What is Retention Rate (And How to Calculate it)?

Retention rate shows the percentage of customers who pay for a product continuously over a given period. For example, businesses that operate from a subscription-based model will pay close attention to retention rate to estimate customer lifetime value, and to forecast revenue.

Businesses that sell products only once over a long period, like a car dealership, for example, are not as likely to use retention rate as a core metric to measure success, unless it also offers another ongoing form of revenue, like an ongoing warranty program.

How to Calculate Retention Rate?

The customer retention rate formula is as follows:

{(CE-CN) / CS} x 100

Provided a measurement period:

• CB: number of customers at the beginning of the period
• CN: number of new customers who sign up for your product during the period
• CE: number of customers you have in the end

Why Measuring Your Retention Rate is Important

Retention rate, especially for subscription-based organizations, plays a significant role in the growth of a business for several reasons:

It's Expensive to Acquire New Customers

Generating new customers requires costly advertising and marketing campaigns to attract them to your business and subsequently improve profits. In fact, it is five times more costly to acquire new customers than to retain those you already have.

High Customer Retention Translates Into Higher Company Revenue

Trust is an essential part of any business, and when customers repeatedly purchase a product from you over a long time, they build trust with you and value your brand. This increases their probability of buying any new products you make as well. Research shows:

• You’re 40% more likely to sell to an existing customer than converting someone who has never bought from you before.
• Companies see a 25% rise in profits for every 5% increase in customer retention.
• 80% of your future profits will come from just 20% of your existing customers.

Satisfied Customers are More Likely to Give Referrals

When customers are satisfied by products and services, they not only come back for more, they also bring people with them. Retained customers tend to praise the company and refer it to their family and friends.

Data shows that loyal customers are 5x as likely to repurchase, 5x as likely to forgive, 4x as likely to refer, and 7x as likely to try a new offering compared to new customers.

Customer Loyalty Creates Opportunities for Repeat Purchases and Upsells

With more efforts spent on nurturing customers you already have, they become loyal to your brand. These customers tend to make repeat purchases and spend more as compared to the new ones. They know your product is good and are satisfied with it to keep coming back for more.

Repeat customers also carry a higher probability of trying out new products. You need to focus on building a customer base and keep them satisfied once you have one.

Are you looking to improve the retention rate at your organization?