Without customer retention metrics there’s no way of evaluating the success of your customer retention strategies. That’s why in this blog post, we’re going to shed light on the power of retention metrics and how they play a significant role in your business.
We’ll delve into various key metrics including customer retention rate, customer and revenue churn, existing customer growth rate and more. Examining these metrics yield valuable insights into your customer retention efforts. Allowing you to make data-driven decisions that further enhance your customer loyalty strategies.
Each section will offer a definition of each metric (if needed), explain its significance to your overall customer retention strategy, and show you how to accurately track it with correct formulas.
By learning how to analyse metrics you’ll be able to identify areas of improvement in your business. As well optimise the customer retention initiatives you’ve already implemented (or plan to adopt) for sustainable business growth.
Knowing the difference: Ensures accurate analysis
9 Key Retention Metrics:
Metrics Aligned with Goals: Setting the Foundation
Aligning metrics with specific goals gives businesses clarity about what they want to achieve by improving customer retention. Goals provide a clear direction and purpose, and KPIs and metrics serve as tangible measures to assess the progress and success of each initiative.
KPIs vs Metrics: What’s the Difference?
KPIs are metrics on a holistic scale and a team-wide responsibility. Metrics not labelled as KPIs on the other hand, are always more centralised around specific departments, smaller teams and individuals. We differentiate between the two as follows:
Not always KPIs
Offer an overall view of the performance in your chosen strategies
Offer smaller view of smaller team oriented tasks and actions
Inform you about the overall performance of your business goals
Individual metrics give you an indication on how well tactics are performing towards their objectives
KPIs - metric that covers the overall goals (in this case the entire retention strategy)
Metrics - method of analysing the objectives (smaller tactical steps and actions within a KPI) towards achieving the overall goal
All KPIs are metrics but not all metrics are KPIs. For example, implementing a smooth onboarding process could be a KPI. One of the objectives to achieve that KPI could be producing content that gives customers support and information about your product or service
Knowing the difference: Drives focus
Setting metrics against goals creates a sense of accountability within an organisation. With all employees having specific metrics to track and common objectives to prioritise, their efforts towards achieving KPIs and the overall goals of the retention strategy also becomes focused.
Knowing the difference: Ensures accurate analysis
Differentiating KPIs and metrics between strategic goals and tactical objectives help you measure their performance more accurately. You’ll know which metrics should be labelled as KPIs, and which should be related to specific objectives in attaining that goal. Otherwise, you run the risk of labelling novelty metrics as KPIs and vice versa.
Don’t worry. We’ll give you scenario examples, insights, and practical tips below. By the end of this blog you’ll have a better understanding of how to measure your retention strategies. In case you’re not sure where to start with retention strategies, why not check our top ten picks here?
1) Customer Lifetime Value: Maximising Customer Worth
Customer Lifetime Value (CLV) is crucial for businesses as it shows the long term value that each customer brings. For that reason, CLV is a metric that estimates the total revenue a customer is expected to generate over the entire duration of their “lifetime” with your business.
Yet, only 42% of companies know how to accurately measure it.
As always, determine the time period in which you want to measure CLV. It doesn’t just need to be a specific period, however. It can be an entire lifespan of the customer relationship too.
First stage: find out the average purchase value (APV) of each customer transaction during the period of time you’ve chosen.
Second stage: do this by adding up the total revenue generated from all purchases and dividing it by the total number of purchases made within that period. This gives you the APV.
APV = Total Revenue / Total Number of Purchases
Third stage: find out the average purchase frequency (PF) of each customer within your chosen time period.
Fourth stage: divide the total number of purchases by the total number of customers
PF = Total Number of Purchases / Total Number of Customers
Fifth stage: calculate the customer lifespan (CL); the average length of time a customers is engaged (this can be the average number of years or months within which the customer keeps purchasing)
Sixth stage: now multiply APV by PF by and multiply that result by your customer retention rate (CRR)
CLV = Average Purchase Value x Purchase Frequency x Customer Lifespan x Customer Retention Rate
- Your average purchase value (APV) is £100.00
- The average purchase frequency (PF) is 10 per year
- Customer lifespan (CL) is 36 months
- Your calculated customer retention rate (before multiplying it by 100 for a percentage) is 0.8
£100 (APV) x 10 (PF) x 36 months (CL) x 0.8 (CRR) = £28,800.00 (CLV)
2) Customer Retention Rate: The Ultimate Loyalty Indicator
Customer retention rate (CRR) measures the percentage of customers retained over a specific period of time. It’s a key indicator of customer loyalty and the effectiveness of the retention strategies you employ.
First stage: of calculating CRR is deciding the timeframe in which you want to calculate the retention rate. This can be monthly, quarterly or annually.
Second stage: is identifying the number of customers you have at the beginning of the timeframe you’ve selected.
Third stage: is the final part that you need in order to calculate CRR. Simply count the number of customers you have at the end of the timeframe you selected.
The CRR formula compares the number of customers at the end of the period (Ending Customers) and new customers acquired during the same period (New Customers) to the number of customers at the start of the period (Starting Customers).
Customer Retention Rate = ((Ending Customers - New Customers) / Starting Customers) * 100
We get the net change in customers by subtracting the number of New Customers from the number of Ending Customers and dividing it by Starting Customers. Then we multiply this by 100 to convert it into a percentage rate that denotes the customer retention rate.
- You have 500 customers at the beginning of the year
- You acquire 100 new customers during the year
- You end the year with 450 customers
450 Ending customers - 100 New Customers = 350 / 500 = 0.7 x 100 = 70% CRR
This means your business would have retained 70% of its existing customer base over the course of the year. Since this is the ultimate loyalty indicator, we’d use this metric before and after you apply retention strategies to compare their effectiveness.
3) Customer Churn: Identifying At-Risk Customers
Customer churn is the rate at which customers stop purchasing and using your product or service.
By the way, if you’re unsure about the definition of any of the terms used in this post, check out this introductory piece on customer retention. Let’s get back to it!
Churn rate isn’t exactly a nice thing to look at but it is essential. By calculating it we can interpret where some issues in the business are coming from. That way, you identify why customers are discontinuing their relationship with your business.
You might have realised that the customer retention rate (CRR) above technically gives you the churn rate too. You’re not wrong. From our 70% CRR example above, we can confidently say the churn rate must be 30%. But what CRR doesn’t tell us is why those customers left the brand.
How Customer Churn gives you the Why?
Collecting a comprehensive dataset is vital for determining the reasons why a customer has left your brand and identifying customers at-risk of churning. Data should include:
- Purchase history
- How long they’ve been a customer
- Their interactions with the brand (engagement)
- Product usage
- Subscription type
What to consider:
Segment your customer base accordingly using these information points. Segmentation allows you to improve targeted analysis of customer behaviour and identify churn patterns within specific cohorts.
Look for patterns or trends in customer interactions with your business. Is there a point where engagement declines? Where does the frequency of purchases decrease? Is usage of product or service dropping for a certain segment list? By identifying specific touchpoints or events, you get a better picture of any problems present within the customer journey.
Also, gather feedback from churned customers. Conduct exit surveys, interviews and provide feedback channels (just one example of a great retention strategy we might add). Check feedback for common themes in their reasons for churning.
By doing these things, you’ll come to understand your customers’ pain points on a deeper level. Giving yourself the ability to deliver informed retention strategies to mitigate churn and possibly win back those who’ve already left.
Measuring customer churn uses practically the same formula as CRR. In fact, see it as a reverse to the CRR formula. However, bear in mind that churn rate would typically be a more concentrated metric used in segment lists and specific stages of the customer journey. That way businesses can pinpoint where churn rate is increasing.
Customer Churn Rate = ((Starting Customers - Ending Customers) / Starting Customers) * 100
- You have 1,000 customers at the beginning of a quarter
- You have 900 customers by the end of the quarter
1,000 Starting Customers - 900 Ending Customers / by 1,000 = 0.1 x 100 = 10% churn
This means your business would have lost a churn rate of 10%. To identify where customers are churning. Also note that some variations of the formula use the average number of customers instead of the starting number of customers.
4) Revenue Churn: Tracking Revenue Loss
Revenue churn rate measures the percentage of revenue lost as a result of customers leaving. Again, like CRR and churn rate, this metric is measured over a specific period of time. Unlike churn rate however, revenue churn specifically focuses on the revenue loss.
The formula for calculating revenue churn rate is:
Revenue Churn Rate = (Lost Revenue from Churned Customers / Total Revenue at the Start) * 100
Your business generates £100,000 in revenue at the start of the month
By the end of the month your business has lost £10,000 due to customer churn
£10,000 Lost Revenue from Churn Customers / £100,000 Total Revenue at the Start = 0.1 x 100 = 10%
The revenue churn rate for your business would be 10%.
Revenue churn rate gives you insights into the financial impact of customer churn. It helps assess the loss of recurring revenue and should help you map out efforts to plug revenue leakage.
5) Existing Customer Growth Rate: Expanding the Customer Base
Existing Customer Growth Rate is a useful metric for gauging the growth of your existing customer base over a specific period without accounting for customers acquired through typical means e.g., outbound marketing. For this reason, ECGR provides a great insight into your business’s ability to retain and expand its relationships with existing customers.
How can your customer base grow without accounting acquisition?
So, how can ECGR measure customer base growth without factoring acquisition? Remember, this is a customer retention metric. Therefore, customer behaviours are central to ECGR. Positive growth indicates that your business is effectively nurturing customer loyalty so well, you’ve encouraged them to:
- Repeat purchases – growing ECGR implies existing customers are making repeat purchases on a regular basis
- Improve engagement – it also reflects the effectiveness of your retention efforts when customers are encouraged to return and engage with the brand
- Refer others to the brand - high ECGR typically comes in tandem with leads generated from your existing customer base due to positive word-of-mouth
Okay – so the latter is a form of acquisition – but the metric is based on growth from your existing customer base. Not from your direct efforts of acquiring new customers. In other words, it demonstrates that your business is effectively capitalising on its existing customer base and maximising their value.
To calculate ECGR, following the same formula as CRR. Pick a period of time (monthly, quarterly, bi-annually or annual):
Existing Customer Growth Rate = ((Ending Existing Customers - Starting Existing Customers) / Starting Existing Customers) * 100
So…what’s the difference from CRR?
The Existing Customer Growth Rate should be applied to a certain cohort of customers in a segmentation list. In this case, it would be a metric. Whereas the CRR covers a larger data pool of customers, making it typically a KPI.
Give yourself the freedom and space to experiment with the ECGR. After you’ve implemented customer retention strategies, peel back your acquisition marketing for a particular segment and use ECGR to see if there’s any growth in that list.
You could compare the performance of various retention strategies this way. Using different ones for each segment. Whichever shows yields the most growth is the winner.
6) Repeat Purchase Ratio: Encouraging Customer Loyalty
Another way to measure customer retention is the Repeat Purchase Ratio. This measures the percentage of customers who’ve made repeat purchases within a specific time period.
RPR is important as it indicates the loyalty and engagement of your customer base. A high RPR reflects overall customer satisfaction, trust and loyalty towards your products or services. Which is what makes RPR (aside from feedback and surveys) a great tool for determining whether your customer base enjoys the product or service you offer.
A high RPR also suggests that the retention strategies you’ve adopted (such as personalised marketing campaigns, loyalty programmes and CRM initiatives) are encouraging repeat purchases.
This information can help you make data-driven decisions. Making most out of your marketing resources via highly targeted campaigns for customers identified as consistent regular buyers. With that in mind, it’s clear to see why RPR is an excellent way of further nurturing already positive relationships with customers. Which in the end retains them for even longer.
Where to start when calculating repeat purchase ratios? Follow these steps:
- First stage: is determining the period of time
- Second stage: involves identifying the number of repeat buyers within said time period Third stage: calculate the total number of unique customers who made at least one purchase in the same period as repeat buyer
Divide the number of customers who made repeat purchases by the total number of unique customers and multiply by 100.
Repeat Purchase Ratio = (Number of Customers with Repeat Purchases / Total Number of Unique Customers) * 100
7) Product Return Rate: Assessing Customer Satisfaction
The product return rate is an important customer satisfaction indicator and plays a crucial role in understanding the quality of your products or services.
A high product return rate suggests that customers are dissatisfied with their purchase. Meaning the product or service failed to meet their expectations. Either due to it being defective or failing to deliver on its perceived value.
Dissatisfied customers are more likely to make returns, seek refunds or replacements. A product retention rate can help you identify key areas of improvement. Proactive measures must always be accurate in addressing customer complaints.
Therefore, think of the PRR as a quality control and product performance tool. One that can help you mitigate negative cost implications of a high product return rate.
As a business owner, you’ll already know that you’ll never fully curtail PRR. Not everyone will like the product or service you offer. By knowing how to measure PRR and analyse it, helps you put things in perspective. Returns here and there are inevitable but they can quickly spiral out of control if not checked.
Use this formula to calculate the product return rate:
Product Return Rate = (Number of Product Returns / Total Number of Products Sold) * 100
- The Number of Product Returns represents the total number of returned products within a specific period of time
- The Total Number of Products Sold refers to the overall quantity of products sold in that period
- Divide the Number of Product Returns by Total Number of Products Sold and multiply by 100 to get your percentage rate
You want to have a return rate below 10%. Anything over 60% is critically negative.
Can I still retain customers with a high PRR?
Selling defective products or something that doesn’t live up to expectations is extremely damaging to brands. However, if you do have a PRR above 10% there’s still time to make changes that’ll have a positive impact.
Analyse the reasons why customers are returning the product. Categorise these reasons into different groups. For example, incorrect sizing, damage during shipping or general dissatisfaction at the quality of the product. Once you’ve identified the root causes, it’s up to you to improve product quality control and address any manufacturing issues.
Ensure that all actions you take remain consistent. Let your customers have their say. Address the problem head on and let them know you’ve heard their feedback. If needed, show them a roadmap of improvements you plan to rollout.
Offering feedback, encouraging engagement, providing excellent customer service, and clearly communicating with your customers goes a long way. Like with most problems in life, the sooner you decide to tackle them, the more time you’ve got to reverse their impact.
8) Net Promoter Score (NPS): Gauging Customer Advocacy
Net Promoter Score (NPS) is one of the most important metrics. After all, it gauges the likelihood that a customer will express the ultimate form of loyalty; brand advocacy – a direct result of effective retention strategies.
The NPS score is calculated based on customer responses to a single question:
"On a scale of 0 to 10, how likely are you to recommend our/product/service to a friend or family member?"
Promoters, Passives & Detractors
Promoters: customers who score 9 or 10. These individuals are enthusiastic about their experiences and are likely to recommend your company, product, or service to others. Promoters play a crucial role as brand advocates, driving positive word-of-mouth marketing that significantly contributes to ECGR growth.
Passives: Customers who score 7-8 and somewhat satisfied with the brand yet not actively engaged. They have a neutral sentiment and are therefore less likely to recommend.
Detractors: customers who score 0 to 6 on the NPS scale. These customers are generally dissatisfied. Detractors feel this way due to negative experiences, having encountered problems, or faced challenges with the product or service. They will express their dissatisfaction through negative reviews and feedback, and even negative word-of-mouth.
Calculate the NPS formula by following these steps:
First stage: Distribute a survey or questionnaire that asks customers to rate their likelihood of recommending the company/product/service on a scale of 0 to 10.
Second stage: Categorise respondents into the three aforementioned groups based on their scores: Promoters, Passives & Detractors
Subtract the percentage of detractors from the percentage of promoters to for the NPS rate. The formula is as follows:
NPS = % Promoters - % Detractors
- 50% of respondents are promoters
- 30% are passives
- 20% are detractors
50% (promoters) - 20% (detractors) = 30% (NPS)
A positive NPS indicates more promoters than detractors in your customer base. This means overall positive brand sentiment, with a higher likelihood of customer advocacy and recommendations.
Bear in mind that NPS benchmarks vary across industries. For that reason we suggest you compare your own scores against competitors. Gain some context of the industry standards and you’ll determine your performance relative to others more accurately. That way, you’ll know whether you need to improve in certain areas.
9) Time Between Purchases: Measuring Customer Engagement
Time between purchases refers to the duration of intervals between purchases, measuring the gap between two transactions by the same customer. Time between purchases is an essential part of retention as it provides insights into:
- Customer behaviour
- Purchase patterns
- Overall engagement with the brand
Conversely, longer gaps between purchases may suggest a decline in customer interest or a need for re-engagement strategies.
Should you decide to measure this metric and find you’ve got longer gaps, don’t worry! We’ve got a blog post on 8 innovative ways to improve engagement here.
Is time between purchases relevant for you?
Time between purchases may be high for some businesses as a result of product life cycle and replacement cycles. For example, certain products are designed to last for longer periods of time. Similarly, big ticket items (and B2B businesses) see bigger gaps between purchases. Therefore, time between purchases is not always relevant to businesses.
However, with that said, identifying where gaps emerge between purchases present upselling and cross-selling opportunities. For example, a highly engaged customer with a history of consistent purchases, could be sold a complementary product. Not only does this increase their spending, it enhances their overall experience too, and keeps your brand top of mind.
You’ll need some form of tech software to keep track of purchase dates and times. Or maybe you can analyse transactions (however, this will mean more manual work further down the line).
First stage: You want the dates of the first and subsequent purchase
Second stage: Put the dates into a common format e.g., YYYY-MM-DD
Third stage: Calculate the time between the two purchases
Purchase 1: 2023-05-01 10:00:00
Purchase 2: 2023-05-05 14:30:00
That would be: Purchase 2 - Purchase 1 = 4 days, 4 hours, 30 minutes.
Customer 1: 45 days between purchases
Customer 2: 8 days and 48 days, accordingly
Add up all time differences: 45 days + 8 days + 48 days = 101 days
Divide by the total number of customers: 101 / 2 customers = 50.5 days (approx. average time between purchases)
Customer Retention: the sum of long term success
Customer retention metrics play a vital role in optimising the customer-centric strategies that you adopt. They ensure that you’re tracking the sustainable means of growth within your businesses.
Each of these metrics offer valuable insights into the behaviours of your customers, their loyalty, sentiments towards your brands, and overall satisfaction with your products. Whilst also providing you with the information you need to make data-driven, informed decisions about your company. Leading you to accurately, efficiently and correctly plan out your strategies with excellent KPIs and metrics.