To set your customer retention program up for success, check these items off first.
Customer retention rate measures the rate at which the business has retained customers over a certain period of time. It’s the most straightforward way to measure retention and here’s how you calculate it:
Customer Retention Rate = (# of Customers at the End of the Period) - (# of New Customers Acquired) / Customers at the Start of the Period
For example, let's say you're looking for your customer retention rate from January 1st - March 31st. You had 5,000 customers on March 31st and 3000 customers on January 1st. In this time, you acquired 2000 new customers. Then, your customer retention formula would be:
(5,000 - 2000)/3,000 = 1
Multiply that by 100 and you have a 100% customer retention rate.
Churn rate tells you the percentage of customers you’re losing every year. It’s natural to lose customers every year, but if your churn rates are more than 5-7%, you need to evaluate your product and support because it means you’re not meeting your customer’s expectations.
In fact, high churn rates are indicators that it may be time to formulate your own customer retention programs. Here’s how you calculate it:
Churn Rate = (Number of Customers at the year’s start- Number of Customers at the year’s end) / Number of Customers at the year’s start
Continuing from the example above, we had 3,000 customers on January 1st. On December 31st that same year, we had 6,000 customers. Your customer churn rate calculation would be: (3000-6000)/6000. That's a -50% churn rate, which looks negative but actually means your business grew.
If your current customer base spends more on your business, it means your sales, marketing, and support teams are doing a good job of keeping them invested in your business. Conversely, a declining existing customer revenue rate means customers might churn. So, it’s important to calculate the existing customer revenue rate to keep a pulse on your customers. Here’s the formula.
Existing customer revenue growth rate = (Monthly Recurring Revenue (MRR) at the End of Month - MRR at the Start of Month) / MRR at the Start of Month
The Repeat Purchase Ratio (RPR) is the percentage of customers returning to make purchases from you. Besides being great indicators of customer success, RPRs help your team refine your marketing strategy and target persona so they can create content that attracts a similar audience.
Here’s the formula to calculate RPR.
Repeat Purchase Ratio = Number of Returning Customers / Number of Total Customers
Product return rate is the ratio of the number of units returned to the number of units sold. It’s impossible to have zero returns, but the standard industry return is 15%, so target below that.
Product Return Rate = Number of Units Sold That Were Later Returned / Total Number of Units Sold
As the name suggests, Time between purchases is the average time it takes a consumer to buy from you. The less the time, the better, because it shows that customers are happy with your products.
You should use this metric carefully because a higher time between purchases could also mean that your products are designed well, depending on the industry you’re from. Here’s how you can calculate time between purchases:
Time Between Purchases = Sum of Individual Purchase Rates / Number of Repeat Customers
Note: To calculate individual purchase rate, you’ll need the exact dates a customer purchased from you, which a CRM can show you since it’ll help you set up records for repeat purchases.
Customer Satisfaction scores (CSAT) don’t directly measure customer loyalty or retention, but when they’re measured at each touch point throughout the customer journey or lifecycle, they tell you if your customers are satisfied or not.
There are other customer metrics like Net Promoter Score (NPS). For the sake of simplicity, however, let’s look at how a CSAT score is calculated:
CSAT= Total number of satisfied customers / No. of customers surveyed x 100%
If you want to learn more about CSAT scores and how they impact your revenue, check out our blog on CSAT scores.
Customer lifetime value (CLV) measures the revenue your average customer generates over their entire relationship with your company. Measuring this according to customer segment or demographic can give you insights into what works and what doesn’t work for your company.
Here’s how CLV is calculated:
For the last step, all you have to do is use the formula below.
CLV = AOV x Number of transactions x Retention period