How To Calculate Customer Retention
“What gets measured gets managed.” - Peter Drucker
Along with measuring your business traffic and conversion, success also relies on customer retention to complete the big picture. You may be getting attention, turning visitors into users or paying customers but are you able to keep them around month after month? Or are they leaving after one experience or one transaction?
If you want to build a sustainable and scalable business, you need to cut down on churn, the rate at which people are discarding your products and services. To do so, calculating your customer retention is the first, and important, step in this process.
Understand Customer Retention
First, retention refers to a certain point in the customer lifecycle and it can come at different points for different businesses: it could be monthly, quarterly, or annually. Know this time period because it is an important factor in your calculations.
Second, there are two different ways to calculate retention:
1. Customer Retention Rate (CRR)
2. Dollar Retention Rate (DRR)
Calculate Customer Retention Rate
Simply put, customer retention rate is the number of customers you manage to keep with respect to the number you had at the start of your period. This does not count new customers. It is basically the opposite of customer churn.
There are three pieces of information you need to calculate customer retention:
1. Number of customer at the end of a period - E
2. Number of new customers acquired during that period - N
3. Number of customers at the start of that period - S
We are interested in the number of customers remaining at the end of the period without counting the number of new customers acquired. That means the customers remaining would be E – N. To calculate the percentage, we divide that number by the total number of customers at the start and multiply by 100.
This gives us CRR = ((E-N)/S)*100
While CRR is a pretty simple calculation, it does have a lot of value. You might argue that your revenue and bottom line matters more and it’s ok to lose a few customers along the way.
However, think about the cost of acquiring new customers. To keep growing, you need to make up for every customer you lose on top of finding new customers. By keeping a close watch on CRR and trying to increase it you’re actually saving money.
Your CRR also gives you an indication of how loyal your customers are and how good your customer service is. By tracking and benchmarking your CRR you can find ways to improve these areas of your business.
Ideally, as a business, you would like your CRR to reach 100%, which means that you never lose a single customer. That’s quite improbable, but you should be aiming for 90% or at the very least 85%. Again, this will vary from business to business, which is why it’s important to track your own rate and try and improve upon it every month.
Calculate Dollar Retention Rate
DRR is basically revenue renewal values – the dollars that renew – and is generally measured on an annual and/or cohort basis.
The important point here is that DRR focuses only on the money, the actual revenue you retain, rather than customers. So if your existing customers start paying more, through upgrades or other purchases, your DRR might grow even if you’ve lost some customers.
This doesn’t mean you focus only on DRR and ignore CRR. If you are consistently losing customers then at some point you will start losing revenue, no matter how many times your existing customers upgrade.
On the flip side, you might see a drop in DRR but a rise in CRR. This would happen if your existing customers start downgrading to lower subscriptions.
For example, if a customer changes from a $100 per month subscription to a $50 per month subscription, you might have still retained that customer, but you lost 50% of the revenue generated by the customer.
Now if other customers start doing this too, you might see a big hit in your DRR. Let’s say your CRR is 90%. If half of your customers drop from $100 to $50, your DRR will now be half the customers at the original value, 45%, and half at half the value, 22.5%. So in total, your DRR is now 67.5%, which is pretty poor.
So which is a better metric? Neither. They need to be used hand-in-hand to get a complete picture of what is happening with your business.
To get an even better picture with DRR, use cohorts to represent the data. For example, your DRR might be different for customers who joined in the first month versus customers who joined in the second month.
If you see such a stark difference in DRR for different cohorts, you know that there should be something you can do to improve the DRR for the lower cohort. Find out what you did different and replicate that for the lower cohort.
Ideally you want your DRR to be above 100%. This means that you’re earning more every period and your company is growing. Many people aim for 110%, but this number might differ for different industries and the life stage of your company.
Calculating Customer and Dollar Retention Rates should be a priority for every business. Forget about vanity metrics like the increase in Facebook ‘likes’ or raw pageviews, these can falsely inflate your sense of success. Retention metrics affect your bottom line and provide real insights into where your strengths and weaknesses are so you can pave the way to sustainable growth and success.
How do you use CRR and DRR to improve your business? Let us know in the comments below.
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