How to Calculate Retention Rate

Stop us if you’ve heard this one before: It costs anywhere from 5 to 25% more to attract a new customer than it does to keep an existing one.

Could you already quote that to us word for word?

We figured as much.

Whether you’re a customer success veteran or are new to the industry, chances are you haven’t been able to escape that statistic. But there’s a good reason it’s quickly become the golden rule of customer success. By mastering how to keep your customers, you’ll be well on your way to achieving expansion and long-term profitability.

So, strap in, and let’s learn the best way to calculate retention and how you can use that number to redefine your customer experience.

What you need to calculate your user retention rate

Knowing your retention rate is the first step when it comes to taking on churn and increasing customer loyalty. To calculator this formula, you’ll just need three key numbers:

1. Customers at the start of a given period
2. Customers at the end of that period
3. New customers acquired during that period

Typically, your retention rate is done on an annual or quarterly basis since it’s used as a benchmarking tool for your overall success strategy. So while you can pick any period of time for your calculation, doing it weekly or daily might not be the best use of your team’s time.

Got all of that? So, once you have all those variables down, your retention rate formula will look a little something like this:

Retention = (Customers you end with - New customers) ÷ Customers you started with

From there, to find your retention rate you just need to multiply your final number by 100. Voila! You’ve already tackled the first step to lower churn.

So what does a “good” retention rate look like?

Well, in a perfect world, as close to 100% as possible. As customer success expert Lincoln Murphy puts it, even losing a single customer a month can put a serious damper on your SaaS company's growth.

"The reality around customer churn is that for every customer you lose through attrition, cancellations or non-renewals, you have to acquire one new customer just to break even," explains Murphy. "That's a tough way to grow! Consequently, you'll need to acquire two new customers just to grow by one net new customer."

Good news: If you're not hitting 100%, there's no reason to panic.

The Harvard Business School has found even just a 5% increase in user retention can grow your company's revenue by 25 to 95%. So although the road to higher retention may seem long, any investment you put toward the customer experience for your existing users will have a major pay off.

How your retention rate relates to the customer experience

Once you have your retention rate, you can use it to understand the drivers of your most successful accounts — and how you can recreate those same outcomes at scale.

Retention analysis is the process of using objective data to understand how customers act when they're happy versus the behavior that's most often correlated with churn. By performing this analysis, you can start to create a retention strategy that addresses points of frustration along the customer journey before they ever come to fruition.

Plus, once you know what drives customers away, you’ll also find opportunities to enhance the positive moments that lead to retention — and eventual advocacy.

To kick off your retention analysis, you'll want to identify some of the key performance indicators that closely align with specific customer outcomes such as churn and retention.

Take a second to think about it: Your team probably already has its own unique markers of customer engagement that are specific to your product and success strategy. These indicators may include:

• How many feature upgrades a customer seeks out
• The frequency at which a user shares feedback
• Whether or not they take part in your loyalty program

That being said, there are some hard data points you can use to develop an objective understanding of the customer journey. We recommend using the following customer success KPIs as a jumping off point for your retention analysis:

Customer lifetime value

CLV represents the value a customer generates for your business throughout the duration of your relationship. The longer an account stays with you, the more profitable it will become.

Retaining customers for a longer period of time can dramatically increase your CLV. Typically, you can expect SaaS customers to stick around for 3 to 5 years. However, as Lincoln Murphy points out, the average customer lifetime is expanding rapidly as more success teams begin to realize the value of retention.

Customer churn rate

Churn and retention are two sides of the same coin. If customers are churning rapidly, then it will be next to impossible to increase your retention rate.

As you begin to find drivers of customer retention, you’ll also uncover which moments can push customers toward churn. Creating a proactive strategy to address these points of frustration will help your team in your efforts to increase retention.

Not sure how to go about doing that?

No spoilers here — keep reading for some of our tips on maximizing retention.

Net promoter score

An NPS survey works to get at the core of the customer experience with one simple question: Would you recommend our product to a friend or colleague?

Once you start working to foster stronger relationships with your customers, you can expect your net promoter score to gradually rise. Plus, as another useful benchmarking measurement, if your NPS results show sentiment trending downward, you know it’s time to raise the alarms.

Remember that your overall retention rate only shows the big picture. By digging into these more specific measurements of the customer experience, you’ll start to see what’s working versus where you still have room to improve.

What your CS team can do throughout the customer journey

You know where your current retention rate stands and you’ve found exactly what drives customer satisfaction. Now, it’s time to put all of that information together to create your retention strategy.

Every team’s retention strategy will look a little different depending on the specific drivers of success you’ve found across the user journey. However, there are some industry-wide solutions that can help you make quick improvements to your overall customer experience:

Improve customer onboarding:

Retention starts on the very first day sales passes the account to your team. If you’ve found customers are churning early in their relationship with your company, your onboarding strategy just may be the culprit.

Be sure that your program leads customers to quick value and helps them see how your product fits into their strategic goals. Gather feedback from customers soon after they complete the onboarding process and be sure to keep close watch on their product usage during the early stages of adoption.

Create an advocacy program:

A common assumption is that once an account has been around for over a year, it’ll require less attention to maintain the relationship.

However, that couldn’t be further from the truth.

Although your most valuable accounts won’t display any of the classic signs of at-risk behavior, that doesn’t mean you should entirely put them on the back burner. Creating an advocacy program will not only help keep them engaged, but will also allow you to tap into some seriously powerful word-of-mouth marketing.

As the lifeblood of your organization, the recurring revenue these accounts generate will prove vital to your long-term success. Don’t think just because they’re not at risk means you don’t need to keep tabs on these users.

Leverage customer success software:

One of the most difficult trade-offs you’ll face as a customer success manager is balancing a demand for personalization with a need to scale your processes as your organization grows.

The more accounts you take on, the harder this will get.

Good news: There’s already technology out there that will let your users have their cake and eat it too.

When you can drill down and see a more holistic view of product usage, you’ll be able to identify issues before they arise. Less time manually monitoring accounts means more time to focus on your retention strategy.

If you're not sure where to start in your search for the right technology, we recommend checking out our CS software buyer’s guide.

Just remember: Customer success is a company-wide effort.

While customer retention may not have the same effect as an account marked "won”, retention can be far more exciting than closing the deal on a new customer. Creating a consistently quality experience for customers across their journey will be essential to maximizing retention and your bottom line.

How to implement your retention strategy

Kicking off your retention strategy won’t come in the form of a single sweeping overhaul. Instead, it’ll take some time, patience and gradual changes to your current processes.

To become more fluent in retention, we’ll take a page out of an up-and-coming language-learning service: Lingopie. This subscription service has labeled itself as the first “binge-worthy” learning tool — it leverages TV shows and movies to help users learn new languages.

And, not to mention, Lingopie is winning at customer retention. After just a few months in business, their retention rate dwarfed that of streaming giants like Netflix, HBO Max and Disney+.

How’d they do it?

It all comes down to a strategy driven by and for their customers:

• Segmented analysis: Lingopie’s team spends time every day analyzing how long customers stay on each page and the types of content they're interacting with to better understand their users' end-to-end journey.
• Customer-focused development: Lingopie has taken on what the team calls a "product-centric" approach to retention. Data and direct customer feedback informs changes in their system to ensure they keep meeting their customers needs as they progress.
• Prioritizing loyal customers: Lingopie nurtures loyalty by consistently communicating with their users, offering them a forum to voice both positive and negative experiences. Customer loyalty is driven by listening, including regular surveys, in-app product-feedback options and support tickets.

As you set out on your retention journey, keep Lingopie’s strategy in mind: The structure of the entire website is designed to continuously evolve to meet customers’ needs and keep adding value to their lives.

Your existing customers hold the key to your companies’ future — it’ll be up to your team to ensure those relationships are successful.

Implementing your retention strategy

As a customer success expert, you know that the majority of your revenue comes from existing customers. It all comes down to understanding what drives customers to stay — and what you can do to keep them even longer.

Looking for a comprehensive solution to better understand your customers and improve user retention? Learn more and schedule a demo with  UserIQ.

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