What is Retention Rate?

Retention rate, or customer retention rate, is a key indicator that measures what percentage of your customers continue to use your products or services over a certain period. It is a critical measure for understanding customer loyalty and a company’s ability to retain its customers.

Retention rate is the opposite of churn rate (customer attrition) and focuses on the customers who choose to stay rather than leave. A high retention rate indicates that your customers are satisfied, loyal, and see value in your product or service, while a low retention rate can be a warning signal that there are problems that need to be addressed.

Why is Retention Rate important?

Measuring retention rate is crucial because it affects the company’s long-term success and profitability. Here are some of the main reasons why retention rate is important:

Lower cost than customer acquisition: It is often much cheaper to retain existing customers than to acquire new ones. By focusing on customer loyalty, companies can reduce their marketing and sales costs.
Higher lifetime value (CLV): Customers who stay longer contribute to a higher Customer Lifetime Value, which improves the company’s revenue over time.
Indicator of customer satisfaction: A high retention rate shows that your customers are satisfied with your product, service, or customer experience.
Predictable revenue: With loyal customers, it is easier to predict future revenue and plan for growth.

How to measure Retention Rate

Measuring retention rate is relatively simple and requires only a few basic data points. Here is the common formula:

Retention rate (%) = ((Number of customers at the end of the period – New customers during the period) ÷ Number of customers at the start of the period) × 100

Example:
Number of customers at the start of the period: 1,000
Number of customers at the end of the period: 1,100
New customers during the period: 200
Retention rate = ((1,100 – 200) ÷ 1,000) × 100 = 90%

This means that 90% of your original customers have chosen to stay.

Retention vs Churn – What is the difference?

Retention rate and churn rate are two sides of the same coin. While retention rate focuses on measuring the percentage of customers who stay, churn rate measures the percentage of customers who leave during a given period. Here is a comparison:

Aspect: Retention Rate / Churn Rate
Focus: Customers who stay / Customers who leave
Formula: ((End Customers – New Customers) ÷ Start Customers) × 100 / (Customers who left ÷ Start Customers) × 100
Indicator: Customer loyalty / Customer attrition
Goal: Increase retention rate / Decrease churn rate

Understanding both retention and churn is crucial for building a successful strategy that ensures more customers stay over time.

Strategy for improving Retention Rate

To improve the retention rate requires a strategic and structured approach. Here are some key steps to strengthen customer loyalty and retain more customers:

Understand customer needs and expectations
Collect regular feedback from customers via surveys, interviews, and user data to understand their needs and identify areas for improvement. By addressing customers’ most important wishes, you can create a better experience.
Deliver exceptional customer service
A strong customer service team is crucial for retaining customers. Quick responses, friendly service, and solution-oriented efforts help to build long-lasting relationships.
Create loyalty programmes
Reward loyal customers with discounts, offers, or exclusive benefits. This shows that you appreciate their support and increases their incentive to stay.
Proactive communication
Keep in touch with customers by sending regular updates, personal offers, and relevant information. A well-maintained relationship reduces the risk of customers leaving.
Analyse churn
By analysing why customers leave (churn analysis), you can identify patterns and develop measures to reduce attrition. This may include improving product quality, lowering prices, or offering better support.
Develop a retention strategy
Create a holistic retention strategy that includes everything from onboarding and training to long-term follow-up and support. By ensuring that customers get maximum benefit from your product or service, the likelihood that they will stay increases.

Benefits of improving Retention Rate

When companies actively work to improve their retention rate, they can benefit from a range of advantages:

Stronger customer relationships: Focusing on building long-term relationships leads to greater trust and loyalty.
Increased revenue: Loyal customers are more likely to make repeat purchases and recommend the company to others.
Reduced marketing pressure: With high retention, the need to constantly chase new customers decreases.
Better reputation: Companies that retain their customers send a signal of quality and credibility to the market.

Retention rate is a crucial metric for understanding and improving customer loyalty. By measuring and analysing retention, companies can identify which factors contribute to customers staying and which risk driving them away. Building a retention strategy is therefore an investment in long-term success.

Frequently Asked Questions about Retention Rate

What is a good Retention Rate?

This is one of the most common questions, and the answer is that it depends heavily on the industry, business model, and customer lifecycle. There is no universal number that is ”good” for everyone.

SaaS companies (Software as a Service) with annual contracts often aim for a retention rate of 90% or higher. For monthly subscriptions, a rate of 95% (corresponding to 5% churn per month) can be a good goal.
E-commerce and retail often have a lower retention rate, as purchases are more transactional. Here, a rate of 30-40% over a year can be considered very good.
Media and streaming services are often somewhere in between.

However, the most important thing is to compare with your own historical data. A positive trend, where your retention rate is steadily increasing, is the strongest indicator that you are doing the right things.

Is it more important to retain new or old customers?

Both are important, but they say different things about your business. To understand this, a cohort analysis is often used, where you follow customer groups (cohorts) who started using your service during the same period.

High retention among new customers (e.g., during the first 1-3 months) shows that your onboarding process is effective and that customers quickly see the value in your product. It is a sign of good product-market fit.
High retention among old customers (e.g., after a year) shows that you are delivering long-term value, have strong customer relationships, and a product that is hard to leave. This is the foundation of long-term profitability.

A common strategy is to first focus intensely on improving retention during the first 90 days, as this is often where most customers leave.

If Retention Rate is 100% minus Churn Rate, why talk about both?

Although they are mathematical opposites, they represent two completely different strategic mindsets and drive different types of activities:

Increasing Retention Rate (offensive strategy): Here, you focus on creating more value for your customers. It is about building loyalty, offering exceptional service, creating a community, and proactively showing customers how they can get more out of your product. It is a strategy for building and strengthening.
Decreasing Churn Rate (defensive strategy): Here, you focus on identifying and fixing problems. It is about finding the customers who are at risk, understanding why they are leaving, and ”plugging the holes” in your product or service. It is a strategy for protecting and preserving.

Using both terms helps an organisation to balance these two important perspectives.

How does an improved Retention Rate affect a company’s profitability?

The impact is enormous and often underestimated. a small increase in retention can lead to a large increase in profit. This is due to several factors:

Increased lifetime value (CLV): Customers who stay longer continue to pay for your service for a longer period.
Higher average order value: Loyal customers tend to trust your brand more and are more likely to buy more products, upgrade their subscriptions, or try new services.
Reduced customer acquisition costs (CAC): You do not need to spend as much on marketing to replace customers who leave.
Free marketing: Long-term, satisfied customers are more likely to recommend you to others (word-of-mouth), which creates a positive growth spiral.

Who in the organisation is responsible for Retention Rate?

Just like with customer experience (CX), retention is everyone’s responsibility, but there are often specific teams that have the main responsibility for different parts of the process:

The Customer Success team: Often has the main responsibility for proactively ensuring that customers get maximum value from the product after purchase.
The Product team: Is responsible for building a product that is so valuable and user-friendly that customers do not want to leave.
The Support team: Handles problems and frustrations that, if not resolved, can directly lead to churn.
The Marketing team: Is responsible for communication that builds relationships and loyalty (e.g., newsletters, case studies, loyalty programmes).

A successful retention strategy therefore requires close collaboration between these departments.

Retention Rate