Retention Rate: How to Calculate and Improve the Metric
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
Why calculate customer Retention Rate:
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:
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.
(5456 - 120) / 5679 * 100%
(11320 - 2600) / 13780 * 100%
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.
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.
| Metric | Description |
|---|---|
| Churn rate | The 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 value | Profit 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 Rate | Metric 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 Index | Measuring 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 Rate | Indicates 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 Score | A 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.
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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