If you want to build a sustainable business that can grow, you must invest in maintaining your profitable customers. Always having to replace lost customers means unnecessary costs in terms of marketing and sales.
In order to work with increased customer loyalty, it is important to be able to measure improvements. The first step in this is to define formula and calculate how well you are to keep customers, customer retention.
Definition of retention
Retention is measuring how well you are to keep customers and their income over time. Change is measured over a certain period. It can be measured monthly, quarterly or yearly depending on the activity. The choice of this time period is important because it determines the greatness of your calculations. Most common is that the time period is 12 months.
There are two different ways to calculate retention:
- Customer retention % - Number of customers you keep
- Revenue retention % - Revenue you keep
How to calculate customer retention
Simply put, customer retention is the percentage of customers that you hold in relation to the number you had at the beginning of the period. This does not count on new customers. That is the opposite of customer churn.
To calculate customer retention you need to know:
- Number of existing customers at the end of a period (E)
- Number of new customers acquired during that period (N)
- Number of customers at the beginning of that period (B)
We are interested in the number of customers remaining at the end of the period without counting the number of new acquired customers. Remaining customers can be calculated by subtracting N from E. To calculate the percentage, it is divided by the total number of customers in the beginning and multiplied by 100.
Customer retention % = ((E-N) / B) * 100
The calculation of Customer Retention% is relatively simple and gives you a lot of insight into how your customer care works. Even though it does not necessarily show a direct link to the company's earnings as some customers are more profitable than others, the figure provide a key indication of how loyal your customers are and how well your customer service is. By tracking and benchmarking your customer retention, you can find ways to improve these areas in your business.
The company's vision should be 100% customer retention, meaning you never lose a single customer. In reality, it is unlikely. The target is obviously due to the customer group and the industry, but for most b2b companies with recurring customers, the target should be 80% - 90%. Again, this varies from company to company, so it's important to track your own course and try to improve it every time.
However, keep in mind the cost of acquiring new customers. In order to continue growing, you must compensate for each customer you lose, in addition to finding new customers to grow your customer base. You save money by increasing your customer retention.
Revenue retention
Unlike customer retention, which measures the number of customers remaining, this KPI means the value of the customers remaining. It is measured over a period which is usually annual.
Den viktiga skillnaden är att du att mäta pengar, de faktiska intäkterna du behåller, snarare än antalet kunder. Så om dina befintliga kunder börjar betala mer, genom ökade beställningar eller köp av andra produktgrupper, kan din intäktsretention växa även om du har tappat några kunder.
The important difference is that you measure money, the actual revenue you retain, rather than the number of customers. So if your existing customers start paying more, through increased orders or purchases of other product groups, your revenue retention may grow even if you have lost some customers.
In order to calculate revenue retention, you need to distinguish revenue per customer in such a way that you only measure the increase / decrease in revenue for those customers who generated an income over the previous period in relation to the current period. This can be complicated if revenue does not occur evenly. Therefore, you need to choose a length of time that gives a true picture.
When calculating revenue retention you need to know:
- Revenues in the previous period (R1)
- Revenue for the current period for the customers included in R1 (R2)
Since we do not want to get misleading figures due to low R1, the numbers for additional customers under R1 should be adjusted to what they should be if the customer had been active throughout the previous period.
Revenue retention % = ((R1 - R2) / R1) * 100
Why, however, you should measure both revenue- and customer retention is because you can see if revenue retention decreases while increasing customer retention. This could, for example, be a sign that you lowering your prices to keep customers, which, of course, results in poorer profitability. Essentially, both revenue retention and customer retention must be used hand in hand to get a complete picture of what's happening to your business.
Preferably, you want your revenue retention to be over 100%. That means you earn more each period and your business grows. Many aim at 110%, but this number may differ from different industries and your company's development phase.
Churn - Loss of customers
Churn is the opposite of retention, ie, how great portion of your customers or earnings are lost over a period of time. Again, you need to exclude the customers that have been added during the period when this is a measure of sales, not on the ability to retain customers.
To calculate customer churn you need to know:
- Number of existing customers at the beginning of a period (B)
- Number of new customers acquired during that period (N)
- Number of customers at the end of that period (E)
We are interested in the number of customers remaining at the end of the period without counting the number of new acquired customers. Remaining customers can be calculated by subtracting N from E. To calculate the percentage, it is divided by the total number of customers in the beginning and multiplied by 100.
Customer Churn % = ((B + N - E) / B) * 100
Conclusions
Each company should prioritize calculation and measurement of customer and revenue retention. These KPI's affect your final results and provide real insights into your strengths and weaknesses so that you can enable long-term growth.
Download calculation template for improved ROI at reduced customer churn