Customer retention rate

Customers come and go, while some will become your “regulars.” If you have a large number of these loyal clients, you likely have good customer retention.

A customer retention rate is a metric that measures loyalty. It shows you what percentage of customers have remained with you and which have headed elsewhere, namely to your competitors.

“Customer retention is essentially about keeping customers that you have. It’s about building customer loyalty,” says Ajay Sirsi, Professor and Director of the Centre for Customer Centricity at York University’s Schulich School of Business.

He breaks down the metric in terms of the past business that your company has done.

“For example, if 100 customers did business with you last year, and the product or service is repeatable, how many of them repurchased? That percentage indicates your retention rate, giving you insight into how loyal your customers are.”

Why is customer retention rate important?

Sirsi lists characteristics of loyal customers that make them an important asset:

• They tend to be more price insensitive
• In the case of a B2B operation, the client knows the advantages that you bring to their business.
• From a marketing and communications perspective, they will cost you less than new customers.
• They can potentially become brand ambassadors.
• The bigger the base of customers you retain, the more leverage you're going to have with the channel that carries your product.

“Getting a new customer takes a lot of effort,” says Sirsi, elaborating on his point that good customer retention can lower marketing costs. “You're introducing yourself, your company, what you do—this person doesn't know you.

“Once they've done business with you, you don't need to go through all of that again.”

However, he does warn that once they are a loyal customer, you’ll need to then focus on maintaining their loyalty and keeping them happy.

As for their being brand ambassadors, Sirsi says, “I’ve been to trade shows where customers take over the selling of a product, telling booth visitors why they should do business with the company. The salesperson retreats, and the customer becomes an evangelist.”

In that respect, loyal customers can also provide your company with testimonials. They can describe how they use your product or service or how your offering has helped their business.

As for gaining strength in your distribution channel, Sirsi says the larger your base of retained customers, the more negotiating power you’ll have with the channel, whether it’s a grocery store, hardware store or another type of outlet.

“The more relationships you have with the end customer—meaning they like you and are loyal—the more leverage you’ll have with the distributor.”

Example of customer retention

Sirsi offers an example where customer retention helped a company negotiate space on a grocery shelf.

“Sometimes a retailer might inexplicably take you off the shelves or order less of your product. Having a strong customer base and a loyal following gives you a strong argument for getting back in the store,” he explains.

“I remember a soda drink manufacturer telling me that the retailer wanted to reduce their shelf space by half because it wanted to put its private label brand on the shelf.

“The backlash from consumers was so great, and consumers were so loyal to this company's brand, that they went to store managers demanding that this product be put back on the shelves.”

How to calculate customer retention rate

To calculate the Customer retention rate (CRR), you can use the following formula:

Where:

E = Number of customers at the end of the period.

N = Number of new customers acquired during the period.

S = Number of customers at the start of the period.

Steps to calculate customer retention rate

Begin by identifying the time period you’ll be measuring.

1. Determine the number of customers at the start (S)

This is the total number of customers you had at the beginning of the time period.

2. Determine the number of customers at the end (E)

This is the total number of customers you have at the end of the time period.

3. Identify the new customers (N)

This is the number of new customers you gained during the period.

4. Apply the formula

Subtract the new customers (N) from the customers at the end (E). Then, divide that result by the number of customers at the start (S) and multiply by 100 to get the percentage.

Let's say you have:

S (number of customers at the start of the period) = 500

E (number of customers at the end of the period) = 550

N (new customers) = 100

You will use this formula:

So, the customer retention rate would be 90%.

This means 90% of the customers you had at the start of the period stayed with you by the end of the period.

How do you improve customer retention?

Sirsi says improving your customer retention means looking at ways you conduct business with customers.

He sees a key point in the customer-vendor relationship: when the existing customer re-evaluates their decision to repurchase.

He says that moment offers a company clues on how to improve customer retention. “Something prevented the customer from repurchasing or re-engaging. Maybe they felt like a promise made by the salesperson during the initial sale was not fulfilled,” Sirsi says.

“So, for example, the salesperson might have said ‘We’ll take care of you. We've got a terrific service department.’ But when the customer's equipment broke down, it took a week for someone to come and repair the machine, or the part wasn’t available. Those are times when customers re-evaluate their decision to repurchase.”

Sirsi, who has worked with companies to try and improve their customer retention, says it takes them looking inward and fixing issues to raise their CRR.

“First, diagnose the reason why customers defect. That might involve going and talking to customers that have left you,” says Sirsi.

“I've seen cases where customers have been neglected, which essentially leaves the door open for the competition to come in, make a pitch to them and scoop up their business.”

Sirsi saw that situation up close when he spent a week accompanying a salesperson on customer visits. “We went to this one customer and saw a brand new piece of competitor equipment in the yard.” He says the salesperson asked the owner why they went to someone else. “And the owner said, ‘Well, we bought this machine six months ago when we were in the market, but you weren't here.’”

The salesperson had not visited this customer for a year after the client mentioned he had no money to invest in new equipment. Not long after, the client’s company was bought by a larger firm, one with enough money to purchase a new piece of equipment.

“This is another reason you must check in with your customers—circumstances can change.”

Sirsi says that lack of attention, slow service or broken processes can all cause a customer to go elsewhere. “And when that happens, your retention rate goes down.”

What is a good customer retention score?

Exceptional retention rate (Above 90%)

• Indicates strong customer loyalty and satisfaction
• Common in niche industries where competition is less aggressive

Great retention rate (80-90%)

• Suggests the business is performing well
• Retaining most of its customers

Good retention rate (70-80%)

• Acceptable business performance
• Opportunities for improvement

Poor retention rate (Below 70%)

• Business may be struggling with customer satisfaction, product fit or competition

What are some customer retention strategies?

Sirsi says the most important strategy you can take to improve your customer retention score is one where you stay in touch with customers.

“I would communicate about new developments, customer testimonials, and introduce new value propositions the company may have.”

He says when customers are in the market for a repurchase, they develop a consideration set, such as price and quality. “You want to make sure that you are in that consideration set. And marketing communications is a great way to ensure that you are not out of sight, out of mind.”

Sirsi says you need to show them that you’re an indispensable part of their business.

When he thinks about the company with the new piece of equipment in its yard, he figures a competitor came in and gave them a good pitch. He says the salesman may not have lost the sale had he sent the customer regular communications.

“Maybe they would have said, ’I need to give that company a call before I make a decision.’”

Next step

Discover how to assess, optimize and digitize your sales process with the free BDC guide, Revving up Your Sales.