January 26, 2017 | Authored by: Kevin Cancilla
Accurately gauging your customer retention rate
Your customer retention rate gives a glimpse into your company's financial health and ability to satisfy customers. The formula to determine your retention rate is simple, but understanding the factors that affect it requires research into your current customers and the surrounding market. These factors are different for businesses operating on a subscription billing model than those accepting standard payments.
Calculating your retention rate
You need three key metrics to start calculating your customer retention rate:
- Find the number of customers at the end of a given time frame.
- Subtract the number of customers acquired over the same period.
- Divide this total by the number of customers you had at the beginning of the time period and multiply by 100.
For example, say you had 600 customers as of Oct. 1 and you want to calculate your retention rate for the month. Thirty of your initial customers left, but you acquired 55 new ones, leaving you with 625 come Oct. 31. Subtract 55 from 625, then divide by 600. Multiply the total by 100, and you'll see your customer retention rate is 95 percent.
According to SalesForce, a healthy customer retention rate for a small business is 85 percent or higher. There are a lot of factors that go into your retention rate, including customer demographics, payment failures, market shifts and your product's ease of use. Review your customers to see if people in a certain region or age group are more likely to churn than others. If, for example, you notice a higher percentage of Canadian customer churn, you'll need to conduct market research into why this happens and how to prevent it. You can also devise new marketing efforts to target these customers specifically.
You can gain similar insight by observing your customer's payment preferences. Certain card providers might be more likely to issue chargebacks, while others may have a tendency toward failed payments. Knowing this information ahead of time helps you anticipate which customers are most likely to churn.
Depending on your market and business goals, you may need to take focused steps to increase your retention rate and reduce churn.
"Your business should focus primarily on addressing reasons people leave."
Customer retention is different for subscription services than for standard business-to-business or business-to-consumer industries. If you use a recurring billing service, customers are retained by default unless they cancel or a payment issue arises. Therefore, your business should focus primarily on addressing reasons people might leave, not just ways to draw them back.
Totango, a customer success platform, identified several reasons why customers churn. One is that they do not see a good return on investment. These customers will use your product frequently immediately after signing up, but their usage will drop sharply as time passes. If your company provides B2B services, have your account management or customer service teams contact new clients with low usage rates to ask how your product can better serve their needs. If you offer a B2C product or otherwise don't have the resources to contact individual customers, send out an automated survey via email.
Another reason might be customers don't understand how to use your product. If you notice users don't engage with your service from the outset, they might need clearer instructions or a tutorial on how to use it. New decision makers can also affect your retention rate, especially for companies that offer B2B software-as-a-service products. If you hear any news about management shifts among your customers, schedule a proactive meeting and describe how your software benefits their company.
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