Customer Retention Rate (CRR) is a crucial Key Performance Indicator (KPI) for businesses, especially those operating on a subscription or recurring revenue model. It measures the percentage of customers a business retains over a specific period. A high retention rate indicates customer satisfaction and loyalty, while a low rate can signal problems with product, service, or customer experience.
Why is Retention Rate Important?
Profitability: Acquiring new customers is significantly more expensive than retaining existing ones.
Customer Lifetime Value (CLTV): Loyal customers tend to spend more over time, increasing their lifetime value.
Brand Advocacy: Satisfied, retained customers are more likely to recommend your business to others.
Predictability: A stable retention rate contributes to more predictable revenue streams.
How to Calculate Retention Rate
The formula for calculating Customer Retention Rate is as follows:
Retention Rate = [(Customers at End of Period - New Customers Acquired During Period) / Customers at Start of Period] * 100
Let's break down the components:
Customers at End of Period: This is the total number of customers you had at the very end of the chosen time frame (e.g., month, quarter, year).
New Customers Acquired During Period: This is the number of entirely new customers you gained within that same time frame.
Customers at Start of Period: This is the total number of customers you had at the very beginning of the chosen time frame.
The term (Customers at End of Period - New Customers Acquired During Period) effectively calculates the number of customers who were retained from the beginning of the period, excluding any new acquisitions.
Example Calculation
Let's assume a business is calculating its retention rate for the month of March:
Number of Customers at End of March: 1,000
Number of New Customers Acquired in March: 150
Number of Customers at Start of March (March 1st): 900