How To Calculate Customer Retention Rate + 9 Ways To Improve It

2023-05-11

Any business that wants to succeed in a highly competitive market must pay close attention to its customer retention rate.

Customer retention metrics help you determine if your business is providing a superior customer experience to keep them coming back — and it’s definitely not something you should overlook. In fact, studies have shown that even just a 2% increase in customer retention equals the same amount of profit as cutting costs by 10%.

In this post, we'll walk through what a customer retention rate is, how to calculate it, and nine ways to improve your customer retention rate so you can keep loyal customers satisfied, coming back, and spending more. Let’s dive in!

What is customer retention rate?

Customer retention rate is the percentage of customers a business is able to retain over a certain period of time.

A high customer retention rate indicates that customers are satisfied with the products or services provided by your business, and are more likely to continue doing business with your company in the future. 

For instance, a customer retention rate of 100% means you didn’t lose any customers, while a 0% retention rate means you lost them all. 

Customer retention is an important metric to track, as it can help you identify areas to improve in order to retain more customers. It’s also a lot more cost-effective to keep existing customers than acquire new ones.

A study done by Market Metrics found that the success rate of converting an existing customer is 60%-70%, while the success rate of converting a new customer is only 5%-20%.  

Converting New vs. Existing Customers

With loyal customers being most valuable to your business, customer retention should be a top priority so you can plan your resources, time, and budget much more efficiently.

What is a good customer retention rate?

A good customer retention rate varies across industries and can be influenced by different factors, such as the nature of your products or services, customer behavior, average cost per purchase, and the competitive landscape. 

However, as a general rule, a good customer retention rate is typically considered around 80% or higher. This means you’re able to retain at least 80% of your existing customers over a certain period of time, while the remaining 20% is considered your churn rate, or the number of customers lost over that same time period. 

This standard may not be the case for all industries, so it’s important to compare your retention rate to your competitors and other businesses in your industry to determine a realistic goal rate.

How to calculate customer retention rate

To remain competitive, ensure you track and measure customer retention regularly. 

To calculate your customer retention rate, you’ll need the following data:

  • Number of customers at the start of a given period (S)
  • Number of new customers acquired during that period (N)
  • Number of customers at the end of that period (E)

Once you have this data, you can plug these numbers into the customer retention rate formula:

[(E-N)/S] x 100 = Customer Retention Rate

Essentially, you’re taking the number of customers you have at the end of a given period and removing the number of new customers acquired during that period. Then you divide that number by the customers you started with and multiply by 100.

Customer Retention Rate Formula

Let’s say, for example, you wanted to know your retention rate for the month of May:

  • S: On May 1, you had 108 customers. 
  • N: You gained 22 new customers in May.
  • E: Throughout the month you lost 11 customers, but since you’ve gained 22 new customers, you have a total of 119 existing customers at the end of the month. Tip: (108 - 11) + 22 = 119.

Customer retention rate = [(119-22)/108] x 100

Your customer retention rate in May would be 89.8%.

9 Proven ways to improve your customer retention rate

Improving customer retention should be a priority for your business. Whether you're looking to increase your rate or ensure your retention rate remains high, these proven tips can help you achieve your growth goals.

1. Create a seamless onboarding process

If your product or service requires some training to get started (e.g., new software like a sales tracking tool), make sure your customers have an easy time navigating through the learning process. 

Providing resources such as tutorial videos, templates, one-on-one consultations, easy-to-find help docs, or a live chat option for quick answers are great ways to make the onboarding process simple and effective.

The initial experiences customers have with your product will have a significant influence on whether they decide to continue using it or look for a different (and easier) option. 

Onboarding strategies are rated as an essential driver of value by 82% of businesses.
Source: Precursive

2. Offer loyalty programs

Loyalty programs are a value-added service that can help you stand out from the competition and encourage customer retention. You can create a sense of loyalty and an emotional connection with your customers by providing them with special discounts, rewards, and other incentives. 

For example, you could offer a program that allows customers to earn points for each purchase they make. Once they’ve reached a certain amount, they can redeem those points for rewards or discounts. Consumers love gift cards and branded swag.

You can also offer personalized rewards like free products on a customer's birthday or anniversary. This can help incentivize customers to buy from you over competitors. 

When customers participate in a customer loyalty program, their spending increases by 67%.
Source: Annex Cloud

Engage with your customers consistently

Another key component of retaining your customers is engaging with them consistently. To help build relationships and encourage loyalty, your business should have a solid customer engagement strategy in place.

Even after an initial transaction, you should continue to nurture your relationship with them, making your customers feel valued and informed about new offerings and deals — not to mention, it keeps you top of mind.

Some examples of engagement strategies could include weekly newsletters with helpful content or new deals, interactions on social media, monthly or quarterly success meetings, and special events like product launches or training webinars.

91% of customers are more inclined to make purchases from companies that acknowledge and remember them as well as offer relevant deals.
Source: Microsoft

4. Make it easy for customers to reach you

One of the most frustrating aspects of customer support is dealing with automated systems that take what feels like forever to help you with your specific needs. That’s why it’s imperative to have live agents available 24/7 so customers can reach you whenever they need to.

While the phone is typically a preferred channel of communication for customer service, live chat and SMS messaging have become effective channels to leverage for quick responses. 

The key here is to make it simple and easy for customers to get in touch, meeting them on their preferred channels and having human agents available around the clock.

60% of customers prefer human interaction from brands.
Source: Oracle

5. Personalize your interactions

Have you ever experienced a small family-owned grocery store or restaurant that had employees who remembered you every time you came in? Did they greet you by name or save your favorite loaf of freshly baked bread in the back just for you? That’s the charm of a mom-and-pop shop that keeps you coming back (even if their prices are higher than the standard grocery chain).

You can take the examples of personalization from those small businesses and implement them into your own. To help build that personal connection, aim to learn as much as you can about your customers and keep track of your interactions.

While you probably can’t personally know every customer like a small grocery store can, you can use tools like customer relationship management (CRM) tools that keep track of all your customer interactions and store relevant information about each person.

59% of customers believe personalization is critical to retaining their business.
Source: Salesforce

6. Listen to feedback

To retain your customers, you have to continuously deliver great experiences. So which experiences leave customers wowed and which ones make them leave? The best way to gain that insight is to simply ask them for their feedback. 

Consider using a poll or survey solution to gather, gauge, and measure customer feedback, and identify areas that need the most improvement across your processes.

You can also encourage customers to leave a review. Monitor these reviews and look for trends — both positive and negative. You can also gain insight by monitoring brand mentions or hashtags on social media.

You can’t always be perfect, but if you show customers that you’ve listened to them and are actively fixing a problem, they’ll be more likely to stay loyal.

53% of customers don’t think companies take any action on their feedback.
Source: Zippia

7. Provide great value for the price

While high-quality products are an essential part of good business, people love a good deal. If your customers find a similar product or service for a better price, it’s possible they’ll go to a competitor. 

Make sure your products or services are priced fairly and are in line with the rest of your industry. To help you determine a fair price, try running a price sensitivity analysis.

If your offerings are more expensive, however, they should be based on an added value that can’t be easily replicated by your competitors. And whatever your added value is, you need to clearly communicate it to your customers so they realize what they’d be missing out on by leaving for a competitor.  

66% of customers say that a good value product for what they are paying inspires their loyalty.
Source: Zippia

8. Study your competition

While you should understand and focus on what you do well, it’s also a good idea to study your competition to see what they’re doing to win customers at your expense. 

Investigate your competitors from all sides, including their products, prices, placements, promotions, user experiences, and customer service. You might even buy their offering and analyze it first-hand.

How’s the product for the price? Is onboarding simple and easy? Do they provide helpful resources and stellar customer service? How so?

By doing this, you’ll learn a lot about your competitors and reveal aspects of the customer journey that could be improved for your own business. 

81% of businesses compete primarily on customer experience.
Source: Gartner

9. Be quick to respond to customers

Customers have high expectations for businesses, so you want to ensure you are delivering top-notch service. One of the best ways to ensure good customer service is by quickly responding to each customer interaction.

If a customer has an issue or complaint, make sure to resolve it quickly and efficiently. This will show them that you value their business and are committed to their satisfaction. 

Responsiveness wins business, so ensure you have a dedicated team of reps available to answer your customers on all channels including, phone, chat, text, and social media. 

90% of customers expect a response to their customer support questions in 10 minutes or less.
Source: Hubspot

Smith.ai can help you improve customer retention

To keep your customer retention rate high and win loyal customers, it’s important to deliver excellent customer experiences.

At Smith.ai, we provide integrated solutions to respond and act upon every lead while also interacting with your current customers. Our 24/7 virtual receptionists can serve as your outreach team or answer your inbound calls and live chats so you can rest easy knowing a dedicated team of reps are available to engage with all of your customers at any time.

To learn more about how Smith.ai can help your business, book a free consultation.

Sources: SuperOffice | Market Metrics 

Tags:
Primary
Business Education
Sales Tips
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Written by Maddy Martin
Maddy Martin is Smith.ai's SVP of Growth. Over the last 15 years, Maddy has built her expertise and reputation in small-business communications, lead conversion, email marketing, partnerships, and SEO.

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