How to measure customer retention rate?
The customer retention rate is a key indicator for any business wishing to assess and improve customer loyalty.
It measures the ability to retain customers over a defined period. Here's the key formula:
Customer retention rate = ((Number of customers at the end of the period - Number of new customers acquired during the period) / Number of customers at the beginning of the period) x 100
This simple calculation allows you to track the evolution of customer loyalty while identifying the strengths and weaknesses of your retention strategy.
Let's explore the details of how to understand and use this strategic indicator.
Customer retention rate: definition and benefits
Before integrating the retention rate into your loyalty strategy, it's essential to understand what it is.
Definition of customer retention rate
The customer retention rate represents the percentage of customers that your company keeps over a given period.
Unlike the churn rate, which measures the rate at which customers are lost, this indicator focuses on those who remain loyal to your product or service.
It is therefore directly linked to the quality of your product (or service) and your ability to maintain a lasting relationship of trust.
The importance of the customer retention rate
A high retention rate reflects a satisfied and committed customer base, generally synonymous with better long-term revenues.
It often costs less to retain a customer than to acquire a new one.
This rate therefore helps you to optimise your marketing strategies and reduce your acquisition costs.
The formula you need to know for the customer retention rate
Mastering the customer retention rate formula allows you to accurately monitor the performance of your loyalty efforts.
This simple-to-calculate metric offers a clear view of the effectiveness of your strategies.
How to calculate the customer retention rate
To carry out this calculation, you'll need the following data:
- Number of customers at the start of the period
- Number of new customers acquired during the period
- Number of customers at the end of the period
Here's the complete formula:
Customer retention rate = ((Final customers - New customers) / Initial customers) x 100
Let's take a concrete example: you started a period with 1,000 customers. You acquired 200 new customers and ended the period with 1,050 customers.
Calculation: ((1050 - 200) / 1000) x 100 = 85%.
Your customer retention rate is therefore 85%, a solid value indicating good customer loyalty.
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3 mistakes to avoid when calculating retention rate
Beware of bias:
1. Exclude new customers from initial customers
New customers acquired during the period should not be included in the calculation of initial customers.
This distorts the comparison and gives an inaccurate picture of your ability to retain your existing customer base.
Be rigorous in distinguishing between old and new customers.
2. Use a consistent period for your data
Make sure that the data you collect covers a consistent period.
For example, comparing a quarter with an entire year would be inconsistent and could mask important trends.
Set regular periods (month, quarter, year) that are suited to your business.
3. Avoid approximations when tracking customers.
Poor management of customer data can lead to approximations: inactive accounts counted as active, errors in tracking unsubscribes, or customers registered under several identities.
Rely on reliable tools for rigorous tracking.
By adhering to these principles, you can avoid overestimating your performance or investing in ineffective strategies.
Other metrics for assessing customer retention
For a complete analysis, the customer retention rate must be complemented by other key indicators.
Revenue generated by loyal customers
A loyal customer buys more regularly and contributes a significant proportion of your sales.
This KPI measures the proportion of sales generated by regular customers. A high level of revenue indicates a solid customer base.
To calculate it, you'll need to know the number of loyal customers (customers who have made several purchases over a defined period) and the total revenue generated by loyal customers.
Simply add up the ratio to total sales to find out how much of the sales are generated by loyal customers.
Customer lifetime value (CLV)
CLV estimates the total value a customer will bring to your company over the entire duration of the business relationship.
It's more than just a figure. CLV reflects a customer's long-term profitability, taking into account recurring purchases and loyalty.
This metric helps you identify your most profitable customers and adapt your marketing strategies to maximize their engagement.
Read our article on CLV (customer lifetime value) to learn more.
Your customers' repeat purchase rate
The re-purchase rate is an invaluable indicator of customer loyalty and engagement .
It measures the proportion of customers who, after a first purchase, return to make a second one within a given period.
This indicator helps you to better understand your customers' purchasing behavior and identify the levers you need to activate to strengthen their loyalty.
You can adjust the analysis according to your needs: one week, one month or one quarter, depending on the specifics of your business.
For example, what percentage of customers who bought once in the past month repeated their purchase during the same period? A high repurchase rate reflects a strong attachment to your product or service.
Average repeat purchase time
Once you've calculated the re-purchase rate, you can complement this indicator with your customers' average re-purchase time.
This measures the average time between two purchases by a customer.
This will give you a more in-depth view of your customers' purchasing habits, enabling you to identify periods of inactivity and anticipate their future behavior.
For example, if your customers buy every 30 days on average, you can plan actions (such as a reminder or special offer) before this deadline to solicit a new purchase.
Conversely, an average re-purchase time of 90 days for high-frequency product may signal dissatisfaction or a lack of commitment.
Cohort analysis
Cohort analysis is a method for understanding customer behavior over a given period.
It segments customers into groups, or “cohorts”, according to their acquisition period, when they made their first purchase.
This makes it possible to track the evolution of each group over time.
For example, a company might analyze a cohort of customers acquired in January to observe their monthly engagement, purchase frequency or retention rate. This method reveals important trends. For example, a drop in activity after a few months may indicate problems.
This may affect the customer experience or your offers.
With segmentation, you can identify what works to retain certain groups, and adjust your marketing strategies to maximize customer satisfaction at every stage of their journey.
What's the best strategy for customer retention?
A high retention rate depends on a solid retention strategy. Here's how to integrate it into your business.
Why integrate customer retention into your strategy
Customer retention reduces acquisition costs while maximizing long-term revenues.
Retaining is therefore a more cost-effective approach than focusing solely on acquiring new customers.
If you'd like to integrate customer retention into your strategy, take a look at our 10 tips on how to boost retention.
4 best practices for improving customer retention
To maximize customer retention, here are a few essential best practices to implement:
- Offer loyalty programs tailored to your customers.
- Offer a smooth, personalized customer experience.
- Choose the right channels for your marketing actions.
- Regularly analyze your performance with the metrics you need to measure customer loyalty.
These best practices may seem simple, but they are essential to your loyalty strategy.
Customer retention rate: an indicator that transforms your business
Customer retention rate is much more than just a metric. It reflects your ability to build lasting relationships with your customers.
Combined with metrics such as CLV or cohort analysis, it becomes a powerful tool for optimizing your loyalty strategies.
By working on your customer retention, you strengthen not only your loyal base, but also your profitability and revenue.
Our Loyoly teams are experts in customer retention, and we offer retention solutions that can be incorporated easily into your customers' experience. These increasingly innovative solutions will help you grow and decrease churn.
