the retention rate include customer satisfaction, competitive offerings, pricing, and marketing efforts.
What strategies can be implemented to improve the retention rate?
Hint Strategies that can be implemented to improve the retention rate include improving customer service, offering competitive pricing, and providing incentives for customers or members to remain with the company, organization, or service.
How will the retention rate be monitored and evaluated?
Hint The retention rate can be monitored and evaluated by tracking customer or member retention over time and comparing it to industry benchmarks.
You might also be interested in reading up on:
- Neil Patel @neilpatel
- Larry Kim @larrykim
- Ann Handley @MarketingProfs
- Rand Fishkin @randfish
- Brian Solis @briansolis
- Made to Stick: Why Some Ideas Survive and Others Die, by Chip Heath and Dan Heath (2007)
- Influence: The Psychology of Persuasion, by Robert Cialdini (1984)
- Your Brain at Work: Strategies for Overcoming Distraction, Regaining Focus, and Working Smarter All Day Long, by David Rock (2009)
- Hooked: How to Build HabitForming Products, by Nir Eyal (2014)
- Tiny Habits: The Small Changes That Change Everything, by BJ Fogg (2020)
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