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Customer Retention Rate: How to Calculate & Boost [+ Industry Benchmarks]

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As businesses continue to find smarter ways to increase profits, it isn’t unusual to find them apportioning a huge chunk of their marketing budget and efforts towards customer retention.

This is expected because customer retention strategy can help increase customer profit and return on investment.

If your business is losing revenue, you might need to start working to increase your customer retention rate. Keep reading as we share more insight to set you on the right path.

What is Customer Retention Rate?

Customer retention rates measure the number of customers a company retains over a period. It is the percentage of customers that remain loyal to using the services of a company.

To ascertain customer retention rate, three factors are required. They include:

  • The number of customers at the beginning of a given period
  • The number of customers at the end of that period
  • New customers that were acquired during that period

Let’s say a company started with 100 customers and gained 15 new customers within a month but lost 10. This leaves the company with 90 of its original customers and 15 new customers at the end of the period. Now, that’s about 105 customers at the end of the period, meaning your customer retention rate is 90%. 

Confused? No need to worry, we’ll explain further to show you how it’s done. 

Why You Need to Know Your Customer Retention Rate

Let’s say you successfully sold a product to a customer. What should you do next? You need to execute customer retention strategies. After all, retaining consumers is easier and less expensive, and recent stats confirm it.

For starters, you get to spend less on customer acquisition. Also, existing customers are 40% more inclined to buy than new ones. As businesses focus on remaining profitable and turning over returns, customer retention rates remain an important driver that takes the front row.

Here are a few reasons why customer retention rate is important.

#1: Increased return on investment

Loyal customers buy more frequently and in larger amounts. In addition, they believe you will listen to their needs and deliver a great service. If loyal customers trust you enough to buy from you, then imagine what you stand to benefit from retained consumers. 

#2: Lowers marketing cost

Retained customers are familiar with your products and services, which saves you a lot on marketing costs. Also, if customers know your products, it minimizes the support required. According to outboundengine, acquiring a new customer costs 5 times more than retaining an existing one. 

#3: Referrals from loyal customers

Repeat customers often suggest ways to improve your products and services. So be proactive and ask repeat consumers how you can improve service. This can help you see opportunities that you may have missed.

#4: Keeps high paying customers

High-paying clients go out of their way to pay premium prices for premium services. As stated by HubSpot, one positive experience could be the deciding factor for a shopper to stick to a brand. On the other hand, a negative experience could send them running to a competitor.

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Customer Retention Rate vs Churn Rate

As well as retention rate, you may also have heard about a “customer churn rate”. Basically, churn refers to the number of customers that leave you within a certain amount of time. So, your churn rate is essentially the opposite of your retention rate. 

If your retention rate is 90%, your churn rate is 10%. If you want to calculate your churn rate (as a percentage), here’s the formula:

(Churned customers / original number of customers) x 100 

Should Customer Retention Rate be a KPI for Your Business?

Our answer to this is a resounding YES. This is because, according to klipfolio, the customer retention rate is one of the most important KPIs (if not the most important KPI next to the new sales KPIs) because it impacts:

  • Recurring revenue
  • Customer satisfaction levels impacts account expansions and referrals
  • The growth of the business

How to Calculate Customer Retention Rate

The formula for calculating customer retention rate is given as:

 [(F – N) / I] × 100

  • "F" is the final number of customers at the end of the period (105 below)
  • "N" is the new customers added within the period (15)
  • "I" is the initial number of customers at the start of the period (100)

Let’s plug in the example we had earlier on into this formula, which gives:

[(105 – 15) / 100] × 100 = 90%

Here’s a breakdown of the steps involved: 

  • First, identify the time frame to study
  • Take the number of initial customers at the start of the period (I)
  • Find the final number of customers at the end of the period (F)
  • Find the number of new customers added within the period (N)

Other Important Customer Retention Metrics

Of course, customer retention rate isn’t the only metric you need to pay attention to. Let’s take a look at some of the others that could be important for your store: 

#1: Revenue churn

Revenue churn measures the monthly recurring revenue (MRR) your business lost over a given time period.

The formula is (MRR lost within the time period / MRR at the beginning of the time period) x 100

Revenue churn helps you to quantify churn for your business, and can help you see that some customers are more valuable than others.

#2: Customer lifetime value

Customer lifetime value (CLV) measures the amount of profit the average customer contributes over their lifecycle.

The formula is (Average order value x Repeat purchase rate) – Customer acquisition cost

Note that there are other ways to calculate CLV, but the formula above is one of the simpler methods. CLV is an important calculation because it helps your business understand whether you should focus on customer acquisition or retention. 

#3: Repeat purchase rate

As the name suggests, repeat purchase rate measures the percentage of customers who come back after their first purchase.

The formula is Number of return customers / Total number of customers

Repeat purchase rate is very similar to customer retention rate, but it ignores the impact of new customers on your overall customer retention. 

What is a Good Customer Retention Rate for Your Industry?

According to a report by Statista, customer retention rates are highest in media and professional services industries. A 2018 survey also discovered a customer retention rate of 84% in both these industries. The industry with the lowest retention rate was hospitality, travel, and restaurants, with 55%.

Industry

Customer Retention Rate

Media

84%

Professional Services

84%

Automotive

83%

Insurance

83%

IT Services

81%

Construction

80%

Financial Services

78%

Telecommunications

78%

Healthcare

77%

Banking

75%

Consumer Services

67%

Manufacturing

67%

Retail

63%

Restaurants

55%

Top Retailers' Customer Retention Rates

Wondering what the retention rate is for some of the world’s top retailers? Take a look at the table below.

RETAILER

Customer Retention Rate

Apple

90%

Amazon

93%

Costco

91%

Netflix

72%

Nike

84%

Tesla

63%

Starbucks

75%

Uber

10%

Walmart

27%

Salesforce

91%

6 Easy Ways to Improve Your Customer Retention Rate

#1 Focus on your customer service

It’s crucial to make sure your customers have a great experience when they reach out to you. Make sure you reply to customer emails or queries quickly, resolve any issues that arise, and treat your customers with respect. A live chat is a great way to connect to your customers quickly.

Source: hunterboots.com

#2 Use your social channels

Social media is a great way to engage with existing customers and encourage them to return to your store. Use social channels to update customers about sales, new products, and anything else that’s relevant. If customers engage with your posts, make sure you respond! 

ecommerce customer retention rate
Source: kyliecosmetics.com

#3 Follow up on customer actions

If your customer makes a purchase, send them an email asking how their new product is. If they had an issue and needed a refund or exchange, follow up to check that everything has been taken care of. Customers love it, and will come back to your store because of it. 

how to improve customer retention rate
hunterboots.com follows up a purchase with a review request email

#4 Consider a loyalty program

Many companies offer a loyalty program by rewarding customers with points each time they make a purchase. Points can eventually be redeemed for a discount on a future purchase. A loyalty program is a great way to convince customers to keep buying from you. 

tips for improving customer retention
Source: tentree.com makes it easy to see how many points you have

#5 Research your competitors

Take a look at what your competitors are offering, and try to top it. This may mean a better loyalty program, faster shipping, a better price, or something else that encourages customers to choose your brand over other options. 

#6 Engage with lost customers

If you have a group of customers who no longer buy from you or use your products, try to find out why. A quick survey can help determine whether they no longer need your product, whether they have moved to a different brand, or whether some other factor is at play. 

customer retention rate optimization
imperfectfoods.com shows old customers what they're missing

Bonus: Encourage Customers to Return for a Personalized Shopping Experience

According to Segment, 71% of consumers feel frustrated when a shopping experience is not personalized. It’s critical to make your customers feel special, and a great way to achieve this is by offering personalized product deals based on what a specific customer is shopping for. 

With PickyStory, you can create personalized experiences by creating product bundles and deals consisting of specific products. You can display these on select product pages, in collections, as popups, or wherever else makes sense for your store. 

customer retention rate

With PickyStory, shoppers get the kind of experience they desire, which brings them back to purchase from your store over and over again. 

Grow your sales with high-performing deals.

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  • Topics: Sales and Conversions

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