How to calculate customer retention – plus how to improve it

Nov 29, 2023
Retention rate is the number of customers that stick with you for a period of time. Improving it is another story. Here's how.

Tracking customer retention rate is a key activity for understanding customer satisfaction and maximizing lifetime value. This metric shows what percentage of customers continue engaging with your business over time.

We'll walk through the retention rate calculation, why it matters, and share tips for deriving actionable insights from your data.

How to calculate retention rate

  1. Decide on a time frame to analyze. Monthly provides more granular insights, but be wary not to panic over anomalies. Quarterly or annually shows higher-level trends.
  2. Identify the total number of unique customers at the start of the selected period from your records. Label this number X.
  3. Determine the number of customers still remaining at the end of the period by re-pulling customer records. Label this number Y.
  4. Subtract the number remaining (Y) from the original total (X) to determine the number of customers lost.
  5. Divide the number of customers remaining (Y) by the original number (X) to calculate the percentage retained.

For example, a company has 1,200 customers at the start of a quarter and 1,080 remain at end.

1,080/1,200 equals a 90% retention rate.

Calculate customer retention rate using this formula. Divide the net number of customers from a certain period by the comparison period to determine customer retention rate.

The value of tracking this value

High retention signifies satisfied customers and strong fit with your products or services.

  • Retaining customers costs less than acquiring new ones. Research from Fred Reichheld of Bain & Co found that in financial services, a 5% increase in retention produced a 25% increase in profit. Often, customers spend more over time with a business, making their lifetime value much higher.
  • Declining retention is an early warning for dissatisfaction or misalignment with customer needs. Identify pain points before significant churn. According to Jill Avery, a senior lecturer at Harvard Business School, if you are starting to see an increase in churn, you may be too late.
  • Changes in retention rate indicate fluctuations in customer loyalty. Stay agile and be deliberate about the insights you drive from each movement.
  • Retention directly impacts profitability. The longer customers stay, the more lifetime value extracted through repeat sales, referrals and upsells over time.

There's no single "good" customer retention rate that applies to all businesses

However, here are some general guidelines on healthy customer retention rates:

  • 80% or higher is considered excellent for most industries. If you can retain over 80% of your customers, you're doing very well.
  • Under 60% signals potential problems with customer satisfaction or your value proposition. Significant churn risks revenue loss.
  • Subscription services and SaaS companies often benchmark towards 85-90% retention as their model depends on recurring revenue.
  • Retail, ecommerce and other transactional businesses often see lower retention (around 60-70%), as customers have many options.

Averages can vary widely by industry

  • Software/SaaS - 80-90% (Forbes - Subscription Business Benchmarks)
  • Telecommunications - 45-65% (CleverTap - Customer Retention Benchmarks)
  • Banking - 65-85% (Forbes)
  • Insurance - 45-65% (CleverTap)
  • Ecommerce - 20-40% (BigCommerce - Ecommerce Metrics Report)
  • Automotive - 45-65% (CleverTap)
  • Healthcare - 70-90% (BMC Health - Patient Retention Whitepaper)
  • Media/TV - 70-90% (Kantar - Media & Entertainment Report)
  • Hospitality/Travel - 30-45% (Hotelify - Hotel Guest Retention Study)

Retention data is only as useful as how you use it

Derive meaningful insights from retention data and use it to take action. Tracking this number is only useful if you use the insights to make changes to your marketing program.

  • Segment rate by customer attributes like purchase frequency, spend, demographics. Identify highest churn risk groups and create an incentive specifically to try to retain them.
  • Comparing rate across acquisition channels. Double down on sources providing longer-tenured customers.
  • Relating customer retention rate to customer retention costs. Understand how your rates and costs affect each other, so that you can more predictably forecast and measure actual results.
  • Monitoring trends over time, noting changes from pricing shifts, campaigns, seasonality.
  • Setting retention goals and tracking progress. Celebrate wins and improvements.

Regularly monitoring customer retention rate provides early warning signs, progress markers, and insights into better serving customers. Now you're equipped to calculate and leverage this vital metric.

Need help making improvements to your retention metrics? Schedule a free demo with a customer engagement specialist.

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About the author
Adrienne Kmetz
Marketing and startup expert with 15 years of writing about business, finance, and entrepreneurship.

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