Do you know how often your customers return to you for repeat business? How often they leave you for a competitor?
Customer retention rate is an essential metric for monitoring the overall health of your company and can help you forecast your financials. Companies with high retention rates are considered healthy and sustainable.
Here’s what customer retention rate means, how to determine if it’s good enough, and how to improve it if it isn’t.
What is customer retention rate?
The customer retention rate measures a company’s ability to keep its existing customers over time. It’s usually measured as a percentage calculated by dividing the number of customers at the end of a period by the number of customers at the beginning.
For example, a company might retain 75% of its customers over one year, meaning 25% did not return during that time. A high customer retention rate indicates that a company holds on to its customers and provides them with a satisfactory experience.
How to calculate customer retention rate
You need three variables when calculating the retention rate: the total number of customers at the start of the given period (S), the total number at the end (E), and the number of new customers who transacted between these two dates (N).
Subtract the number of new customers from the number of customers at the end date. Then, divide this by the number of customers you started with and multiply the result by 100. Here’s the formula:
For example, if you start the month with 5,000 customers, add 1,000 new customers along the way, and finish the quarter with 5,100 customers, the formula for your quarterly retention rate would look like this:
In this example, the retention rate is about 78%, meaning about 4 out of 5 customers made repeat purchases within the quarter.
What is a good customer retention rate?
Businesses want to retain as many customers as possible; the higher your retention rate, the better. A 100% retention rate (however unlikely) means you aren’t losing any customers—all of them come back for repeat business—whereas a 10% retention rate means 9 out of 10 customers don’t come back, indicating retention issues.
A good customer retention rate varies depending on the industry. For example, a 90% or higher customer retention rate in the subscription-based services industry is often considered good. It’s, therefore, best to base your retention goals on other businesses in your industry. Find our guide to customer retention rates by industry.
What can impact customer retention rate?
People cite various reasons for sticking with or abandoning a given brand. They may decide to stay because the price is right, because they had a positive customer experience in the past, or because they simply love the product. They might leave because they found a better deal elsewhere, they had a negative customer experience, or your product no longer interests them.
Here are some of the top three reasons customers return—or don’t return—to a business:
Unhappy customers tend not to return. On the other hand, when people enjoy their interactions and service, they come back. Customer satisfaction is about driving an effective balance between customer expectations and your business’s ability to meet them.
A decrease in satisfaction often results in a lower retention rate. Frequently measuring customer satisfaction allows you to quickly and dynamically adjust your retention strategy.
Do your customers depend on your services? Can they get the same service elsewhere?
Essential businesses, such as grocery stores, pharmacies, utility companies, or niche contractors, typically have higher customer retention because they provide goods and services that people need regularly. Because of this, customers will likely return to these businesses—even during difficult times or economic downturns.
Contractual obligations can improve customer retention by (legally) committing customers to a service or product for a given period.
Take the telecom industry as an example. When you get a new phone service, you sign a contract detailing what you’re paying for, how much you’re paying, and even the hardware you use. Most companies make these contracts valid for a specific time, guaranteeing their customers’ business for this period, upping the company’s retention rate.
While it’s usually possible to stop or change service, “out clauses” often add a layer of difficulty, keeping even unhappy customers begrudgingly subscribed to the service. On the other hand, incentives to extend a contract might help retain customers after the expiration date.
Contractual obligations demonstrate why a retention rate is merely a number; it doesn’t reveal why customers remain loyal to a brand, only the percentage of them who do.
Seven ways to improve customer retention rate
Improving retention is ultimately about elevating your relationship with your customers. Here are seven ways to improve your customer retention rate:
- Provide excellent customer service. Make sure your customers are satisfied with the service they receive. Respond to their inquiries and complaints promptly and professionally.
- Gather feedback. Take customer feedback into account when making improvements to your business. Consider using customer feedback tools, such as online surveys, customer satisfaction surveys, and net promoter score (NPS) surveys.
- Offer competitive pricing. Customers may be tempted to switch to a competitor if your prices are too high. Make sure your prices are competitive while still allowing you to make a profit.
- Provide high-quality products or services. Customers are more likely to continue doing business with you if they are satisfied with your products or services. Make sure you are consistently delivering high-quality products or services to your customers.
- Build trust and credibility. Customers are more likely to stay with a business they trust. Be transparent and honest in your business practices, and do everything you can to build trust and credibility with your customers.
- Create a customer loyalty program. Offer rewards and incentives to loyal customers. This can include discounts, exclusive offers, and other perks that make your customers feel valued and appreciated. You may also want to reward those who refer new customers to your business.
- Stay in touch with your customers. Keep your customers informed about new products, services, and promotions. You can do this through email newsletters, social media, or other channels. This can help keep your business top-of-mind for your customers and make them more likely to continue doing business with you.
Good customer retention rates FAQ
What is the average customer retention rate by industry?
There are plenty of resources available for identifying retention rates by industry, from blog posts to trade publications and professional organizations that keep track of these statistics within their niche. You may also want to join industry associations where you can learn about retention and much more.
What is a realistic customer retention rate?
There’s no short and simple answer to this question. Retention rates can vary considerably from industry to industry. For example, a 90% or higher customer retention rate in the subscription-based services industry is often considered good. In contrast, the hospitality industry has a relatively low average customer retention rate of about 55%. Take the initiative to familiarize yourself with what’s expected in your sector.
What does an 80% customer retention rate mean?
This means four out of five customers returned to you for repeat business within the period you’re measuring—monthly, quarterly, or annually. Retention around this level suggests the business is operating quite sustainably.