Customer Retention Metrics: Methods & Formulas to Measure Success
October 27, 2023
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Business growth isn’t just a goal for upper management. A Gartner survey found that 64 percent of customer service and support leaders listed growing the business as their most critical priority in 2022.
Why? Because customer service and support leaders play a critical role in company growth by managing customer retention.
Net retention revenue (NRR) can grow indefinitely, as you can see from looking at companies like Twilio, Slack, or Shopify. They have average recurring revenue (ARR) of over $1 billion and are still seeing NRR well over 100 percent.
However, if you’re not measuring customer retention correctly, you won’t know what problems hurt retention rates and how to fix them.
It’s essential to track the right metrics and understand why they’re important to continuously improve your customer retention.
What is a good customer retention rate?
The ideal customer retention rate is 100 percent, of course, meaning that no one left. But what’s realistic for your company?
Forrester found in 2021 that typical B2B customer retention rates range between 76 and 81 percent. Of course, that also varies by industry.
A few median retention rates by industry, according to 2023 data from CustomerGauge:
- Energy/utilities: 89%
- Computer software: 86%
- Telecommunications: 69%
- Wholesale: 44%
Once you know what a reasonable customer retention rate is in your industry, you can see how you currently compare and set goals for improvement.
Customer retention metrics
What are customer retention metrics? They’re the key performance indicators (KPIs) that you can track to determine if you’re on track for improving customer retention and reducing customer churn.
To maximize the usefulness of these metrics, determine how you currently rate in each KPI, so you have a benchmark and use that to set goals. From there, monitor your data and make adjustments to improve your results.
Customer retention rate
The customer retention rate is the most straightforward way to measure retention.
How to calculate customer retention:
- Subtract new customers gained during a period (Cust gained) from customers at the end of the period (Cust end)
- Divide that result by customers at the start of the period (Cust start)
- You can multiply the result by 100 to get a percentage
When your customer retention rate is solid, you’ll be doing well in revenue and other customer metrics.
If you’re ready to boost your customer retention rates, though, improving some specific customer retention metrics can help you drive improvement.
Customer churn is the opposite of retention—it measures how often customers stop buying from your company and move to a competitor.
While some churn is expected, you should try to keep it as low as possible while maintaining a profitable business.
How to measure customer churn
- Take the number of customers lost during a period (Cust lost)
- Divide by the number of customers at the start of the period (Cust start)
- Multiply your result by 100 to get a percentage
A low churn rate translates directly to a better customer retention rate.
Customer revenue growth rate
As you retain customers, you want to maximize their lifetime value by encouraging them to spend more with your company. That’s why it’s essential to measure the customer revenue growth rate.
How to calculate customer revenue growth
This metric is calculated with this formula using monthly recurring revenue (MRR).
- Take the MRR at the end of a period (MRR end)
- Subtract the new customer MRR
- Subtract this result from your MRR at the start of the period (MRR start)
- Divide by MRR at the start of the period (MRR start)
This calculation helps you understand how much recurring revenue you get from current customers without allowing growth to cloud the equation.
Aim to increase MRR from your current customers by helping them choose upgrades that meet their needs and solve their business problems.
Repeat purchase ratio
If you offer individual purchases instead of a recurring subscription, you’ll need to calculate your customer revenue growth differently.
Instead of looking at customer revenue growth, look at your repeat purchase ratio. This can help you determine your most profitable customers and focus on bringing in more similar business.
How to calculate repeat purchases
- Start with your total number of customers and subtract new customers
- Take the number of returning customers in a period
- Divide that number by the result from Step 1
You can also use the same formula to calculate repeat purchase revenue.
Replace the top of the formula with “revenue from returning customers” and the bottom number with “revenue from all customers – revenue from new customers.”
Removing the new customers helps ensure your repeat purchase ratio isn’t negatively impacted by growth. Repeat purchases should be based on tenured customers since new customers haven’t had time to buy more than once.
Product or service adoption
How much are your customers using your product or service? High usage can indicate a customer is getting value from the solution and can be a strong predictor of renewal and overall customer loyalty.
How to measure customer adoption
The formula depends on your product or service. You can measure how much time users spend logged in, the number of integrations they have activated, or the number of logins.
Measure how this changes over time, and also consider segmenting your customers to identify those with the highest adoption. Find out what those customers have in common to attract more similar buyers.
It’s also crucial to determine what makes your solution a great fit for them and see if you can expand that to your other customers—for example, did they get specific onboarding or training that helped drive adoption?
Net revenue retention
Net revenue retention (NRR) has become a focus for many businesses. Startups in some industries, such as SaaS, are finding that the valuation metrics of a with high retention rates can be 2x as much as a company with average rates, and other businesses find that high retention help maintain stability in difficult economic times.
It’s no surprise that 45 percent of brands said they spent more than half of their marketing budget on retention in the 2023 Customer Engagement Review by Braze.
How to calculate NRR
- Add your initial MRR and your upsell and cross-sell MRR
- Subtract churn and downgrade MRR
- Divide your result by your initial MRR
This helps you understand how your organization is increasing MRR with upsells and cross-sells, offset by how much you’re losing in churn and downgrades.
The better this number is, the better you are at retaining customers and increasing their overall spend.
Which metric is best for evaluating customer retention?
As you can see, there are many ways to measure customer retention. Which one is best?
If you have a recurring revenue model, the best measurement is net revenue retention (NRR). This will help you understand how much customers are spending with your organization and offset that number with how many customers you lose.
That means you can drive NRR in a number of ways—increasing upsells/cross-sells, reducing churn, improving customer education to reduce downgrades, and more.
If you make individual sales, metrics like repeat purchase ratios (using the number of customers or revenue) will be most helpful. This will help encourage your team to show customers the value of your overall product line, rather than a single product or service, to get them to buy from you repeatedly.
It’s far easier to sell to an existing customer than to win a new one, so repeat customer revenue is invaluable for your company to grow and become successful.
Use the Learning Cloud to increase customer retention
Boosting customer retention means helping your buyers see the value of your products and services so they stay with your brand. Customer education is the foundation of showcasing this value, but to make it effective, you need the right platform.
The Learning Cloud from WorkRamp is the single platform for your customer learning needs. With an easy-to-use, intuitive interface, you can create courses, build a customer academy, and give users the resources they need to get the most from your products or services.
Discover how the Learning Cloud can help you increase customer experience and improve retention. Contact us for a free, personalized demo.
Complete the form for a custom demo.
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Anna SpoonerFreelance Writer
Anna Spooner is a digital strategist and marketer with over 11 years of experience. She writes content for various industries, including SaaS, medical and personal insurance, healthcare, education, marketing, and business. She enjoys the process of putting words around a company’s vision and is an expert at making complex ideas approachable and encouraging an audience to take action.
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