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How to Calculate Your Customer Retention Rate

Updated Nov 08, 2023

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Marketing efforts are often heavily tied to the goal of attracting new customers to a business. However, this doesn’t mean your existing customer base should fall by the wayside. If anything, retaining customers can be easier, less expensive and more impactful than pursuing new leads.

With so much to gain from strong customer retention, it’s crucial to understand your retention rates so you’ll know if you need to do more work to keep customers from leaving. Read on for our guide to customer retention, including how to calculate your retention rate and how to keep your customers.

What is customer retention?

Customer retention is when a first-time customer turns into a repeat shopper by coming back to make another purchase from you. If a customer buys the same product on a regular basis or several different products on an irregular basis, you have retained that customer.

Savvy customer retention practices encourage repeat purchasing and strive to make each shopper more profitable for your company. They also benefit your customer base, as most customer retention strategies involve making the shopping experience easier. This is a win-win, allowing you to get more value from your customers and your customers to get more value from you.

The benefit of managing customer relationships is immense. Research shows that, while most businesses make sales to between 5 and 20 percent of new customers, they close deals with 60 to 70 percent of existing customers. According to Zippia, a 5 percent increase in customer retention results in a profit increase of 25 to 95 percent, with 65 percent of a company’s sales coming from returning customers.

Additionally, it’s seven times less expensive to retain customers than to acquire them. You can determine whether your company is effectively harnessing this power by calculating your customer retention rate.

Did You Know?Did you know

Losing existing customers costs businesses over $75 billion a year, according to Zippia. Learn how to manage your customer relationships with high-quality CRM software.

What is the customer retention rate?

Your customer retention rate is the percentage of your customers who, during a given period, are not first-time buyers. To calculate your customer retention rate, gather the following data points:

  • Your total number of customers at the start of the period, signified by the variable S
  • Your total number of customers at the end of this period, signified by the variable E
  • Your total number of new customers acquired during this period, signified by the variable N

Note that N refers to the number of customers you gained, independent of whether you lost any customers. As such, if you gain 30 customers but lose 12, use 30 for N, not 18. Your number of lost customers matters only when calculating E, which is the sum of S and the difference between your gained and lost customers.

How do you calculate customer retention?

Using the above variables, this is the customer retention rate (CRR) formula:

CRR = [(E – N)/S]

When you calculate your customer retention rate, you will see a decimal as the value. You can convert this decimal to a percentage by multiplying it by 100.

Here’s an example. Let’s say at the beginning of the most recent quarter, your company had 120 customers. Over this quarter, you gained 40 customers but lost 10. As such, S = 120, E = 120 + 40 – 10 = 150, and N = 40. When you plug these values into the customer retention rate formula, you get the following:

CRR = [(150 – 40)/120] = 0.9167

CRR = 0.9167 x 100 = 91.67%

This value is approximately that of many industry-leading companies. Of course, a customer retention rate of 100 percent would be ideal, but even the largest and most successful businesses rarely achieve this metric. Per Shopify, retention rates across all industries average between 70 and 80 percent. But there’s a ton of variability among business categories, and this percentage takes time to reach. In fact, Omniconvert found that it’s common for businesses in all sectors to see a retention rate below 20 percent in a two-month period.

FYIDid you know

Customer retention rates can vary drastically by sector. For 2022, SurveySparrow found rates ranging between 4 and 85 percent.

How do you improve your customer retention rate?

If your customer retention rate is lower than you’d like, you can take several approaches to improve your rate. Here are the strategies we recommend.

Customer loyalty programs

A common tactic companies use to hold on to customers is to register them in a loyalty program. When you think of customer loyalty programs, large businesses with rewards cards might come to mind. But even the smallest enterprises can implement this strategy.

For example, to run a hassle-free customer loyalty program, you could use an email marketing platform that delivers newsletters with discounts and offers available solely to loyalty program members. With this incentive, your customers might be more likely to buy from you again.

TipTip

Check out our roundup of the best email marketing software to find the right solution for your business.

Customer feedback surveys

After customers make a purchase, ask them to complete a feedback survey to inform you about their experience. This can make the customer feel listened to and valued, thus increasing the likelihood that they will return for future purchases. However, if you gather customer input without ever implementing changes based on their feedback, you might appear uncaring and lose customers as a result.

Notably, customer feedback surveys are convenient because you can administer them in many ways. You can request that customers take your survey after a customer service call, send an email survey after an e-commerce purchase, or include a survey URL or QR code on a paper receipt.

Social media

Almost every business owner is familiar with the benefits of using social media for business marketing, and social media is just as powerful for customer service. You can use strategic hashtags or separate customer service social accounts to make your company easily reachable on channels your target audience likely already uses every day. When you couple this presence with quick responses and meaningful solutions, customer retention often follows.

Values-based initiatives

Customers use their dollars to support the causes that matter to them. It’s vital for your company’s values to align with those of your customers if you hope to retain them. Demonstrating ethical habits, such as eco-friendly initiatives and fair employment practices, can make customers feel good about — and want to continue supporting — your business. 

Simplified shopping experience

Your customers shouldn’t have to do extra work to find and purchase your products or services. From a seamless checkout process with few payment steps to unambiguous communication materials, it’s all about creating a pain-free customer experience. If you make things clear and easy to follow, customers are more likely to return to your brand because your company is simple to patronize. Plus, a good customer experience can lead to additional growth through word-of-mouth praise. 

Additional incentives

If you’ve ever stopped purchasing products from a brand and got an email offering discounts if you return, you’ve seen the power of using incentives for customer retention. You can use top marketing automation software and email marketing tools to identify customers you’ve recently lost and offer them incentives to come back, thereby increasing the likelihood that you’ll regain their business. This approach can be just as useful for first-time buyers whom you hope to convert to repeat customers — after all, retention is often easier than acquisition.

Invest in customer retention for a thriving business

While catching the attention of new customers is one of the keys to business growth, customer retention can have an even bigger impact on long-term profit and company sustainability. Existing customers cost less to obtain, and their purchases may account for the majority of your profits. Calculating and tracking your retention rate can give you valuable insight into where you may need some additional work. And if you do want to boost your retention rate, there are plenty of ways to incentivize your customers to return to your business.

Natalie Hamingson contributed to this article.

Max Freedman
Business Operations Insider and Senior Analyst
Max Freedman, has spent nearly a decade providing entrepreneurs and business operators with actionable advice they can use to launch and grow their businesses. Max has direct experience helping run a small business, performs hands-on reviews and has real-world experience with the categories he covers, such as accounting software and digital payroll solutions, as well as leading small business lenders and employee retirement providers. Max has written hundreds of articles for Business News Daily on a range of valuable topics, including small business funding, time and attendance, marketing and human resources.
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