“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 and turning visitors into 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 step in this process.
Understand Customer Retention
First, retention refers to a certain point in the customer lifecycle and it can be measured monthly, quarterly, or annually depending on the business. Know this time period because it is an important factor in your calculations.
Second, there are two different ways to calculate retention:
- Customer Retention Rate (CRR)
- Dollar Retention Rate (DRR)
Calculate Customer Retention Rate
Simply put, customer retention rate is the percentage of customers you keep relative to the number you had at the start of your period. This does not count new customers. It is the reverse of customer churn.
There are three pieces of information you need to calculate customer retention:
- Number of customer at the end of a period (E)
- Number of new customers acquired during that period (N)
- 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. Remaining customers can be calculated by subtracting N from E. To calculate the percentage, we divide that number by the total number of customers at the start and multiply by 100.
Customer Retention Rate = ((E-N)/S)*100
While CRR is a pretty simple calculation, it has a lot of value. You might argue that your revenue and bottom line matter more and it is 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 to grow your customer base. You’ll actually save money by increasing your CRR.
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. You should be aiming for 90% or at the very least 85% CRR. 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
As opposed to CRR, which measures the customers that renew, DRR measures the dollars that renew. It 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 should focus only on DRR and ignore CRR. If you are consistently losing customers, 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 retained that customer, but you lost 50% of the revenue generated by the customer.
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 consist of half the customers at the original value, 45%, and half the customers at half the value, 22.5%. So in total, your DRR is now 67.5%, which is pretty poor.
Essentially, both CRR and DRR 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, you can use cohorts to represent the data. You may see differences in customers you acquired in different points in time.
A stark difference in DRR for different cohorts can tell you valuable information about the differences in your customer base and help you generate ideas for how to increase retention for certain groups.
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. These 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.