How to Calculate Retention Rate
Retention rate is a critical metric in the world of business, especially for subscription-based companies or those with recurring revenue models. It measures the number of customers who continue to do business with a company over time. Calculating retention rate can provide valuable insights into customer satisfaction, loyalty, and overall business performance. In this article, we will discuss how to calculate retention rate using a simple formula.
What is Retention Rate?
Retention rate is the percentage of customers that remain with a company over a specific period, compared to the total number of customers at the beginning of that period. This metric helps businesses track customer satisfaction, monitor trends in customer churn and assess the effectiveness of their customer retention strategies.
Calculating Retention Rate
Calculating retention rate is a straightforward process. Here’s a step-by-step guide to calculating retention rate:
Step 1: Determine the Time Period
Choose the time period you want to measure the retention rate for. This could be a month, quarter, or year, depending on your preferences and needs.
Step 2: Identify Your Starting Customer Base
At the beginning of your chosen time period, take note of how many customers you have. This number will represent your starting customer base (C_start).
Step 3: Identify Your Ending Customer Base
At the end of your chosen time period, determine the number of customers who are still doing business with you. This number represents your ending customer base (C_end).
Step 4: Calculate Your Net New Customers
Calculate the total number of new customers acquired during the time period (C_new). These are
customers that were not part of your starting customer base but joined your company during the specified time frame.
Step 5: Use the Retention Rate Formula
Now that you have collected all necessary data points, plug them into the following formula:
Retention Rate = ((C_end – C_new) / C_start) x 100
By applying this formula, you calculate the percentage of your starting customer base that remained with your company by the end of the specified period.
Let’s say you run a subscription-based business and want to calculate your retention rate for the month of January. At the beginning of January, you had 200 customers (C_start). By the end of January, your customer base grew to 250 customers (C_end). During January, you acquired 60 new customers (C_new).
To calculate your retention rate for January, plug these numbers into the formula:
Retention Rate = ((250 – 60) / 200) x 100
Retention Rate = (190 / 200) x 100
Retention Rate = 0.95 x 100
Retention Rate = 95%
Your retention rate for January was 95%. This means that out of the initial 200 customers, 95% remained with your company by the end of January.
Calculating retention rate can provide valuable insights on how well a company is keeping its customer base satisfied and engaged. Keeping track of this metric enables businesses to better understand their customers’ behavior and make informed decisions regarding their customer retention strategies.