Customer retention rate + formula: A guide for 2024

What is customer retention rate?

Customer retention is like keeping guests entertained at a dinner party. The better their experience is, the longer they’ll stay. But at times, the party can get crowded, making it difficult to determine how well you did in keeping certain people from leaving.

In business, customer retention rate helps you measure just that, accounting for the number of customers you started with, ended with, and any you gained along the way.

To help you keep a close eye on customer retention, our guide covers what customer retention rate is, how to calculate it, other key retention metrics, and tips for improving customer retention.

More in this guide:

• How to calculate customer retention rate using the customer retention formula
• Retention rate vs. churn rate
• Other key customer retention metrics
• How to improve customer retention rate
• Frequently asked questions
• Make your customers stick with Zendesk

How to calculate customer retention rate using the customer retention formula

To calculate customer retention, you’ll first need to identify the specific time frame you want to measure. Some companies evaluate retention on an annual, quarterly, monthly, or weekly basis. Fast-moving software as a service (SaaS) companies with user bases that fluctuate rapidly and dramatically may even look at this data daily.

Once you’ve decided on a specific time frame, you’ll need to gather the following data:

• The number of customers at the end of a given period (E)

• The number of customers added within the time period (N)

• The number of customers at the start of a given period (S)

After you’ve gathered this information, you can plug your numbers into the customer retention formula to calculate your customer retention rate.

For example, if you want to measure your retention rate for the calendar year, you’d follow these steps:

1. Start with the number of customers at the end of the period (E): If you’re measuring retention for the calendar year, E is the number of customers you have on December 31.
2. Subtract the number of new customers gained within the period (N): Remember, you don’t want new customers throwing off your data, so subtract all customers you acquired in the past year from E.
3. Divide the result by the number of customers at the beginning of the period (S): In this case, S would be the number of customers on January 1 of the previous year.
4. Multiply by 100: The result is a percentage. Say a company has 100 customers at the start of the period (S), ends the period with 100 customers (E), and adds 10 customers over the period (N). The organization has a customer retention rate of 90 percent: [(100-10)÷100] x 100 = 90%.

By following the formula and steps above, you can calculate your customer retention rate over any given period, from days to years.

Retention rate vs. churn rate

Your customer churn rate is simply the inverse of your customer retention rate. For instance, if your retention rate is 90 percent, then your churn rate is 10 percent. The simplest way to determine your churn rate is to follow the customer churn rate formula:

Again, say a company has 100 customers at the beginning of the year but loses 10 customers by the end of that same year. The business has a churn rate of 10 percent: (10 ÷ 100) x 100 = 10%.

Identifying your churn rate can be more complicated than it first appears, as churn has multiple definitions. For instance, a churned customer can be when they cancel a subscription or when they don’t renew.

But it can get tricky: Say a company offers a free trial of its product, and some customers cancel at the end of it. Should the company consider those customers churned even though they never impacted revenue? Issues like these are why it helps to use multiple customer retention metrics for building a more nuanced understanding of why some customers stay and others go.

Other key customer retention metrics

It’s always a good idea to prioritize customer loyalty and aim for a high retention rate. But not all customers are equally valuable to your company, and the mere fact that a customer churned doesn’t tell you anything about why they left. To better understand why certain customers remain loyal and others don’t, you need to look at additional customer retention metrics.

Revenue churn

Revenue churn tells you how much monthly recurring revenue (MRR) you lost over a given period. You can calculate revenue churn using the following formula:

Revenue churn doesn’t measure the total number of customers—it measures their impact on your bottom line. This information is useful if you have a tiered pricing model, no set average order values, or many customers who downgrade rather than churn.

Using the revenue churn formula is a helpful way to put churn in context. Say you lose old customers who were paying legacy rates for your service. After tracking revenue churn, you might see that losing these customers doesn’t have a major impact on revenue and frees up resources to take on new customers who are willing to pay more.

Net Promoter Score®

Net Promoter Score® (NPS) is a tool for measuring customer loyalty. Companies calculate their NPS by sending customers a one-question survey asking how likely they are to recommend their product to other people.

People who respond with a low score are classified as “detractors,” those in the midrange are “passives,” and customers at the top are “promoters.” The aggregated results are converted into a company’s overall NPS. This particular score is useful for identifying churn before it happens. Companies can see which customers are satisfied and which need extra attention.

Repeat purchase rate

Repeat purchase rate is the percentage of customers who do business with a company again after their first purchase. You can calculate the repeat purchase rate using the following formula:

Thus far, most of the customer retention metrics we’ve covered apply specifically to SaaS companies or other businesses that operate via contracts or subscriptions. But repeat purchase rate applies more to companies without fixed contracts, such as retailers. For example, if you’re running an e-commerce business, you want to ensure customers come back to you instead of defecting to Amazon.

Customer lifetime value

Customer lifetime value (CLV) measures how much profit the average customer contributes to a business over their entire life cycle. You can calculate customer lifetime value using the following formula:

CLV is an important metric because it points to whether your company needs to invest more in marketing campaigns to acquire new customers or in a retention strategy to keep the customers you have. On a side note, don’t forget to calculate your consumer acquisition cost.

You can boost a low CLV by encouraging customers to make additional purchases, putting more resources into customer loyalty programs, and generally focusing on improving customer satisfaction. If your customers have a high CLV, you can likely afford to spend more on acquisition. Most companies don’t have a single CLV for their entire customer base. Instead, they use separate calculations for different customer segments.

How to improve customer retention rate

Now that you know how to calculate your customer retention rate and other key retention metrics, you may wonder how to improve your rate. Follow these tips to help take your customer retention rate to the next level:

• Set clear customer expectations: If your customers have an unrealistic expectation of what your business provides, they may be quick to leave once they realize your product or service isn’t what they expected.
• Understand customer service metrics: A company that understands the right metrics can easily align marketing and customer service efforts with its larger customer retention strategy. By using these metrics as your North Star, you can quickly identify and address areas of improvement that can boost your retention rate.
• Solicit customer feedback: Make sure you build customer feedback into your retention strategy. Listening to the people who share their time and money with your business can help you create a richer customer experience (CX) and lead to more returning customers.
• Create a loyalty program: Rewarding customers who are loyal to your company can encourage them to stick around. You can incentivize loyalty in many ways, from offering special discounts to early access to new products.
• Improve your CX: The more pleasant a customer’s interaction with your business is, the more likely they are to continue doing business with you. From offering personalized customer service to meeting customers on their favorite communication channels, there are plenty of ways to improve your CX.

From setting clear customer expectations to prioritizing your CX, following the above tips can help you improve your retention rate and keep your customers from jumping ship.

Frequently asked questions

Make your customers stick with Zendesk

While you can’t force your customers to stay, improving your CX can help keep them satisfied. When trying to keep your customers at the party, consider Zendesk, the host with the most. With our customer experience software, you can provide personalized omnichannel service and solve issues faster with AI-powered insights. This helps reduce your customers’ wait time and gives them a positive experience that keeps them returning year after year.

Net Promoter, Net Promoter Score, and NPS are trademarks of NICE Satmetrix, Inc., Bain & Company, Inc., and Fred Reichheld.