Your business must evolve to resist competitors, stay relevant, and grow a loyal customer base. However, customers come and go as they please for many reasons: consumer satisfaction, budget sensitivity, or even a change in habits or lifestyle.
To understand their coming and going, you’ll want to calculate your churn rate (how often you’re losing customers within a given period) and your retention rate (how effectively your business keeps its customers).
These data points can inform decisions on which processes you may want to change—or abandon—to keep a customer coming back. Let’s unpack them in detail.
What is customer retention rate?
Customer retention rate is the rate at which a business keeps its customers within a given period of time. Calculating retention rate helps companies understand the relationship between what they do (like their marketing strategies and other internal business processes) and the outcomes they achieve (how much money they’re making).
A high retention rate means customers return with some degree of regularity. This consumer data point is invaluable for making important decisions, like whether it makes sense to spend more money on ads, for instance, to attract new customers. High retention rates are critical for businesses that rely on monthly recurring revenue (MRR), such as companies that use subscription models.
Customer retention metrics can indicate customers’ trust and familiarity with a brand—the strength of their business relationship. According to Harvard Business Review, some 80% of consumers consider trustworthiness in their purchasing decisions, despite trusting only 34% of the brands they buy from.
Customer retention rate is not to be confused with customer lifetime value (CLV), which measures the total income you can expect to make from a typical customer as long as they remain a client, and repeat purchase rate, which measures the proportion of customers that make more than one purchase.
How to calculate retention rate
You need three different variables to calculate retention rate: total customers at the start of the designated time period (S), the total number at the end (E), and the number of new customers 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 by 100. Here’s the formula:
For example, if you start the quarter 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 looks like this:
In this example, the retention rate is about 78%, meaning approximately four out of five repeat customers made repeat purchases within this quarter.
What is customer churn rate?
Think of customer churn rate as the opposite of retention rate. Where retention rate measures repeat purchases, user churn rate reflects how often customers stop doing business with you.
Measure your churn to identify the percentage of customers that transact with your business only once within a designated period. These customers may have canceled their subscription service or given their business to your competitor.
No amount of churn is perfect because it reflects the rate at which customers choose not to return. Of course, every business owner wants every customer to return, but this is impossible. If you’re in business for any length of time, having a customer churn rate above zero—i.e., some level of customer departure—is inevitable and to be expected. No brand can be everything to everyone.
Measuring churn is a little bit like measuring missed opportunities—keep a finger on this pulse to figure out how to increase repeat business and attract a loyal user base.
How to calculate customer churn rate
You only need two variables to calculate your churn rate: the number of customers at the start of your time period (S) and the number at the end (E).
Subtract the number at the end from the number at the beginning. Divide the result by the number at the beginning, then multiply by 100. Here’s how to calculate churn rate:
For example, if you start the year with 50,000 customers and end it with 48,000, you can calculate your annual churn rate like this:
Your churn rate depends on your business volume. Businesses with hundreds of thousands of loyal customers may reasonably handle higher churn rates that would cause smaller companies to run into trouble or shut down. The goals and critical levels for churn rate vary from business to business.
Customer retention rate vs. churn rate
Retention rate measures the good (how often customers come back), while churn rate measures the undesirable (how often your customers leave you).
A high retention rate means your business successfully attracts repeat business and establishes a solid and trustworthy brand. The lifetime value of a customer is much greater when they come back regularly; a company with a high user retention rate is poised to thrive.
However, if your churn rate is high, your business’s customers don’t have a compelling reason to return. To reduce churn and become more self-sustaining, you may need to gather customer feedback and devise a more robust customer retention strategy.
Why monitor customer retention rate and churn rate?
There are two reasons to monitor your customer retention and churn rates. One is to maximize retention. A high retention rate establishes confidence that your business can generate sustainable income. When retention trumps churn, it indicates that everything you’ve done to keep your customers satisfied is working and they are willing to keep buying it from you.Tracking these metrics can also help you predict revenue gains. Successfully identifying and filling a market need can get you far, but tactics like product enhancement and increasing marketing and sales teams’ budgets can propel you even further. Being in touch with these two metrics makes it possible to accurately predict your revenue gains further into the future, allowing you to shift toward innovating internally to remain relevant and protect your advantage.
Customer retention rate vs. churn rate FAQ
Are churn and retention rate the same?
No. Businesses look to minimize churn and maximize retention. Churn and retention rates are similar in theme but are two different consumer data points. Retention rate looks at how frequently you retain customers, whereas churn rate looks at how often customers stop doing business with you.
What is a good KPI for customer retention?
There’s no single optimal key performance indicator (KPI) for customer retention. Retention goals can be high, but specific goals are ultimately up to the leadership of each business. The closer your retention is to 100%, the more dominant you are in your market. When retaining customers, certain inevitabilities about the business landscape—like competition and consumer choice—mean that perfect retention is impossible. Few businesses can boast 100% customer satisfaction.
What is a good customer churn rate?
Different businesses determine acceptable levels of churn depending on years of operation, finances, and the steadiness of their sector, among other factors. Still, it’s good to be in touch with the industry averages. If your industry’s average retention rate is between 85% and 95%, you might aim for a churn rate between 5% and 15% to compete.