Customer retention rate is a metric that measures the percentage of customers a company retains over a specific period, indicating the effectiveness of its customer loyalty and satisfaction strategies. It represents the portion of existing customers that remain active and continue to do business with a company rather than churning or switching to a competitor. This metric is often expressed as a percentage.
Focusing on retention can be more cost-effective than constantly acquiring new customers. A high retention rate also reduces the need for higher customer acquisition costs. Understanding a company's ability to foster positive long-term relationships is essential.
The customer retention rate is calculated by subtracting the number of new customers acquired during a period from the total number of customers at the end, then dividing that by the number of customers at the beginning, and multiplying by 100 to express as a percentage. The formula is: ((Total customers at end of period – New customers acquired) / Customers at start of period)) x 100.
A reasonable customer retention rate varies by industry, but a rate above 90% is generally considered excellent. However, in the SaaS (software as a service) industry, 35% is regarded as a reasonable retention rate due to monthly subscription billing.
Improving customer retention includes providing excellent customer service, personalizing interactions, implementing customer loyalty programs, regularly engaging with customers, collecting feedback and acting on it, and creating a strong brand experience. Focusing on the customer journey to resolve pain points is also vital.
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