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How do You Calculate Retention Rate?

By Mathew Gollow on March 31, 2021
Last updated on June 21, 2024

Retention rate is the percentage of customers you retain over a given period. It’s one of the most critical metrics SaaS and subscription companies can measure. A high retention rate suggests you have a low churn rate, which is good news for your business.

But how do you calculate your retention rate? And why should you care? Learn the easiest way to calculate retention rates in your business with this simple guide.

What is Retention Rate?

Retention rate is a popular metric that calculates the total number of customers you

retain over time. The higher the retention rate, the more customers you have retained within a specific period. The lower the retention rate, the fewer customers you have retained.

Retention rate is the opposite of churn rate — a metric that calculates the percentage of customers who cancel or don’t renew a subscription. Data-driven SaaS and subscription companies should measure both retention rate and turnover rate regularly.

Why Should You Measure Retention Rate?

Retention rate determines whether customers are happy or satisfied with your subscription service. A high retention rate suggests customers receive value from your subscription. A low retention rate shows the opposite.

Customer retention is critical for businesses like yours because it’s easier and cheaper to keep repeat customers than acquire new ones. Research shows it costs five times more to attract a new customer than keep an existing customer.

Once you have calculated your retention rate, compare it with other user churn metrics for further insights into churned and current customers. Or compare your retention rate with the industry average.

How to Calculate Retention Rate

The best way to calculate your retention rate is to use the following formula:

Customer Retention Rate = ((CE-CN)/CS)*100

• CE means the number of customers at the end of the period you want to measure.
• CN means the number of new customers gained during that same time period.
• CS means the number of customers at the start of the time period.

Example

• You want to measure your retention rate for January.
• You had 100 customers at the beginning of January (CS) and gained 50 customers during the month (CN). At the end of January, you have 150 customers (CE).
• Using the formula ((CE-CN)/CS)*100, your retention rate for January is 50 percent (((150-50)/100)*100).

Example

• You want to measure your retention rate for January.
• You had 1,000 customers at the beginning of January (CS) and gained 1,000 customers during the month (CN). At the end of January, you have 2,000 customers (CE).
• Using the formula ((CE-CN)/CS)*100, your retention rate for January is 100 percent (((2,000-1,000)/1,000)*100).

Retention rate, though useful, only provides basic insights about your customers. For example, this calculation doesn’t tell you where customers come from or how long they have been subscribers. You could measure retention rates for specific groups (“cohorts”), such as customers from a particular region or customers who have been subscribers for over 12 months.

You can also use retention rate alongside other SaaS benchmark metrics for deeper analysis.

How to Improve Retention Rate

The easiest way to improve your retention rate is to find out why some customers continue to subscribe to your service and some customers don’t. Once you have discovered this information, you can create retention strategies that reduce the number of customers who cancel or don’t renew subscriptions.

Here are the best ways to find out this information:

• Send subscribers email surveys to determine the value of your product/service. What do subscribers love? What do subscribers hate? How can you improve customer acquisition?
• Send churned customers email surveys to determine the value of your product/service. Why did these customers cancel? How can you improve the customer experience?

You can also generate valuable feedback via social media, online forums, direct mail, and other communication channels.

Pro-tip: Many customers don’t renew a subscription when their credit card expires. Baremetrics’ Recover lets you communicate with customers when their cards are due to expire so you can update payment details, improve your retention rate, and optimize your customer retention strategy.

Bottom Line

Retention rate is one metric that drives revenue for SaaS and subscription companies like yours. Using the calculation above determines your retention rate so you can make business changes accordingly. For even better results, calculate the retention rate alongside a broad range of churn metrics.

Mathew Gollow

Mathew spends his days bringing the brilliant ideas of the Baremetrics team to the blog. When Mathew’s not chasing after his team for more accurate and clear information, you can find him teaching voice at the local music academy.