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Retention Rate: How to Calculate and Improve the Metric

Date: 2024-07-04 | Time of reading: 8 minutes (1470 words)

The goal of any business is not only to attract but also to retain customers. A loyal audience that consistently returns for repeat purchases, renews subscriptions in apps and services, provides companies with more stability, and saves advertising budgets.

Therefore, tracking user retention regularly is essential. In marketing, there is a metric called Retention Rate (RR). This metric considers the ratio of old and new customers over a specific period and indicates when a customer retention strategy needs adjustment.

In this article, you will learn what Retention Rate means, why it is used, how to calculate the customer retention rate, and how to increase RR.

What is Retention Rate and why measure it

Retention rate is a customer retention metric that shows what percentage of people return and use a business's product again. This metric is especially popular in the IT sector, where users need to regularly log into applications and services to benefit their creators.

Why calculate customer Retention Rate:

Understand product effectiveness: Determine how well your product actually solves customer problems so that they continue using it.

Evaluate marketing and service efficiency: Assess the effectiveness of marketing departments and the service level provided by the company. A low retention rate is a warning signal. Analyzing it will show which department is underperforming and why customers are not returning.

Reduce marketing costs: Retaining customers is cheaper than acquiring new ones, which usually involves multiple advertising campaigns. The retention rate metric shows how effectively your marketing works on existing customers.

Increase company revenue: The usefulness and convenience of your product enhance customer loyalty. Loyal customers not only return and respond to additional offers but also recommend your brand to others.

In the article "Customer Loyalty: What Is It and How to Calculate It" we explained in detail why loyalty is important and which metrics are used to measure it.

How to calculate Retention Rate

To calculate the customer retention rate, you need the following data:

  • A. The number of customers at the beginning of the selected calculation period.

  • B. New users during this time.

  • C. The number of people who continue to use your product at the end of the period.

The Retention Rate formula looks like this:

Calculate Retention Rate formula

The calculation period is chosen depending on the business sector and the product's characteristics. If the purchase cycle is quick, the Retention Rate is calculated more frequently. The usual calculation periods for this metric range from daily to yearly.

Example RR Calculation #1:

At the beginning of the month, the interior design app had 5,679 users. During the month, an additional 120 users joined. At the end of the month, 5,456 people were using the product.

(5456 - 120) / 5679 * 100%

RR = 93%

Example RR Calculation #2:

Over the year, 11,320 people made purchases in the online store, starting with 13,780 customers at the beginning of the year, and 2,600 new buyers during this period.

(11320 - 2600) / 13780 * 100%

RR = 63%

It is also permissible to calculate the retention rate for separate cohorts of users to ensure proper segmentation and enhance the personalization of offers.

How to evaluate Retention Rate

There is no specific benchmark percentage for RR because each industry has its own figures, and customer acquisition and retention are done differently. Therefore, it is advisable to benchmark against market leaders you aspire to match when calculating your RR. It is important to consider successful cases.

For example, a retention rate of 65% for a mobile app would be low, whereas it would be high for the retail sector, where the average is 63%.

Another way to find your benchmark for RR is by considering your own data from previous periods. By continuously tracking the rate, you will establish your internal ideal percentage. This method is also suitable when competitor RR information is not publicly available.

Retention Rate and other metrics

Marketing is a system that should not be evaluated based on a single metric. To assess whether your strategy is working when launching campaigns for customer retention and loyalty enhancement, other metrics are also used.

MetricDescription
Churn rateThe number of users (in %) who unsubscribed from emails or newsletters via messengers, SMS, Push and stopped using your service. That is, churn rate metric indicates how many people have stopped connecting with the brand through all communication channels. Churn is a normal process, because products sometimes lose relevance for customers. But it is important that this indicator is overlapped with new users.
Lifetime valueProfit from the customer over the entire time they have interacted with the company. A useful metric for personalization because over a long period of time with a customer, the brand gathers enough information about their needs, tastes and orders to make a customized offer.
Redemption RateMetric for evaluating the use of provided bonuses: discount coupons, points and so on. Needed to check the effectiveness of loyalty programs and marketing campaigns.
Customer Satisfaction IndexMeasuring customer satisfaction with specific interactions with the company and product. It is checked, for example, to what extent users are satisfied with the quality of goods, variety of assortment, communication by phone with service, technical support, and so on.
Repeat Customer RateIndicates how many people out of all customers have returned for purchases two times or more. A high return rate indicates satisfaction with a product or service and its usefulness to users.
Net Promoter ScoreA metric of user commitment to your company. Shows how willing customers are to buy again and recommend you to others. Users rate the brand on a given scale, and an overall coefficient is calculated for all the answers of the questionnaire.

How to improve Retention Rate

To impact RR, it’s crucial to understand what user retention means for your company and what tools and methods are used. Then, choose the available strategies.

Improve the product. Increase its value for customers by adding new features, improving existing ones, fixing bugs, and so on. The faster and more effectively your product solves the customer’s problem, the more often they will want to return to it.

Simplify product use. Eliminate lengthy and confusing registrations, provide a simple onboarding process, and ensure an intuitive interface to enhance the user experience.

Launch marketing campaigns as retention methods. Remind users about your product through email newsletters, push notifications, messages in messengers, and SMS. Use special offers and promotions to encourage users to return to purchases and other target actions, with personalization being particularly effective. Providing bonuses for various activities, which also benefit your brand, can be useful for retention.

For example, Nook Vibrant Kitchen, a plant-based meal delivery service, excels in ecommerce email marketing with their loyalty program explainer email. It outlines earning and redeeming points, referrals, and the bottle return program, ending with a join call. This thorough guide helps eliminate customer confusion.

Customer loyalty program based on clients’ activitiesNook Vibrant Kitchen gives points for every type of activity

Expand the audience and attract new users for whom your product has great value. Here, the marketing strategy primarily ensures an influx of new users so that the number of loyal and engaged users outweighs those who have lost interest in your product.

Engage in dialogue with customers. Ask users for their opinions about the service or product they purchased, and about the ordering, delivery, and other processes. Loyalty increases when people understand that brands listen to them and respond to criticism. Additionally, responses in surveys and questionnaires will point out the strengths and weaknesses of the product and service. Addressing these deficiencies will lead to an increase in Retention Rate.

Survey to ask for feedbackThe user is asked to take a survey and leave an opinion about the online store's performance

Summary

Retention rate is the customer retention rate, calculated over a chosen period of time (day, week, month, etc.). This metric is essential for evaluating the product's usefulness to the audience, reducing marketing expenses, and increasing business sales.

The RR formula considers the ratio of customers at the beginning and end of the period, along with the number of new users. There is no universal rule for what the customer retention rate should be; for evaluation, examples from one's own business field or previous data are used.

In addition to Retention Rate, other metrics can be calculated to increase marketing effectiveness, such as customer lifetime value, churn rate, repeat purchases, use of rewards, and loyalty and satisfaction indexes.

To improve RR, companies enhance the product, simplify its usage, launch marketing campaigns targeting existing customers, and maintain constant communication with them.

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Author: Ksenia Yugova

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