Customer Retention Rate: How to Calculate and Improve It
Want to reduce costs, grow your business – and measure your brand’s overall success? Start tracking your customer retention rate now.
As a small-business owner, there are countless metrics to measure. However, one of the most important figures to track, aside from profit and loss, is your customer retention rate.
Put simply, your customer retention rate (CRR) reveals how many customers stay with your brand after they’ve made an initial purchase.
A high customer retention rate suggests your business is successful, while a low customer retention is a red flag; it suggests that one or more elements of your product, service or customer experience is not meeting customer expectations.
As well as providing an overall health-check for your business, strong customer retention rates are important in terms of acquisition costs, referral and loyalty figures. Here’s how:
Cost: A high number of repeat customers means you’ll need to spend less on acquiring new customers
Referrals: Repeat customers are likely to be happy, loyal customers – who are, in turn, more likely to refer other customers to your business
Loyalty: Hyper-loyal customers are more likely to pay higher prices, and support new releases or products
How to calculate customer retention rate
There’s a simple formula to calculate customer retention rate: CRR = ((E-N)/S) x 100
- Subtract the number of new customers (N) from the total number of customers at the end of the time period you’ve decided on (E)
- Divide the result by the number of customers at the start of this time period (S)
- Multiply by 100
Let’s say you’re a fashion retailer with 100 customers during January. Then, in June you have 90 customers, 40 of whom are new. That means that your customer retention rate during that six-month period is 50 per cent or (90-40)/100 x 100 = 50.
What’s a good customer retention rate?
Customer retention rates vary considerably according to a range of factors, including industry, cost of goods and the time period measured. Some industries - like banking - have extremely high retention rates of around 75 per cent, with customers unlikely to make the switch between banks.
Other industries, such as retail, have much lower customer retention rates, with one study finding that beauty retailers’ retention rates are around 26 per cent on average. However, even within the beauty category retention rates can vary between products, with make-up enjoying a higher retention rate (20.4 per cent) than hair care (13.2 per cent) for example.
Case study: How PAS increased customer retention rate
One way to increase your customer retention rate is to focus on lapsed customers. Last year, PAS Group, which includes a number of fashion retailers such as Review and Black Pepper, embarked on a series of ‘win-back’ campaigns.
Head of digital marketing and loyalty Anna Samkova and her team identified customers who hadn’t shopped with the brand in nine months, 18 months and 36 months and targeted them with discounts and tailored content.
“[These customers] received email communications [or for those] who were non-email marketable received a text message. And then they received one reminder within the month,” Samkova explains.
The campaigns drove millions of dollars in purchases across the group and played an important role in lifting Review’s customer retention rate from 48 per cent to 69 per cent, with Black Pepper’s rising from 70 per cent to 77 per cent.
“It was actually very surprising to me that we were able to successfully recover and win-back so many customers, who then go to the top of the funnel again,” she says.
How to improve your customer retention rate.
Four ways to drive repeat purchases and create loyal customers.
1. Understand why customers ‘churn’
The flipside of customer retention is “churn”, which is the number of customers who don’t return after they purchase from you. Boosting customer retention means taking a close look at your churn rate and those customers who aren’t returning.
"Start looking for clues in your data."
“Start looking for clues in your data,” says founder of ECommerce Growth UK Ian Rhodes. “Are people churning after one, three or six months? Do you understand why? Are you gathering customer insights that let you know why customers no longer use your product?”.
To better understand retention and churn, perform an audit to understand how, when and why people use your product. Even better? Survey customers about their experience and why they haven’t repeated purchased.
2. Map the customer journey and surprise and delight
One way to strengthen customer retention rates is to map all the touchpoints on your customer journey – from the moment they first interact with the brand, through to purchase and post-purchase – and identify ways to ‘surprise and delight’ them at that moment of their journey.
That might mean offering visitors to your website a discount for signing up to your newsletter or adding a personalised touch to your delivery.
"They buy into our brand and appreciate how we make them feel."
Founder of baby brand Bonnie + Kind, Judy Fraser, includes a personal note with every delivery bought online. “I believe part of the reason [customers] come back is the personalisation upon purchase. They buy into our brand and [appreciate] how we make them feel like an individual [as opposed to] a label.”
As well the personalised note, Fraser photographs products that are purchased as gifts and shares them with the gift-giver, explaining “this is so they get to see it and feel part of the whole gifting experience”.
3. Offer incentives
Although discounting should always be a last resort to avoid cutting into margins, offering incentives is a tried and tested way to cultivate loyalty.
This can be achieved through loyalty programmes, which offer rewards for repeat shopping, or perks such as previews of new collections or products, or other incentives such as early access to sales. Another option is to incentivise customers to refer other shoppers, a tactic that can drive sales among new customers and strengthen loyalty among existing shoppers.
Find out more about how to launch a customer loyalty programme that works here.
4. Personalise the customer experience with tech
Modern Point of Sale (POS) systems and Customer Relationship Management (CRM) software can deliver detailed data about your customers and the way they shop. Use these insights to make recommendations based on their purchase history or deliver content like email newsletters, filled with products and recommendations (or even discounts) that will appeal to them specifically.
All references to any registered trademarks are the property of their respective owners. Afterpay does not endorse or recommend any one particular supplier and the information provided is for educational purposes only.
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