Retention Rate measures the proportion of customers you've retained over a specific time period. It’s a metric that’s indicative of your user’s affinity to your product or their enthusiasm for your service.
How to Calculate Retention Rate
To calculate retention rate use the following formula:
Customer Retention Rate = ((CE-CN)/CS)*100
- CE = # of customers at the end of period
- CN = # of new customers acquired during period
- CS = # of customers at the start of period
Take a look at the example below for this set of customer data:
If you started January with 5000 customers, acquired 250 customers and ended the month with 5050 customers, your retention rate for January would be 96%.
Customer Retention Rate (January) = ((5050-250)/5000)*100
Customer Retention Rate (January) = 96%
If you started Q1 with 5000 customers, acquired 1270 total customers between January and March, and ended Q1 with 5600 customers, your retention rate for Q1 would be 87%.
Customer Retention Rate (Q1) = ((5600-1270)/5000)*100
Customer Retention Rate (Q1) = 87%
Calculating retention rate should typically be done using cohorts or groups. This simply means that when you’re calculating retention rate, consideration needs to be given to certain attributes of a customer. For instance, when a customer signed up and where they came from.
Rather than simply measuring retention based on averages, calculate retention rate based on cohorts like “customers who activated after February 2017” or “users who found your product through organic” vs “users who found your product through paid channels”. The more specific your cohorts are, the more insights you can glean about what you’re doing right and where you’ve missed the mark.
Retention Rate vs Churn Rate
While Retention Rate is the proportion of customers you've retained over a specific time period, User Churn Rate, also referred to as Attrition Rate, refers to the percentage of customers who have cancelled or unsubscribed from your service during a specific time period.
As such, if your retention rate for a certain time period is 90%, your churn rate for that same time period is 10%.
What’s a Good Retention Rate?
Simply put, a good retention rate is as close to 100% as possible. Likewise, a good churn rate is as close to as 0% as possible. The specific numbers you aim for will be dependent on your particular business.
As a reference, our Open Benchmarks reveal the median churn rates for 700+ small and medium sized SaaS companies. As seen above, when we know the churn rate for a certain time period we also know the respective retention rate.
Managing Your Retention Rate
It’s frequently said that acquiring a customer is significantly harder than retaining a customer. It’s true. Therefore, your retention rate should be a key focus. The best way to retain customers will vary depending on your product or service offering. For online products, tactics like frequent and personalized customer interaction and strong online help sections can be helpful with increasing retention and squashing attrition.