How to Calculate Customer Retention Rate: formula and metrics

The customer retention rate formula allows you to determine how effectively a company works with its existing customer base. By calculating key loyalty indicators, you can optimize your marketing strategy, increase resource usage efficiency, and choose new promising areas of business development. 

In this article, we will tell you how to get the main customer retention metrics, what they affect, and what benchmarks should be your reference values.

What is the Customer Retention Rate

Customer retention rate is the relative number of regular customers who cooperated with the company during the reporting period. This indicator does not take into account new customers who have joined the business audience over a certain period. 

It is important to choose the right period to find the level of customer retention. When it comes to SaaS products or other subscriptions, you can choose any period of time, starting from one day. But in retail, such detail is unnecessary, as the frequency of purchases depends on the cost and characteristics of certain products. For example, a grocery supermarket can safely measure customer retention rates for a week or two weeks, a small electronic gadget store - for one year, and a real estate agency and car dealership - for 3 or 5 years.

How to Calculate Customer Retention Rate: formula

The customer retention formula looks like this:

For example, if a company has 100 customers at the beginning of the period and 110 at the end, including 18 new ones, the indicator will be equal to (110-18)/100×100%=92%.

It is also important to understand that retention and churn rates are interdependent. The higher the first number, the lower the second, and vice versa. Therefore, there is an alternative formula for customer retention calculation:

For example, the analytics system automatically calculated an 11% churn rate. But it doesn't have a retention rate by default. To get it, you don't have to reconfigure reports or buy additional modules. You can subtract 11% from 100% to get 89%.

It is essential to know how to find customer retention rates. According to Invesp, selling additional products to regular customers is 3-14 times easier than expanding the customer base. By working with the existing base, it is possible to optimize the use of marketing budgets, reduce the workload of company employees, and improve overall financial results.

Customer Retention Rate Metrics

It is difficult to describe customer loyalty with just one or two indicators. Therefore, building a full-fledged analytics system is necessary to make the right management decisions. Let's learn more about the most important customer retention metrics.

Income Retention

It shows how profitable cooperation with regular customers is. The formula looks like this:

This indicator should not be analyzed independently but in conjunction with the usual metrics of retention and churn. For example, a company's SaaS service lost a lot of subscribers over the past year. However, the level of revenue retention remains quite high. This means that the churn is formed by users of free and basic versions. And this situation is not necessarily negative. The loss of such subscribers allows the company to free up resources to serve priority customers who generate the bulk of income.

Customer lifetime value

There are several formulas for this metric. The most popular calculation is the following scheme:

By calculating customer retention and lifetime value, you can find out if improving the terms of service is worthwhile to reduce churn. If cooperation with a customer generates relatively little revenue, it may be better to let them go instead of offering discounts, bonuses, or other retention tools. 

The customer lifetime value metric is the most useful in the context of customer segmentation. By dividing them into groups on this basis, you can choose individual strategies for working with them. This allows for optimizing the marketing budget and personally addressing a customer. According to McKinsey, at least 71% of consumers expect personalization when interacting with a business, and 76% are upset when they don't get what they want.

Repeat purchase rate

If you consider products with a long life cycle, such as a car or a computer operating system, it is reasonable to measure customer retention through repeated business. The following metric is used for this purpose:

For example, a car dealership served 200 customers over three years, and 13 of them changed their cars during this period. The repeat purchase rate is 13/200×100=6.5%. Some companies go further and calculate the level of loyalty by creating their own criteria for this concept. For a coffee shop, loyalty can be seen as 4–5 purchases per week, and for a hardware store - 1–2 purchases per month. In this case, the formula is transformed - it takes into account the number of customers who bought the product at least N times, where N is the loyalty criterion.

Net promoter score

Unlike other metrics, NPS does not have a precise calculation formula. It is based on survey results. In surveys, customers are asked to assess the likelihood that they would recommend a particular brand or product to their friends. Usually, marketers use a scale from 1 to 10, which has a scientifically based interpretation.

People who give a score of 0 to 6 are considered detractors, 7 or 8 are passive customers, and 9 or 10 are loyal customers. To assess the overall reputation of a company, marketers sometimes use the aggregate NPS index:

The following formula can also be used to make management decisions:

A negative figure means that people are generally dissatisfied with the business and that the approach to marketing, service, pricing, or product policy should be changed. A figure from 0 to 20% means a neutral attitude, from 20 to 50% - generally positive, and over 50% - very positive. The British jewelry company Taylor & Hart has one of the highest scores in the world, scoring over 80% in a study conducted by Hotjar in 2020.

What Is a Good Customer Retention Rate

We get a certain percentage when calculating the indicator using the basic formula for customer retention rate. It is worth comparing it to a particular benchmark to understand whether it is positive or negative. And it is important to know that there is no single standard for a good customer retention rate. Each field of activity has its own value, which is worth focusing on. 

According to Exploding Topics statistics, the average customer retention rate across all industries is 75% per year. The highest and lowest rates are observed in the following industries:

It also depends on how to measure customer retention rate. Choose the optimal time period for your business to get a real, meaningful figure. Another important tip is to evaluate the indicator in the dynamics, analyzing its changes. This will allow you to draw conclusions about the correctness of certain decisions.

Customer Retention Rate: How Claspo Can Help

Claspo is a convenient platform for creating widgets that can solve the following customer retention tasks:

• Collect feedback via surveys. You can add a short survey form directly to the widget or use it to redirect site visitors to the appropriate page. We carefully store all your customers' answers and allow you to download them in CSV format. However, the best option is to integrate Claspo with your ESP or CRM and transfer all responses to a single data repository to further communicate with each customer based on their responses.
• Offer personalized discounts, promo codes, and bonuses to increase customer loyalty. With Claspo, you can show your widget with a discount only to those visitors who came to your site from a particular communication channel, advertisement, or email campaign.

For example, if you announce a discount to your customers in an email newsletter, only they will see a widget reminding them of your offer after navigating to your site. It can direct customers to a relevant page or contain a unique promo code that they can apply on the checkout page to receive a discount.

• Retain users with final offers. Claspo allows you to set up different widget display scenarios to place them in the proper context and increase their effectiveness. For example, your widget can appear when a customer goes to an unsubscribe page or tries to leave the site, showing them a personalized offer that can change their mind.

Whatever solution you choose, it is easy to bring it to life. Claspo has over 700 ready-made widget templates for different purposes and a simple visual editor to customize them. Since no design or programming skills are required to use Claspo, you can create your first without any help today.

The best part is that Claspo's free plan with no time limit allows you to verify the effectiveness of our platform and see the first results without spending a single penny. So why delay? Strengthen your customer retention strategy with widgets now!