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Customer Retention Rate: Definition, Formulas, And Related Metrics

customer-retention-rate:-definition,-formulas,-and-related-metrics

There’s nothing quite like seeing a new customer come back for more of what you’re offering. It’s validating, exciting, and helps you gain confidence in your brand.

So if you’re a solo ecommerce store owner or an in-house marketer, you’ll have a pretty good idea of the importance of customer loyalty and retention. Customer retention (i.e., returning customers) helps your business grow in revenue and reputation. 

But if your store is relatively new, or you’re just starting to experience the start-up growth phase, you might not know which specific metrics to track as your business scales. 

In this guide, we’ll be going into detail about customer retention and its related metrics, including why they’re important, how you can track them, and the exact formulas you (or your customer loyalty software) should use to calculate them.

What is customer retention?

Simply put, customer retention is a fancy way of describing customers who keep coming back to buy more from you. It’s usually presented as a percentage-based metric, i.e. if you have a customer retention rate of 70%, it means you’ll have kept 70% of your customers during the period you’re measuring (more on this shortly).

When a customer comes back to you to either buy the same product, another product, or a service you offer, this counts towards your customer retention—when a customer stops coming back either because they no longer want to use your product or they’ve defected to a competitor, this will go to the ‘churn’ rate instead.

Why is customer retention important?

As rising customer acquisition costs show no sign of slowing down any time soon, brands need to focus on maximizing the relationships they already have. Simply put, it’s more cost effective to nurture existing customer relationships than trying to spend money to acquire new ones. 

Other than potential cost-savings (and potential boosts in revenue by as much as 95%), having customer retention strategies is also critical for your overall customer relationship management (CRM). Think about it; there’s no customer relationship without the effort of retaining them.

Summed up in one equation, loyal customers = long-term sustainable growth. 

Measuring customer retention: Metrics and tools you need to know

Let’s focus on the specific metrics involved in customer retention, starting with the most obvious ones we touched on earlier – customer retention rate and customer churn rate.

Customer retention rate (CRR)

We’ve already discussed why this metric is important, so let’s move straight onto the formula you need to calculate it, which is:

CRR = (Total customers at the end of the period – new customers acquired) ÷ (Customers at the beginning of the period) x 100

Customer Retention Rate Formula

The “period” can be anything you choose, but it’s most common to choose quarterly or annually. Here’s an example of that formula with some (random) numbers punched in:

(2000 – 300) ÷ 2200 x 100 = 77% Customer retention rate

Between 70–80% is average for businesses across most industries—though some in the professional services industry, such as ICON, see just over 98% CRR. Of course, if your retention rate is anything less than 25%, you should look closer at building a better retention strategy.

If you need help with your CRR, check out our blog post on how to increase customer retention!

Customer churn rate (CCR)

Calculating your CCR is perhaps one of the more straightforward retention-related metrics, and it’s just as important—a high churn rate in your business likely means your customers aren’t happy with your product, or your services don’t meet their expectations. Conversely, a low churn rate means you’re on the right track. So here’s the formula:

CCR = (Lost customers ÷ total customers at the start of time period) x 100

As before, here’s an example of the formula with some numbers:

(150 ÷ 900) x 100 = 16% Churn rate

While having a churn rate between 10–25% is pretty typical for businesses, having it above 10% isn’t the best position to be in—ideally, you want it as low as possible. And if it is in that average range or above, you should consider doing some customer research to find out where issues may be.

Customer lifetime value (CLV)

Calculating the CLV of a customer is a little trickier than other metrics we cover in this guide only because it requires you to calculate something else first—customer value. However, knowing the CLV of your customers can help you understand your revenue source better.

On the other hand, a decreasing average CLV means you’re either attracting more low-value customers or losing customers more quickly over time. 

So here’s the formula you need to use for first calculating customer value:

Customer value = (Average purchase value x average number of purchases)

For example, for an ecommerce subscription-based company, customer value could be the monthly subscription over a year, e.g. $14.99 x 12 = $179.88

From calculating a customer’s initial value, you can move on to calculating their lifetime value:

CLV = (Customer value x average customer lifespan)

If you find that your customers stay with you for an average of 3 years, the CLV of those customers would be $179.88 x 3 = $539.64. 

In this example, a higher CLV can come from customers who make one-off purchases on top of their subscription, and a lower CLV would come from customers who stop subscribing earlier than average.

Revenue churn

Another interesting metric related to customer retention is revenue churn, which refers to the revenue lost from existing customers. 

It’s vital to track revenue churn because this helps you understand the rate at which customers negatively affect your revenue from actions such as order cancellations or subscription downgrades. Customers with high revenue churn are likely to leave your brand behind. So here’s the formula using monthly recurring revenue (MMR):

Gross revenue churn = (Churned MRR ÷ MRR at the beginning of the month) x 100

With actual numbers, the formula looks like this:

($250k ÷ $2m) x 100 = 12.5%

This is an okay metric, but it doesn’t consider revenue expansion from existing customers from upgrades, for example. So to find this part out, you’ll need a net revenue churn formula:

Net revenue churn = (Churned MRR – expansion MRR) ÷ MRR at the beginning of the month x 100

In our example, let’s say the business gained $50k in expansion revenue, so:

($250k – $50k) ÷ $2m x 100 = 10%

With this metric, it’s possible to have a negative percentage, which tells you your revenue expansion gains outweigh your revenue losses. 

Net promoter score (NPS©)

NPS© is a popular metric, which you might recognize even as a customer of other brands—it measures your customer’s overall satisfaction and how likely they are to refer your business to other people. You’ll usually be able to gather the information you need for this from customer feedback surveys

Here’s the exact formula you’ll need when you have the numbers:

NPS© = (Number of promoter scores ÷ total number of respondents) – (Number of detractor scores ÷ total number of respondents) = Answer x 100 = %

So let’s say your NPS© survey had 300 total respondents. “Promoter” scores come from positive responses, and “detractor” scores come from negative responses—dividing each by the number of responses gets you a decimal that you can turn into an overall percentage by multiplying it by 100.

For example:

(275 ÷ 300) – (25 ÷ 300) = 0.83

0.83 x 100 = 83%

This way, you can see the overall health of your customer satisfaction; if it’s a low number, you can take action to improve your customers’ experiences.

Repeat purchase rate

The repeat purchase rate is the formula you’ll want if you want to determine your customer loyalty. This metric helps you see the percentage of customers who return and buy more from you (which is a better formula for product-led businesses).

Tracking your repeat purchase rate is important for helping you determine if your products align with your customers’ expectations (or not, if the rate is low).

RPR = (Number of customer who purchased more than once) ÷ (total number of customers) x 100

So for numbers in this case, here’s an example:

(12,500 ÷ 50,000) x 100 = 25%

Nice and easy, right? 

Time between purchases

The final metric in this guide is the time between purchases. The name is self-explanatory, but figuring out your average time between purchases tells you how quickly your customers want to buy from you. 

Here’s the formula: 

TBP = (Sum of individual purchase frequency by days ÷ number of repeat customers)

Let’s say you already know your number of repeat customers from using a CRM or a customer loyalty program software, and that figure is 50.

By using each of those customers’ individual purchase frequency (using a spreadsheet would be handy if you’re doing this manually) and adding them up, you get the first part of the formula, so for example:

140 days ÷ 50 = 2.8 days (rounding it up to 3 to be conservative)

Whether or not the time between purchases is good for your business depends on the nature of your product (e.g. for FMCG goods like groceries, three days is good). 

Boost your customer retention rate with LoyaltyLion

Calculating these metrics would be quite a handful if you did all of this manually—and it would become impossible as your business grows. Instead, you can use a customer loyalty program software like LoyaltyLion, which helps you record all the data from your loyal customers’ purchases.

LoyaltyLion can give you a customer value snapshot which makes tracking metrics like the ones in this guide a total breeze. 

Not sure how a customer loyalty program would benefit your business? Check out some of our customer retention case studies to see how other brands have scaled their businesses using LoyaltyLion.

Special thanks to our friends at LoyaltyLion for their insights on this topic.
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