Customer retention: how to evaluate the effectiveness of a customer retention strategy and fix mistakes

What is Customer Retention Rate

Customer Retention is a company’s ability to maintain a long-term relationship with a customer. A high score means your customers are happy to come back for a new purchase and recommend you to their friends. Retention work starts with the first contact between you and your client and never ends, at best. To always have an idea of ​​how your company is doing with customer retention rates, you need to track certain metrics.

We calculate the Customer Retention Rate (customer retention rate)

A metric that directly demonstrates retention efficiency. It is necessary to read it in order to understand how effectively your tools work.  To calculate CRR, you need to subtract the number of new customers for the period from the number of customers at the end of the period, and then divide this difference by the number of customers at the beginning of the period.

The retention rate is closely related to the churn rate: if you add these numbers, you get 100%.

Calculating Customer Retention Rate by example

Let’s say that at the beginning of the month the company had 150 clients, and at the end of the month it became 162, 18 clients stopped using the services, but 30 new clients appeared. We calculate CRR: (162-30) / 150 = 0.88 or 88%.

Churn rate formula (churn rate)

Probably all marketers know about the existence of this metric. Churn rate is the number of people who stop interacting with your company. We have already talked about how to calculate churn and what it affects. If your company’s customer list contains hundreds or even thousands of names, then it makes sense to analyze churn on a monthly basis. A small business can afford to calculate it once every six months or a year. To calculate churn, you need to divide the number of customers you’ve lost by the total number of customers. Churn depends on customer satisfaction with working with you. Collect feedback, analyze your customers’ behavior, develop a loyalty program – make your marketing strategy more customer-centric.

We calculate the Churn rate for example

Let’s say you have now decided to calculate the churn per month. Recall: at the beginning of the month you had 150 clients, at the end of the month there were 162. At the same time, 18 clients stopped using your services, and 30 new clients appeared. We consider: 18/150 = 0.12. Translated into percentages, the churn is 12%. CRR, as we found out, is 88%. In total, churn and retention give 100% – we have retained someone and lost someone.

Monthly Recurring Revenue Formula

MRR is your regular monthly income. It is important to keep this indicator in mind, and also to know the churn rate of MRR. The article is also devoted to calculating churn. It is noteworthy that the outflow can be negative. In this case, your business, in addition to revenue from new sales, receives additional income from existing customers – this is very cool. To calculate the MRR, you need to multiply the number of customers by the average income from each customer. You can improve this metric using up-sell (increase in tariffs) or cross-sell (additional sale) techniques.

Calculating Monthly Recurring Revenue for example

For example, you have an online swimwear store. On average, 50 people buy from you per month, the average check is 1200 rubles. MRR with these data is 60,000 rubles. To increase it, you can try up-sell: sometimes after placing an order, offer the user a discount on the next purchase within, for example, two weeks. This offer may well motivate the client, he will place another order, and the average income will grow.

Repeat Purchase Rates Formula

If customers return, then they are happy with their purchase. The repeat purchase rate is one of the best indicators of loyalty. Even if it is 8%, this number of people can raise your annual income by 40%. How does it work? Let’s say you are a B2B company selling website widgets. The frequency of purchases depends on the processes within the client company: someone makes one large purchase at the very beginning and does not return for a long time, and someone orders your services monthly. By recording how many customers are returning for purchase and how often, you can make personalized offers, which will significantly affect loyalty and retention.

To find out what percentage of your customers are returning, you need to divide the number of people who made more than one purchase in a period by the total number of buyers in the same period. The frequency of the calculations depends on the size of the business: it can be calculated monthly, quarterly, or annually.

Purchase Frequency Formula

This metric is related to the previous one, but it shows how often the average customer makes a purchase from your store. The importance is obvious: the more people buy from you, the higher your profit. To calculate PF, you need to divide the total number of purchases in a period by the number of unique (important) customers in the same period.

Increasing the frequency of purchases is one of the direct tasks of marketers. To motivate customers to buy more often, arrange promotions, sales, make personal offers to customers

Customer Lifetime Value Formula

Another popular metric with many abbreviations: LTV, CLTV (C comes from Customer), CLT. This indicator shows how much income the user will bring to you for the entire time of your interaction with him. It is important to always keep it in mind: it gives an understanding of how to properly distribute the marketing budget. If LTV is low, you should seriously consider focusing on retention rather than acquisition. As we’ve discussed, existing customers tend to generate higher returns than new ones. If the LTV level is gradually increasing – you have something to be proud of! The indicator is calculated in different ways, they differ from each other in the accuracy of the result. The most common formula is the product of the average purchase price, the average number of purchases per month, and the average customer retention time in months….