Measuring Customer Retention for a Business

Instructor: Savannah Samoszuk

Savannah has over eight years of hotel management experience and has a master's degree in leadership.

How does a company find out if their customers are returning to them? This lesson will explain customer retention, the importance of customer retention and different ways to measure customer retention.

What Is Customer Retention?

Sally runs an online store selling clothes. All of her purchases are done online. With the use of technology, it is harder for companies to see if customers are returning. For example, if Sally ran a store where customers came in person to make purchases she would recognize the customer and know if they were a repeat customer. This is why companies need a way to figure out if their customers are returning.

Customer retention is the loyalty a customer has to a brand or store based on their return business. Companies have found that while they need to bring in new business, it is even more important to retain that new business and turn it into repeat business. Retained customers will most likely spend more on a regular basis, cost less to retain, and refer other people to the business. This is why measuring customer retention is necessary for businesses. We will now look at a few different ways to measure customer retention.

Customer Retention Rate

The first way companies can measure customer retention is by the customer retention rate. Customer retention rate is basically the number of customers you manage to keep during a specified amount of time. For example, companies can choose to calculate customer retention rate monthly, quarterly, or annually. This calculation lets a company know how they did with customer retention. It provides a percentage. Ideally companies would like to have 100% customer retention, which would mean that they are retaining all of their customers.

Calculating Customer Retention Rate

In order to measure customer retention using the customer retention rate a company needs to know the number of customers at the beginning and end of the period and how many of those customers were new customers. You want to know how many customers are left at the end of the period without counting the new customers. You will take the customers at the end of the period and subtract the number of new customers during that period. This tells you how many customers were retained. Then, to get the percentage, you divide that number by the number of customers at the beginning of the period and multiply it by 100. See below for the calculation.

Customer Retention Rate = ((Number of customers at the end of the period - Number of new customers during that period) / Number of customers at the start of the period) * 100

For example, let's say Sally had 100 customers at the beginning of the month, and of those 100 customers 15 were new customers. Then at the end of the period, Sally has 75 customers. She would take the 75 customers at the end of the period and subtract the 15 new customers to get 60. Then should would divide 60 by the 100 customers she had at the beginning of the period and multiple by 100, which would give her a customer retention rate of 60%.

Sally's Customer Retention Rate = ((75 - 15) / 100) * 100 = 60%

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