How to Use the Customer Retention Rate Formula

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How to Use the Customer Retention Rate Formula

How do you use a customer retention rate formula to guide your business? Customer retention rate is a key metric for measuring the success of your business. In this article, we’ll discuss what customer retention rate is and how to use the most common customer retention rate formula. We’ll also look at some examples to help you understand the calculation process. And lastly, we’ll explore customer retention rates by industry so you can see how they vary.

calculate-customer-retention-rate-formula

What is the customer retention rate?

Customer retention rate is the percentage of customers who stick with your company over a given period of time. This metric is important because it’s a measure of customer satisfaction and loyalty. If you have a high customer retention rate, it means that your customers are happy with your product or service and are unlikely to leave for a competitor.

What is the difference between customer lifetime value and retention rate?

Customer lifetime value (CLV) is a metric that measures the total value of a customer to a company. Customer retention rate, on the other hand, is the percentage of customers who remain with a company over a period of time.

While these metrics seem similar, they are used in very different ways. Customer lifetime value is used to calculate how much revenue a customer will bring in over the course of their relationship with a company. Customer retention rate, on the other hand, is used to determine how well a company is retaining its customers.

Not all the customers that are retained will have high customer lifetime value. A customer that churns (cancels their subscription) immediately after signing up will still be counted in the customer retention rate calculation. This is why customer retention rate should not be used as the sole metric to judge the health of your business.

However, customer retention rates are essential for companies to track. Customer retention rates can give you insights into how well your company is doing at customer acquisition and customer service.

What is the difference between retention rate and churn rate?

They are really two sides to the same coin. The customer retention rate is the percentage of customers that stick with a company over a certain period of time. The churn rate is the percentage of customers that leave within that same time frame.

Churn rate is often used as a metric to measure customer satisfaction. If customers are leaving in droves, that’s a sign that something is wrong. A high customer retention rate, on the other hand, indicates that people are happy with your product or service.

How to calculate customer retention rate 

The customer retention rate formula is important to measure because it tells you how well your business is keeping its existing customer base. A high customer retention rate means that your business is doing a good job of keeping customers happy and engaged. A low customer retention rate could be an indication that your business needs to improve its customer service or make other changes in order to keep customers coming back.

Customer retention rate formula

((CE-CN)/CS)) x 100 = customer retention rate

CE = number of customers at the end of a period

CN = number of new customers acquired during that period

CS = number of customers at the start of that period

This calculation can be done over any period of time you choose – a week, a month, a quarter, a year… whatever makes sense for your business.

How to calculate customer retention rate in Excel

Excel can be a useful tool for calculating various customer service metrics. You will need to import data from your CRM including customer IDs and acquisition dates.

Once you have this data imported into Excel, you can calculate how many customers you had at the start of the period (CS), how many customers you had at the end of the period (CE), and how many customers were acquired during that period (CN). Then use the customer retention rate formula to calculate your customer retention rate for any time period you choose. Just set the formula to calculate the customer retention rate based on a given time period.

To do this, simply follow the example below:

Customer retention rate calculation example

It can be difficult to picture how this looks in real life, so let’s look at some examples.

Example #1

Let’s say your business started with 100 customers in 2019 and ended with 120 customers in 2020. You also gained 40 new customers in that year. In this case, your customer retention rate would be 80% for that year.

((120-40)/100)) x 100 = 80%

That means you are retaining 80% of your customers each year! We will discuss later in this article if that is a good customer retention rate based on your industry.

Example #2

If you started a month with 500 customers, ended the month with 490 customers, and had 2 new customers that month, your customer retention rate would be 97.6% based on the formula.

((490-2)/500)) x 100 = 97.6%

Great job! That would be a truly amazing retention rate.

customer-retention-rate-formula-example

What’s a good customer retention rate

Now that you know how to use calculate customer retention rate formula, you’re probably wondering what’s a good customer retention rate? The answer to this question varies depending on the industry.

There really is no average customer retention rate for all industries. There are some industries where the customer retention rate is much higher and others where it is much lower.

Average customer retention rate by industry

Customer retention rates vary widely by industry. Some industries have customer retention rates as high as 80% or more, while others have customer retention rates below 20%.

Here are some statistics from some of the largest industries:

  • Retail: 63%
  • Banking: 75%
  • Telecom: 78%
  • IT: 81%
  • Insurance: 83%
  • Professional services: 84%
  • Media: 84%

[make into table]

As you can see, customer retention rate varies widely by industry.

Customer retention rates for e-commerce

The customer retention rate for e-commerce is much lower than in other industries. This makes sense because it’s easier for customers to switch to a different e-commerce company.

The customer retention rate for e-commerce businesses is particularly important because of the high cost of acquiring new customers. The customer acquisition cost for e-commerce businesses is $58 on average. This means that it’s important for e-commerce businesses to focus on customer retention.

Understanding the customer retention rate formula

Customer retention rate formulas can seem confusing at first, but it is really very simple. Calculating the customer retention rate is essential for understanding how well your business is doing at creating loyal customers. 

If you have a low customer retention rate, don’t worry! It might just mean your customer service representatives need the tools to connect with customers. Check out our course catalog to find the one that works best for your team!

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