From bakeries specializing in doughnuts that sell out within hours to online banking apps you check daily, businesses create products and services that keep customers returning for more. And if they’re doing so effectively, they’re likely tracking how customers make ongoing purchases based on value, ease of use, customer service, and more. This system of measuring the percentage of repeat customers is called a customer retention rate, or CRR.
While customer retention statistics are an excellent indication of a business’s health, they are unique to each sector. An ecommerce website selling obscure collector items, for example, will not have the same retention rate as a nationally recognized supermarket chain. Despite differences in retention rates by industry, there is a shared goal: to retain customers for the business.
What is customer retention?
Customer retention is the percentage of returning customers to a business measured over a particular time—weeks, months, quarters, or year. Retaining customers is highly regarded and coveted by savvy business owners, because repeat customers are likely to spend more on purchases and generate more revenue.
In fact, existing customers are likely to spend 67% more than new customers. In the financial services sector, for example, according to a Bain & Company report, a 5% increase in customer retention can produce more than a 25% in profit.
Higher customer retention rates signal that a business is doing right by the customer, since the customer is returning for more purchases. Returning customers also tend to be enthusiastic about recommending their favorite businesses and brands to family, friends, and colleagues—organically raising awareness.
The perfect (not likely attainable) customer retention rate is 100%; the lowest customer retention rate, of course, would be 0%. Each industry has its own average CRR that lands somewhere in between, but the average customer retention rate across industries is 70% to 80%.
The formula for calculating customer retention rate is not as intimidating as it might look. The equation is: CRR = [(E-N) ÷ S] x 100. To calculate the customer retention rate, take:
E = the number of customers at the end of the measured period
N = customer acquisitions during the measured period
S = number of customers at the start of the measured period
So, let’s say an online house plant retailer wants to know its retention over a six-month period. It started with 150 customers (S), ended with 120 (E) and had 5 new customers (N). (E-N), in this instance would be 115—here’s how you’d calculate this retailer’s CRR:
120-5 = 115 ÷ 150 x 100 = 76%
If math isn’t your strong point, consider using this calculator to determine the customer retention rate.
It’s easier for ecommerce, SaaS companies, and B2B businesses to calculate customer retention rates from data gathered from online purchases compared to brick-and-mortar shops, where customers’ buying habits are less trackable, if at all. Several retention strategies that physical businesses can implement to help track returning customers’ activity include loyalty programs, store-issued credit cards, gift cards, surveys, mailing lists, and online purchasing.
9 factors influencing customer retention rates
A satisfied customer will return to an establishment to make more purchases, raising the customer retention rate. While customer satisfaction is a key factor affecting customer retention rates, it’s not the only one. There are nine other factors that help determine a business’s customer retention rate. They are:
Customers return to businesses that they trust and that provide a certain amount of transparency. It’s easier to cultivate customer loyalty when customers know they can easily return items and won’t be slapped with hidden fees or experience other unwelcome business practices. Whether it’s an insurance company or another type of service provider, customers are more likely to be loyal to a brand if they are confident the company will be accountable should something go wrong.
2. Customer service
Customer-centric employees and attentive service also attract repeat customers. Whether it’s a fancy online shoe boutique or a chaotic grocery store, customers notice kind, polite, individualized customer assistance. According to a Gartner report, when customers feel they’ve received value from a customer service interaction, there is an 82% probability of repurchasing or renewal, and a 97% probability of positive word of mouth.
3. Customer lifetime value
When customers peruse an ecommerce platform, an app, or a physical shop and feel like they are being spoken to through the product selection and marketing visuals, they’ll likely return—and repeat customers have a higher customer lifetime value (CLTV), which assesses a customer’s total money spent with a business during their relationship. More specialized services or products tend to have fewer customers, but they are typically extremely loyal, as they feel valued by the businesses.
Customers often return to businesses when they feel a sense of community with fellow customers, the brand, and even the employees. The Local, a small news platform in Europe geared for foreigners living there, has reduced its churn rate to less than 4%—nearly unheard of in the media industry—by actively engaging with readers and analyzing data to see what keeps them subscribing. In the past, media companies’ focus for revenue was always advertising.
5. Supports goals
When a customer shops and they feel the products or a particular service will help them reach their goals and achieve success, they come back. If someone is actively making DIY home improvements, for example, they will be more receptive to a housewares store that offers expert support and storage solutions.
Customer loyalty can blossom when a business’s values align with customers’ beliefs. For example, customers may want to know if a business is paying its employees a living wage and treating them fairly, or that the business is a certified B Corp.
Some customers prioritize convenience above all else—if a store is on their way to work or a product will arrive more quickly than a competitor’s, that often may trump other factors such as values or community.
For the average consumer, lower prices often attract repeat customers—who doesn’t like to pay less? Lowering joining fees or offering special promotions can attract new customers who then transition to repeat customers.
Sometimes it’s the little things: specials, samples, and freebies that create loyal customers. Discounts, as well as incentives, sales, free delivery, and loyalty programs, often make retained customers feel appreciated and are helpful strategies when acquiring customers just walking in the physical or virtual door.
A mix of these customer-centered factors attracts repeat customers. In fact, a joint Treasure Data/Forbes survey, found that 74% of respondents were likely to make purchases based on a buying experience, and 77% think the customer experience is just as important as the quality of the products or services.
What is the average customer retention rate by industry?
Whether a customer is returning to a favorite business to purchase groceries, apps, or a luxurious handbag, the frequency of visits can vary—from days to years—so different industries have a range of retention rates.
The average banking customer retention is relatively high, at 75%, as customers generally keep their bank account at one bank and get charged a monthly fee. Meanwhile, the hospitality industry, which includes restaurants, has a comparatively low rate, at 55%—despite the frequency that people dine out, due to the multitude of choices. Comparing these two retention rate averages, or any other two unrelated sectors for that matter, is like comparing proverbial apples to oranges. Statista compiled a list of the average global customer retention rate from 2018.
Media companies: 84%
Professional services: 84%
Automotive and transportation: 83%
IT services: 81%
Construction and engineering: 80%
Financial services: 78%
Telecom industry: 78%
IT and software industry: 77%
Consumer services: 67%
Hospitality, travel, and restaurant: 55%
Strategies to improve customer retention rates
When companies focus on their customer retention rate data, it helps to show what’s working and what’s not. Perhaps there’s a pattern among customers who don’t return, called the attrition, or churn rate. Or maybe there’s a common complaint. Typically, customers return to businesses when their expectations have been met. So, a high churn rate might indicate that customer expectations have not been met. Perhaps the reason is due to poor customer service or an unpleasant customer experience not resolved by the staff.
If your business’s customer retention rate isn’t measuring up to the industry average, there are numerous measures you could take. For starters, there is retention software available, like Zendesk and Gainsight, that help with retaining existing customers. Customer service companies like Gorgias help with customer satisfaction to improve customer retention. Even talking shop, troubleshooting, and discussing actionable insights drawn from customer feedback with fellow entrepreneurs can plant the seed for unique customer retention programs that are designed for the particular needs of each entrepreneur’s business.
Also, consider comparing retention data to previous periods to illuminate if the business has grown, or has room to grow. Both physical and virtual businesses can try implementing various marketing strategies, such as email campaigns, customer feedback tools, and loyalty programs, to better engage customers.
If you have a Shopify store, you can improve retention rates by building customer groups based on customer engagement, or lack of engagement. From there, you can use these to run email automations to re-engage customers or visitors and turn them into retained customers.
Average customer retention rate FAQ
What is a realistic retention rate?
A realistic customer retention rate depends on your industry. Comparing your retention rate averages to previous periods can show if your retention strategies are attracting current customers to make more purchases or not.
What is a KPI (key performance indicator) for customer retention?
There are several KPIs for customer retention. One is the repeat purchase rate, which is when a customer transitions from buying the same product once a month, for example, to three times a month. Another KPI is analyzing simple customer satisfaction scores that potentially improve over time. A painful (yet informative) KPI is a business’s customer churn rate, which is the rate current customers stop purchasing goods or services.
How do you measure customer retention?
The customer retention rate equation CRR = [(E-N) ÷ S] x 100 measures a business’s customer retention rate over a given time.
E = number of customers at the end of the measured period
N = customer acquisitions during the measured period
S = number of customers at the start of the measured period
The equation is best suited for ecommerce or B2B businesses, as purchasing products or services online typically provides the necessary data to the business owner as opposed to buying in a physical store, which can be difficult to track. Another option is a customer retention rate calculator.