The solution to growing your business while retaining and maximising current customer accounts? Customer retention, of course, but how do you measure customer retention? The answer is in customer retention metrics- the factors used to calculate the probability of retaining and attracting customers to your business. That’s because you can’t know if you’re doing well at keeping customers, especially high-value accounts, without good customer retention data. That’s why we’ve collated 9 essential customer retention metrics below to help you start making the decisions to improve your customer success strategy.
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What is customer retention?
Customer retention refers to a business’s ability to keep customers loyal and become repeat buyers who don’t stray to competitors. It’s vital to any businesses longevity and success as it indicates whether your product, service and value are working well to please your existing customers.
Why is customer retention important?
Customer retention is important because attracting new customers is costly, as much as 5-25 times more than nurturing an existing customer. The upside for those who can maintain good customer retention rates is that current customers will likely spend a whopping 67% more than those new to you and your value. In turn, this helps to produce recurring revenue, a portion of income that is expected to continue, which makes business activities predictable and stable- something businesses always need.
9 Essential Metrics & Formulas to measure Customer Retention
There are plenty of metrics you can use to to measure customer retention, but we’ve narrowed down a list of the essential ones below:
1. Customer Retention Rate
For your customer retention strategy to succeed, you must measure it to determine how well your strategy is working and whether it’s a good enough rate to continue to expand. That’s why many opt to use the most straightforward customer retention metric, the Customer Retention Rate. A simple formula that measures how many customers a business has retained over a set amount of time.
How to measure customer retention rate
(Customers at the End of the Time Period) – (New Customers Acquired) / Customers at the Start of the Period.Customer Retention Rate Formula
To calculate your customer retention rate, first, add the number of customers you had at the beginning of a period (this can be annual if you have a small customer list.) Then add all of your new customers onboarded alongside the number of customers you had at the end of the period.
Then subtract the number from the end of the period from the newly acquired customers, and divide that answer by the number of customers you had at the beginning of the period.
2. Customer Churn Rate
The customer churn rate measures the rate customers decide to stop buying from you and often refers to customers you didn’t manage to retain as “churned customers.” However, you should note that customer attrition will play a role in your customer churn rate to a certain degree.
Not sure what percentage is good or even bad for customer churn rate? A good rule of thumb is that if your annual churn rate is greater than 5 to 7%, it’s time to evaluate how you’re making customers happy and get to the root cause of the problem. However, it’s likely that if your churn rate is high, you may need to reevaluate how your product or service is failing to meet customer expectations and needs.
How to measure customer churn rate
(# of Customers at start of year – # of Customers at the end of year) / # of Customers at the start of the year.Annual Customer Churn Rate Formula
3. Revenue Churn Rate
Revenue churn rate measures the percentage of revenue lost from existing customers in any given period. As a result, revenue churn rate is considered a great customer retention metric for gaining a “birds-eye view” of your customer retention health – which is why you must track it on an individual basis.
If you notice that you have a high level of revenue churn, your customer may be at risk of leaving, at which point your services team must quickly take action to prevent this from happening.
How to measure revenue churn rate
(MRR at start of the month – MRR at end of month) – MRR in upgrades during the month / MRR at start of the monthRevenue Churn Rate Formula
4. Repeat Purchase Ratio
The repeat purchase rate (RPR) measures how many customers have returned to your company to buy again. It may seem obvious, but a high repeat purchase rate is often a good indication of strong customer loyalty. That’s why both sales and marketing teams use this metric across different customer demographics to compare and contrast the data. The results can help you hone in on your buyer personas, readjust them and sell more effectively to those markets. You should also note that while many use this to apply to products, it can also be used as a formula for subscriptions or contract renewals.
How to measure repeat purchase ratio
# of Returning Customers / # of Total CustomersRepeat Purchase Ratio Formula
5. Product Return Rate
The product return rate only applies to those selling tangible solutions and refers to how many products were returned in any given period. While, in some instances, product returns will always be inevitable for various reasons not relating to the quality or your service – product returns are never a good sign, so you must try to keep this number as close to zero as possible.
How to measure product return rate
# of Units Sold That Were Returned / Total # of Units SoldProduct Return Rate Formula
6. Time Between Purchases
The time between purchases metric measures the average time it takes customers to buy from you again. It’s a valuable metric to follow because it reveals how happy customers are with your product or service, alongside how much they’re tempted or willing to try competitor’s solutions.
How to measure time between purchases
Sum of Individual Purchase Rates / # of Repeat CustomersTime Between Purchases Formula
7. Customer Lifetime Value (CLV)
The customer lifetime value metric (CLV) measures the revenue generated by an individual customer. It’s crucial to consistently track this customer retention metric and ensure that you ideally see the level stay constant because a shrinking CLV suggests you’re either capturing low-value customers or losing loyal customers fast.
How to measure customer lifetime value
Customer Value * Average Customer LifespanCustomer Lifetime Value Formula
8. Customer Acquisition Cost (CAC)
The customer acquisition cost is how much you pay for new customers and is essentially the opposite of customer churn. This is important because you’re probably in trouble if this cost is higher than your CLV.
How to measure customer acquisition cost
Total cost of sales + Marketing/# of Customers AcquiredCustomer Acquisition Cost Formula
9. Loyal Customer Rate
The loyal customer rate measures the number of customers to repeat-purchase your product or service over any given period. A valuable metric worth noting since your most loyal customers are the ones who buy from you the most – and so the metric identifies the percentage of your customer base that’s actively demonstrating loyalty.
How to measure loyal customer rate
# of Repeat Customers / Total # of CustomersLoyal Customer Rate Formula
Final word: Who’s responsible for customer retention?
While it’s essential to use customer retention metrics to your advantage, it’s also worth considering who’s responsible for customer retention in your business. That’s why the answer is that it depends on the type of business you are in. Overall, it’s crucial to remember that everyone is responsible for the smooth running of operations and practising good customer relations to nurture and retain current customers.
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