How to calculate customer retention rate

TL: DR

  • Your customer retention rate is one of the most important numbers in your business. 
  • It's a metric that tells you how well you're retaining customers, and it can significantly impact your bottom line. 
  • Using the following formula, Retention Rate = ((E-N)/S) x 100, you can calculate your customer retention rate.
Did you know that the average annual customer retention rate for the SaaS industry is 50-68%? On top of that, the average company will lose 10-25% of its customers each year.

It's clear that customer retention is essential for the success of any business. Yet, many companies struggle to keep their customers happy because they don't know how to measure or even track customer retention.

In this article, we'll cover how to calculate customer retention rate (CRR). 

By understanding how to measure CRR properly, you'll be able to take the necessary steps to improve customer retention at your company.

What is customer retention rate?

Customer retention rate or CRR is the percentage of customers who stay with a company over a period of time. CRR is typically measured on an annual basis, but it can also be helpful to measure CRR on a quarterly or monthly basis in order to track progress and identify any potential issues early on.

5 reasons why customer retention rate is important to focus on

When it comes to customer retention, many companies focus on acquisition and forget about the importance of keeping their customers happy. Here are five reasons why customer retention rate is so important:

  • Lower marketing costs 
  • Repeat customers means more profit
  • Free word-of-mouth advertising
  • Gain valuable feedback
  • Higher purchase values

Lower marketing costs 

New customers can be very costly to acquire. In fact, it's estimated that it costs five times more to acquire a new customer than it does to retain an existing one. By focusing on customer retention, you can reduce your marketing costs and reinvest those savings into other areas of your business.

Repeat customers means more profit

When customers feel brand loyalty, they're more likely to make repeat purchases. In fact, according to Bain & Company, a five percent increase in customer retention can lead to a 75 percent increase in profit. Plus, repeat customers also increase the customer lifetime value, which is also an important measure of how viable a SaaS business is. 

Free word-of-mouth advertising

When customers are happy with your product or service, they're more likely to tell their friends and family about it. This word-of-mouth advertising is invaluable because it comes from a trusted source (the customer).

Gain valuable feedback

Your customer retention rate can give you both direct and indirect feedback about how healthy your SaaS business is. If you see a sudden drop in customer retention, combined with tools like session replays, it could be a sign that something is wrong with your product or service. On the other hand, if you see a steady increase in customer retention, it's a good indication that you're on the right track.

Higher purchase values

Existing customers are also more likely to spend more money with your company because they trust your brand, know how to use your product or service, and are more likely to take advantage of upsells and cross-sells.

How to calculate customer retention rate

Now that we've covered why customer retention rate is so important, let's talk about how to actually calculate it.

The formula for this is to calculate customer retention rate is Retention Rate = ((E-N)/S) x 100
  • N stands for the number of customers gained during a specific time period
  • E stands for the number of customers at the end
  • S is the number of customers you had at the beginning of a specific time period.

While this might sound a little confusing, it's actually pretty simple to calculate. For example, let's say you start off with 100 customers and gain 20 new customers over the course of a year. At the end of the year, you have 120 customers. This means your retention rate would be ((120-20)/100) x 100 = 100%.

By understanding how to calculate your customer retention rate, you can take the necessary steps to improve customer loyalty, improve customer lifetime value, lower acquisition costs and reduce churn, which are just a few of the reasons this metric is so crucial.

Author

Shifa Rahaman

Content Marketing Manager

Contributor