As the name suggests, retention rate is a calculation that allows companies to determine what percentage of their customers they are retaining versus the amount they are losing. It’s the amount of people who are doing business with a business at the end of a given period of time. This number is expressed as the percentage of individuals who were active customers at the start of the given period.
It’s important for business owners to have a firm understanding of how many customers they are attracting and retaining. This information allows them to determine if their marketing efforts are working or if they need to make improvements. If the percentage of the percentage rate is high, a business knows that it’s making the right moves to attract and retain customers; if it’s low, an organization can work on developing techniques to reduce the amount of defections and improve retentions. In other words, knowing your customer retention rate can allow you to determine if your business is growing, and if not, take action to improve growth.
How to Calculate Customer Retention Rate
To calculate customer retention rate, there are three basic piece of information that you need:
- The amount of customers at the end of the given period (E)
- The number of new customers acquired during the given period (N)
- The amount of existing customers at the start of the given period (S)
Once you have this information, you can work your calculation. Subtract N from E to calculate the remaining customers at the end of a period, then divide that amount by the total number of customers at the start of the period and multiply by 100.
For example, if at the beginning of a period you had 100 customers and at the end of the month you had 105, though you lost 15 and attracted 20 new customers, the calculation for your retention rate would be as follows:
((105-20)/100)) X 100
Your customer retention rate would be 85 percent. In other words, 85 percent of your customers are still doing business with you at the end of the period, and the rate at which you are losing customers is 15 percent.
Why Customer Retention Rate is Important
Though customer retention rate is pretty easy to calculate, the percentage provides a lot of value. Some of the benefits of knowing your customer retention rate are as follows:
- In order to continue growing your business, you not only need to attract new customers; you need to replace customers that you have lost. By increasing your customer retention rate, you can save money in the long run. That’s because it costs less to retain existing customers than it costs to acquire new ones.
- Customer retention rate can also let you know how loyal your customers are and how effective your customer service efforts are. By keeping track of and benchmarking your customer retention rate, you can figure out new ways to improve your customer service efforts so that you can ensure your customers are satisfied and continue doing business with you.
- A high customer retention rate is a key indicator of the growth of your business. By increasing customer retention, you can substantially increase your profits.
Ways to Improve Your Customer Retention Rate
In a perfect world, your customer retention rate would be 100 percent, which would indicate that you never lose any customers. In reality, however, retaining 100 percent of your customers isn’t likely. A better goal is to achieve a 90 percent retention rate. Why? – Because even if your customer service is excellent, it’s still highly likely that you are going to lose customers for reasons that aren’t related to customer service; however, retaining 90 percent of your customers puts you in an excellent position for growth.
If your retention rate isn’t where you would like it to be, here are some tips that can help you improve it:
- Establish expectation. The success of a business begins with customer expectations. If your customers are expecting outstanding results but you only deliver good results, there’s a chance that they will leave. If they are expecting decent results but you deliver outstanding results, they’ll be overjoyed. Don’t set your expectations too low, however, as people won’t choose to do business with your company in the first place.
- Over-deliver. Deliver more to your customers than you promised them. Exceed what you said you were going to provide and give your customers things that they weren’t expecting.
- Promote loyalty. If you give your customers a reason to continue doing business with you, your retention rate will increase. Establishing a customer loyalty program can help you achieve this goal.