The Retention Rate refers to how many customers came back to purchase the product or avail of the service you offer during a specified timeframe. It measures the success rate of a product or service. Simply put, it can be stated that it is an important metric to determine success or failure. The retention rate is critical for subscription-based businesses that sell something regularly. In contrast, it is a less critical success metric for businesses that do not make a sale every day.
When a company introduces a new business or a new product or service, it uses the retention rate of the product/service to determine its success. It provides a percentage of the customers who buy your product/service once and then keep rebuying it for a specified period.
It determines the success rate of your product/service and customer satisfaction. If your business has a higher retention rate, it has a low churn rate. The churn rate determines the percentage of customers who did not regularly buy your product/service.
The Importance of Customer Retention Rate
Retaining a customer for an extended period is essential as it enhances a company’s position in the market and earns more profit. It is the most crucial metric to determine a company’s success. It is essential because:
- It leads to huge profits. According to research, if a company increases its retention rate by 5%, it will earn 25% more profit. The reason behind this profit is that the customer who buys your services/products for an extended period trusts you and thinks highly of your company. If your company has a higher retention rate, know that it is well-reputed.
- By retention rate, a company can determine whether its products or services are still solving its customer’s problems or not. If a company invests in advertising, marketing, and sales campaigns to support its new product, it might spike sales for a limited period. However, this will go in vain if the product does not solve the customer’s problem. So, it is one of the best ways for any company to know whether its products/services add some value to its users’ lives.
- Retaining the existing customers is less costly than getting new customers now and then.
Now that we know the importance, let’s see how to calculate it.
Calculating the Retention Rate
To calculate the retention rate, we need the following data:
- Total customers at the beginning of the specified period.
- Total new customers during that period.
- Total customers when the chosen timeframe ends.
Once you have collected the data mentioned above, it is time to calculate:
- Retention-Rate = ((customers at the end of the specified period) – (The number of new customers you got during that period) / The number of customers at the beginning of the specified period) * 100
A simpler equation can also calculate it:
- Retention Rate = 1 – Churn rate (irregular customer)
Ways of Improving the Retention Rate
A company can improve it by:
- Improving the customer experience by improving the interface and features of the product.
- Collecting the customer’s feedback about the product or service.
- Creating a loyalty program to bind your customer with yourself.
- Offering discounts and incentives over buying the product or the service.
From all the discussion above, we can conclude that the retention rate is the most crucial metric in any product’s life cycle and determines its success rate. Therefore, companies should improve it and keep checking it over time.