Tracking and analyzing customer retention should be a high priority for any company with the hope of becoming successful. Your customers are the people who keep you in business, and customer retention is a measure of how well you satisfy them. Dissatisfied customers will not continue to give your business their money.
Understanding how retention rate works, calculating it and other KPIs, and gleaning insights from your data are all crucial steps to making your business work. Keep in mind that retention rate is just as critical to a subscription or membership-based business as a company selling consumables. In other words, it’s viable for all businesses.
What Is Retention Rate?
Your company’s retention rate is a measurement of customers who return to your brand to purchase more products or continue using your services.
For example, it would measure the number of customers who continued to resubscribe to your service month after month. However, it is less important for companies selling cars, furniture, or other items that are not replaced frequently.
What Is Customer Churn?
Customer churn refers to customers who discontinue their business with your brand. This can happen for a variety of reasons. It can mean the customer was dissatisfied with your product or service or that they decided to discontinue service because it was no longer needed or affordable.
Why Is Retention Important for My Business?
Customer retention helps to increase your profits because existing customers who choose to stick with your company are consistently profitable. They are also more valuable than new customers because each dollar they spend costs you less to attain.
Additionally, retention rate gives insight into whether your brand is meeting and exceeding customer expectations. When your company constantly satisfies its customers, they’ll stay out of trust instead of experimenting with competitors.
How Do You Analyze Customer Retention?
Analyze your customer retention by first identifying why your customers return and then why customers churn, then compare the results to find out how to increase retention and decrease churn.
Why Do Customers Churn?
Customers churn for a number of reasons:
- Poor customer service experience
- Decreased quality of products or services
- Additional benefits, features, or functionalities found elsewhere
- Price differences with competitors
- Your product is no longer convenient
- Customer’s budget or schedule changed
- Promotional period ended
While it is important to consider all of these reasons, some are more likely to happen than others, and all of them, except for a customer’s changing needs, are within your company’s control.
How Do Customers Churn?
One example is, in subscription or service-based companies, customers cancel their subscription or membership. With products, the customer stops purchasing the items.
How Do I Calculate My Retention Rate?
Calculating your retention rate is simple. First, choose a period of time to measure. Record the number of customers your company had at the end of the period and subtract the number of new customers. Divide that number by your total customers. Then multiply that number by 100 for your final retention rate.
(ending customers – new customers) / total customers * 100 = retention rate
(300 – 25) / 450 * 100 = 61.1%
Which Retention KPIs Should I Measure?
Knowing which KPIs to measure is an essential part of analyzing your brand’s success. Having the right metrics on your side makes it easier to understand where to focus your company’s efforts for improvement. While there are plenty of different indicators, these provide some of the most valuable information.
Customer Churn Rate
Customer Churn Rate measures the number of customers who have churned during a specific period. The rate of churn doesn’t explicitly list why the customers are leaving, which means it is up to your company to perform other evaluations to learn what is driving customers to leave. Is it poor customer service? Does your brand have a competitor who is undercutting your prices? Or is it a product issue?
Knowing how many customers choose to leave and why they’re leaving is crucial for growing your business and your bottom line.
Customer Lifetime Value
The Customer Lifetime Value measures the contribution of a customer throughout the entire business relationship. The longer the CLV is, the more loyal your customer is.
Net Promoter Score
The Net Promoter Score is a measure of customer loyalty. It asks the customer a straightforward question: how likely are they to recommend your brand to a friend? The customer answers on a scale of 1-10, with 1 being the worst score and 10 being the best score, meaning that they are going to recommend you.
MRR Churn Rate
Monthly Recurring Revenue (or MRR) Churn Rate refers to any fluctuation in your company’s churn rate each month. Since you want to avoid churn, a negative MRR churn rate is good for your company. On the flip side, a positive MRR churn rate is bad news because it means that you’re losing customers for some reason.
Customer Engagement Score
Your Customer Engagement Score can vary depending on which inputs your company wants to measure. However, it is essentially a way to track customer activity through purchasing products and other KPIs.
This score can be helpful if you plan to separate customers into groups based on ethnicity, age, gender, and other factors. By identifying who is most likely to become a customer and stay a customer, your company will have a better idea of how to market itself and who the target audience currently is.
We’ve listed the basics, but there are plenty of other retention KPIs that your company can mix and match to create reports that are meaningful.
Some other KPIs to consider are:
- Customer Satisfaction Score – a measure of how much your customer enjoyed their experience or product.
- Customer Retention Cost – if your company has a loyalty or rewards program, this can add up to an expensive proposition over time. You want to ensure that it makes financial sense.
What Is a Retention Report?
A retention report records the number of customers who have both purchased a product or service and then repurchased that item or renewed their subscription within a specified time period. This can be a great way to see if your product or service satisfies customers over time, especially if your company just ran a promotion or free trial.
Suppose the majority of customers who signed up for the promotion or free trial canceled their membership after the promotional period ended. That may be a sign that your product needs improvement, the price needs to be reduced, or that the trial period wasn’t long enough for customers to understand your product’s benefits.
Armed with the information about customer retention, your company can analyze it’s retention reports and other KPIs to see where improvements need to be made. These reports can shed light on specific areas of your product or service where customer satisfaction is lacking and help your company retain customers for longer, increasing your profit margin one happy customer at a time.
Let Kissmetrics help you analyze your retention and churn to increase your customer lifetime value.