How to calculate, assess, and improve customer retention

February 4, 2022 | 3 minute read
Jennifer Ajer
Sr. Product Marketing Manager, CX Marketing B2C
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improve customer retentionIn a market where customers have more options than ever before, keeping the customers you already have is incredibly valuable. But for companies focused on improving customer retention, simply understanding that value isn’t enough. Businesses need a solid metric to help them track and evaluate progress if they are to create a true strategy for elevating customer retention.

Calculating average customer retention rate

Customer retention is used to track ongoing engagement and resulting sales, helping brands understand their ability to keep the customers they’ve worked to acquire. To put this measure into numerical context, average customer retention rate tells you the percentage of existing customers that you continue to engage.

First, consider your products typical repurchase cycle when determining the time period to use when measuring retention. The biggest challenge is not the formula for retention, it is the timeframe to consider. For instance, if your product is milk, the repurchase rate may be one week. On the other hand, if your product is a car, it could be 4 years. For the purposes of this article, we will say that our hypothetical repurchase rate is one quarter.

Here is the formula to calculate customer retention:

  1. Subtract the number of customers added throughout the quarter from the number of customers at the end of the quarter.
  2. Divide the difference by the number of customers you had at the beginning of the quarter.
  3. Then, multiply the quotient by 100 to get your retention rate for the quarter.
  4. At the end of the year, add your quarterly retention rates and divide by four to get your average customer retention rate.

Understanding retention in context

Higher customer retention generally indicates that your customers get value from your products and services and are satisfied with the experience you provide. But what’s a “good” or “bad” retention rate? The answer is: that depends.

Some businesses are predisposed to higher (or lower) retention rates due to their industries, their customers, the nature of their products—the list goes on. The point is that it’s important to consider your business context when evaluating your customer retention. Ask yourself the following questions:

  • What are the barriers to entry in our industry? If it’s easy and inexpensive for customers to switch to a new provider, retaining them may be more difficult.
  • How do customers use what we sell? Are our offerings relevant at a single point in time, or are they something customers use regularly?
  • Does our business model facilitate recurring purchases? 

This list is not exhaustive, and there’s no perfect answer to the question of “good” versus “bad” retention. Always weigh factors unique to your business when evaluating your own.

Increase retention through customer loyalty programs

Once you have a better understanding of your “starting point” with customer retention, you can begin to put a plan in action to increase the metric over time. Set a goal for year-over-year improvement to your average customer retention rate. Then, think through the factors that impact customer retention—service quality, customer satisfaction, brand trust, and commitment were found to be key in 2020—and select ones you can control to raise your retention rate. 

Investing in a customer loyalty program can influence these factors by dialing up your engagement with customers, improving your customer experience, and rewarding customers for sticking around, and there are many different types of loyalty programs to choose from based on your objectives.

 

Improving customer retention and loyalty will help you get more value from your customer base. Looking for a solution to increase your rate? Learn why Forrester named Oracle CrowdTwist a Leader in Loyalty Solutions.

Oracle CrowdTwist

Jennifer Ajer

Sr. Product Marketing Manager, CX Marketing B2C

Jennifer Ajer is a seasoned cross-channel marketer who has ten years’ experience in various marketing roles. She is currently a Senior Product Marketing Manager for Oracle Marketing Cloud's B2C products.


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