Customer retention rate (CRR) refers to the rate at which customers stay with a business for a given period of time.
It is a metric used to assess the proportion of clients that a company or organization keeps over a given time frame. It is a vital sign of customer loyalty and the success of a company’s efforts to keep its current clientele.
A higher customer retention rate demonstrates a company’s success in upholding customer satisfaction, fostering lasting relationships, and providing value to its existing clientele.
According to a study by Bain & Company, increasing customer retention rates by just 5% can increase profits by up to 95%.
For this reason, it is therefore easy to understand that customer retention is crucial to long-term business growth and profitability as it is typically more cost-effective for businesses to keep their current clients than to find new ones.
How to calculate CRR
The formula for calculating the customer retention rate is as follows:
Customer Retention Rate = [(CE-CN)/CS)] x 100
CE = Number of customers at the end of a specific period
CN = Number of new customers acquired during that period
CS = Number of customers at the start of that period
To illustrate this calculation, let’s consider an example:
Suppose a business had 500 customers at the beginning of the year (CS), acquired 100 new customers during the year (CN), and had 450 customers at the end of the year (CE).
Customer Retention Rate = [(450 – 100) / 500] x 100
= (350 / 500) x 100
= 0.7 x 100
CRR = 70%
Therefore, the customer retention rate for this business for the given period would be 70%.
What is a healthy CRR to have in a business?
Due to differences in customer behavior and expectations, different industries may have different ideal or healthy customer retention rates (CRR). However, in general, a higher customer retention rate is preferred by most businesses because it denotes greater client loyalty and satisfaction. Here are some instances of typical customer retention rates for various industries:
Software as a Service (SaaS) Companies:
According to Statista, companies in the software-as-a-service sector frequently strive for high retention rates, which typically range from 80% to 95%.
E-commerce and Retail:
The e-commerce and retail space often face higher customer churn rates than other businesses. A study by RJMetrics, an e-commerce analytics platform, suggests that a healthy CRR for e-commerce businesses is around 30% to 40%.
Telecommunications and Cable Providers:
A CRR of around 69% is considered good for cable and telecommunications companies, according to Customer Gauge.
Subscription-based businesses, such as subscription boxes, streaming services, or membership-based businesses, typically aim for CRRs above 80%. However, this can vary depending on the industry and business model.
According to a report by Accenture, the average CRR for retail banks is around 80%.
It’s important to remember that these figures are only general guidelines. Individual companies within each industry may have different benchmarks depending on their circumstances and business models.
To evaluate their performance and pinpoint areas for improvement, companies should also compare their retention rates to industry averages and their historical data.
Why should businesses track CRR?
There are several reasons why businesses should monitor their customer retention rate (CRR). Some of the most important reasons are:
Customer satisfaction and loyalty:
CRR is a critical indicator of customer satisfaction and loyalty. Businesses can evaluate their effectiveness at satisfying customer needs, providing value, and preserving long-lasting relationships by tracking CRR.
A high CRR suggests that customers are satisfied with the goods or services and are more likely to continue doing business with the company in the future.
Getting new customers costs more money than keeping your current ones. Monitoring CRR enables businesses to compare the revenue from retained customers to their customer acquisition costs. Long-term cost savings and increased profitability can result from a higher CRR.
Growth and stability:
High customer retention rates help businesses grow and remain stable. Repeat business, good reviews, referrals, and long-term relationships are more likely to come from loyal customers. As a result, a reliable revenue stream is created, serving as the basis for long-term expansion.
Finding opportunities for improvement:
By tracking CRR, businesses can spot patterns and trends in customer attrition.
This data enables them to identify areas that require development, such as product quality, customer satisfaction, or overall customer experience.
Once these problems are addressed and customer satisfaction is increased, businesses can take proactive steps to raise CRR.
A high CRR can give an advantage in the market. It proves the company has a sizable customer base, brand loyalty, and successful customer retention techniques. As a result, the company can stand out from rivals and draw in new clients who value commitment and lasting relationships.
Recommendations for decision-making:
CRR data can offer insightful information for tactical decision-making.
Businesses can determine which customer groups are more likely to remain or leave by examining retention rates across various customer segments.
Using this data, marketing strategies, product offerings, and customer engagement initiatives can be customized to meet the needs and preferences of particular customers.
When do you need to start calculating your CRR?
When you have a sizable number of clients and a clear window of time to gauge their retention, you should begin computing your Customer Retention Rate (CRR). Depending on your industry and business, the precise timing might change.
In general, it’s best to start computing CRR as soon as your business operations begin. This enables you to establish a baseline retention rate and monitor it over time to evaluate your progress and spot any trends or changes in customer retention.
Here are some common scenarios when you may consider starting to calculate CRR:
Business with an already established customer base:
You can begin calculating CRR immediately if your company already has a customer base. This will enable you to set a benchmark for subsequent analysis and better understand your current retention rate.
For new company:
It might take time for a new company to build a sizable customer base to calculate a useful CRR. In these circumstances, it is advised to hold off until you have a sizable clientele and a predetermined time window (e.g., a few months) to evaluate their retention.
Industry benchmarks and best practices for customer retention in your particular industry can also be found by conducting research. This can help you understand the retention rates that are typical or healthy for your industry, which will help you set realistic goals and objectives.
Regardless of when you begin computing CRR, it’s crucial to be consistent in your approach and monitor it frequently over predetermined timeframes (e.g., on a monthly, quarterly, or yearly basis).
This consistency will allow you to track changes over time, spot fluctuations, and make wise decisions to boost customer retention and overall business performance.
Rightly monitoring CRR can help you to evaluate efforts to retain customers, gauge customer loyalty, pinpoint problem areas, and make wise decisions to promote expansion and profitability.