Customer retention rate

Sustained revenue depends on customers continuing to buy or renew. Retaining an existing relationship is generally less expensive than attracting and converting a new customer, and an established customer is usually easier to resell to, cross-sell to and up-sell. Customer retention rate shows how much of the acquired base actually stays.

When to use it

• Answer the key performance question: “To what extent are we keeping the customers we have acquired?”
• Assess this KPI within the Customer perspective.
• Plan data collection, formula use, reporting frequency, and data-source requirements for this KPI.
• Compare results against the targets, benchmarks, examples, or trend guidance available for this KPI.

Origins

Retention became a central management measure as relationship marketing and customer databases expanded in the 1980s. Leonard Berry’s nineteen eighty-three formulation of relationship marketing, followed by work on loyalty economics, shifted attention from completing individual transactions to sustaining profitable relationships. No single person invented the rate: cohort definition, period length, treatment of new customers and the meaning of “active” determine how it should be interpreted.

What it is

Perspective: Customer perspective.

Key performance question: To what extent are we keeping the customers we have acquired?

Most businesses therefore try to turn first-time buyers into durable, profitable customers. In The Loyalty Effect, Fred Reichfeld argued that “A 5% improvement in customer retention rates will yield between a 20 to 100% increase in profits across a wide range of industries.”

Retention is based on observed behaviour: customers actually renewed, stayed or purchased again. That makes it different from forward-looking indicators such as net promoter score or brand equity. Those measures may suggest repurchase intent, but neither intention nor past retention guarantees future behaviour.

The rate is the proportion of an existing customer cohort that remains active or repeats a purchase during a defined period. A high figure can indicate satisfaction, but it can also reflect switching barriers or incentives strong enough to outweigh poor service. A low figure should trigger investigation into why customers leave, especially relative to competing offers.

Not every acquired customer should be retained at any cost. Some relationships are structurally unprofitable or disproportionately expensive to serve, so retention must be interpreted with customer profitability and customer lifetime value.

Customer churn, also called attrition, is the complementary view: the percentage of customers lost over the same defined period.

How to use it

Measurement

Data collection method

Use purchasing records from the general sales ledger or a CRM system when customer identities are reliable. Where customer-level records do not exist, a survey can provide an estimate, although with lower precision.

Formula

Retention rate measures the percentage of a starting customer cohort that remains over a specified period. A common textbook calculation divides active customers at period end by active customers at period start, but this incorrectly includes customers acquired during the period.

A better formula is:

For an even cleaner renewal measure, define the customers who were genuinely at risk of leaving at the beginning of the period and divide the number who remained by that at-risk cohort.

Frequency

Match frequency to the customer lifecycle, contract term or normal repurchase interval. Monthly collection is appropriate for many industries, but a longer cycle may be necessary for infrequent purchases.

Source of the data

In most organisations, the sales ledger or CRM system provides the required customer status and transaction data.

Cost/effort in collecting the data

Cost depends mainly on customer-data quality. A bank with stable customer identifiers can calculate retention inexpensively. A restaurant chain without reliable identity data may require a survey, raising cost while reducing confidence.

Target setting/benchmarks

A typical company may lose customers at 10–30% per year, but meaningful targets must reflect the industry and the organisation’s own history. Retail banking has traditionally retained more customers than mobile-phone or internet providers, where frequent package comparison encourages switching. In one J.D. Power and Associates automotive study, Toyota led at 64.6%, followed by Lexus at 63.0% and Honda at 62.8%. Most commercial organisations set retention targets during their annual marketing-planning process.

Example

A global telecommunications company used retention on its corporate dashboard by tracking the share of genuinely at-risk customers who renewed in its CRM system.

Suppose 200,000 mobile-phone contracts come up for renewal in December and 130,000 renew. The customer retention ratio is:

This cohort-based view is more reliable than raw churn because churn records can include customers who merely changed handset or phone number, moved between pay-as-you-go and monthly contracts, or were disconnected for non-payment.

Businesses without contracts or persistent customer records face a harder problem. A retailer without a loyalty programme may track transactions but not people, forcing it to estimate retention through surveys. Wal-Mart follows transaction volume because it does not identify individual customers. Boots, by contrast, links an estimated 70% of sales revenue to loyalty cards, enabling it to compare actual purchase history with predicted return frequency and basket value.

Top practical tip

Define and count the customer consistently before calculating the rate. A telecom provider must decide whether one person with phone, tablet, mobile and broadband contracts is one customer or several, and whether a family contract represents one relationship or multiple people.

Also align the observation window with the purchase cycle. Mercedes Benz may estimate that customers replace cars every five years, but even then it needs durable identity matching when a returning buyer changes address, credit card or other details.

Top pitfall

Never treat retention as a complete customer-health measure. Pair it with customer profitability and customer satisfaction so that high retention caused by switching friction is not mistaken for a healthy, valuable relationship.

Further reading

Frederick F. Reichheld and Thomas Teal, The Loyalty Effect: The Hidden Force behind Growth, Profits, and Lasting Value, Boston, MA: Harvard Business Press, 2001.