How To Calculate Customer Retention Rate

Customer retention is essential for the success of any business. Yet, many companies struggle to keep their customers happy because they don't know how to measure, evaluate or improve their customer retention rate.

The average annual customer retention rate for the SaaS industry is 50-68%, and, in addition to that, the average company will lose 10-25% of its customers each year. In this article, we'll go into how to measure CRR and strategies you can implement to make sure that you are beating industry averages and retaining as many customers as possible.

We'll cover: 

• What customer retention rate is
• How you can calculate your customer retention rate — both manually and in Excel (we've prepared a template)
• What a good customer retention rate is
• Why and how often you should calculate your customer retention rate
• How to interpret your CRR
• Strategies you can implement to improve a low customer retention rate and, finally,
• How software like Fullview can help you increase your CRR

What is customer retention rate?

Customer retention rate (AKA CRR or user retention rate) is the percentage of customers who stay with a company over a period of time. It is expressed as a percentage of a company's existing customer base, meaning that if you start with 100 customers and lose 10 over some period of time, your customer retention rate during that period was 90% (i.e., 90 of your existing customers remained customers and didn't churn).

Should you count new users when measuring user retention?

It's important not to include new customers who signed up during that same period when you're calculating your customer retention rate. This is done in order to accurately analyze your customer retention rate and what it means about what you're doing right — and what you could improve upon. Why? 

Because making up for churn by acquiring new customers is unsustainable and can hide serious issues with your product, customer experiences, or business model. Plus, it's 5 times more expensive to acquire new customers than it is to retain existing ones, so shoring up churn with new acquisitions quickly becomes an expensive enterprise.

How often should you measure CRR?

CRR is typically measured on an annual basis, but it can also be helpful to measure customer retention on a quarterly or monthly basis in order to track progress and identify any potential issues early on. How often you measure customer retention depends very much on your business model: if most of your contracts are long-term or annual contracts, measuring CRR frequently is pointless. In contrast, some subscription or pay-as-you-go businesses can benefit from measuring CRR frequently — over time periods as little as a day, in some cases.

Why is it important to measure customer retention rate?

When it comes to customer retention, many companies focus on acquisition and forget about the importance of keeping their customers happy. Here are five reasons why customer retention rate is so important:

• Lower marketing costs: It's estimated that it costs five times more to acquire a new customer than it does to retain an existing one. By focusing on customer retention, you can reduce your marketing costs and reinvest those savings into other areas of your business.
• Repeat customers means more profit: When customers feel brand loyalty, they're more likely to make repeat purchases. In fact, according to Bain & Company, a five percent increase in customer retention can lead to a 75 percent increase in profit. Plus, repeat customers also increase the customer lifetime value, which is also an important measure of how viable a SaaS business is. 
• Free word-of-mouth advertising: When customers are happy with your product or service, they're more likely to tell their friends and family about it. This word-of-mouth advertising is invaluable because it comes from a trusted source.
• Gain valuable feedback: Your customer retention rate can give you both direct and indirect feedback about how healthy your SaaS business is. If you see a sudden drop in customer retention, it could be a sign that something is wrong with your product or service. On the other hand, if you see a steady increase in customer retention, it's a good indication that you're on the right track.
• Higher purchase values: Existing customers are also more likely to spend more money with your company because they trust your brand, know how to use your product or service, and are more likely to take advantage of upsells and cross-sells.

How to calculate customer retention rate?

CRR is relatively straightforward to calculate. In order to do so, you'll have to: 

• Decide on which time period you want to calculate CRR for. This could be a month, a quarter, a year, or another length of time that makes sense for your company and business model.
• Identify the customers at the start of this period. If you use CRM software like HubSpot or Intercom, this number is easy to find and automatically tracked.
• Count the total number of customers at the end of that period. Include both existing and new customers — we'll subtract the number of new customers acquired when we're calculating CRR.
• Count the number of new customers you have acquired during that time period. We'll need to subtract this number from the total number of customers at the end of the period to arrive at an accurate CRR.

Once you've done all of that, you can calculate your customer retention rate using this formula: 

Customer Retention Rate = ((Customers at the end of the period - New customers acquired during that period) / Customers at the start of that period) x 100

For example, if you have: 

• 100 customers at the start of the time period
• 120 customers at the end of that period
• 30 new customers acquired during that period

Your CRR would be: 

((120-30) / 100) x 100

Or 90%

Can you customer retention rate be negative?

Yes, you can have a negative customer retention rate. But the only way for this to happen is for you to lose some or all of the new customers you acquired during that period as well as existing customers at the start of that period.

For example, if you started the period with 5 customers, added 150 customers during that period and ended the period with 100 customers, that would imply that you lost at least 50 new customers during that period.

Using the formula above, you would technically end up with a negative customer retention rate: 

((100 - 150) / 5) x 100

or - 1000%

How to calculate customer retention rate in Excel?

For an easier way to calculate your customer retention rate, we've made a template you can use (it's ungated and completely free to use — all you have to do is make a copy of it).

Once you've made a copy, follow these steps to automatically calculate your customer retention rate: 

• Import a list of customers you had at the beginning of the period in column A
• Import a list of customers you had at the end of the period in column B
• Import a list of the new customers you added during that period in column C

And then template will calculate your CRR. Find it by clicking on the image above or here.

If you want to create the template yourself, here is the formula: =(((COUNTA(B:B)-1)-(COUNTA(C:C)-1))/(COUNTA(A:A)-1))

Just remember to import the right customers into the right columns as detailed in the bullet list above.

10 best ways to increase retention

If you calculate your CRR and find it lacking, here are some tried-and-tested ways to increase your customer retention rate:

• Master your onboarding
• Personalize your customer experiences 
• Make proactive support a habit
• Build trust and loyalty 
• Always seek and implement customer feedback 
• Start a loyalty program 
• Provide value 
• Use the right tools 
• Offer the right incentives to customers who are churning
• Measure your performance and improve it

Master onboarding

Have you ever wondered at what points a customer is most likely to churn? One of the major ones is if they sign up for your product and don’t immediately get a sense of what it is, how to use it, or how it can benefit them. You have to demonstrate value from the minute they log on or you risk losing them. The best way to do this is to design a simple but effective onboarding sequence that hooks them immediately. If yours is a particularly complex product, design your onboarding sequence in stages and make sure there is a clear CTA at each one – even if it is as simple as prompting them to add a team member. 

Personalize your customer experiences

No one likes feeling like just another number on a spreadsheet. It’s crucial to remember that those retention targets you are trying to achieve represent real human beings. One of the best ways to retain a customer is to reach out personally when they sign up. You don’t have to do this for every customer (for example, those on your free plan may not be relevant), but there are certain segments you should absolutely make it a point to develop relationships with. This is also one of the best ways to foster a sense of loyalty in your customer base. 

Offer proactive as opposed to reactive support

If a customer is reaching out to you with a problem, it’s likely that they have spent at least some time trying to figure it out on their own before giving up. This means that, when they reach out, they are already feeling a sense of frustration and helplessness. This is why it is so crucial to offer proactive support rather than waiting for customers to reach out to you once they have already encountered a problem. The best way to do this is to invest in a session replays tool that records user sessions in your product. You can then monitor these sessions on an ongoing basis to scan for issues. 

How software can help you increase your customer retention

With a software platform like Fullview, all your customers' sessions in your web app are automatically recorded so you can review them to see customer behavior, bugs, and signs of frustration like rage clicks in context. Sessions where users encountered errors or bugs are clearly labeled, so you can identify the most crucial ones and reach out to those users directly, thus preventing them from getting frustrated and churning. 

Fullview is 100% GDPR compliant and all data is stored on servers in the EU.

Learn More about Fullview Session Replays

Build trust and loyalty

Like every good relationship, your relationship with your customers should be built on a foundation of trust if you want to inspire any brand loyalty. SaaS customers have a lot of choice these days, so your brand reputation counts for a lot. One of the best ways to build this trust is to be completely transparent with your customers and take steps to make sure their data and privacy are protected. Another way to build trust is through social proof in the form of testimonials and reviews. 

Always seek and implement customer feedback

Customer feedback should form the bedrock of any good product. After all, if you aren’t building it with your customers in mind, who are you trying to build it for? It’s a good idea to make it a point to solicit their feedback at relevant points in their customer journey. You can build it into your onboarding sequence, send a short CSAT survey after a customer support interaction or email particularly active users with a longer product survey.

Start a loyalty program

Another great way to ensure that your customers stick with you for the long haul is to incentivize that longevity with a loyalty program. Loyalty programs can take many different forms, so you’ll have to design yours around your particular business. You could, for example, give customers who stick around for a particular amount of time discounts on plans or items. You could start a point-based loyalty program, where customers earn points for every dollar spent. Or you could offer a tiered loyalty program and give customers discounts based on the amount they spend on your platform — the more the spend, the bigger the discount. Again, it all depends on your business model. 

Provide value

This one should be evident, but it bears repeating: if you don’t demonstrate value to your customers from the moment they sign up, they are likely to leave and never return. One of the most likely moments for customers to churn is during onboarding and then within the first few days or weeks of signing up for your platform. If you can hold their attention and demonstrate immediate value in that time, they will stick around. However, if you don’t demonstrate any value or make it difficult for them to realize this value, they will likely churn. 

Use the right tools

In order to prevent as much churn as possible, it is essential to get your tech stack right and make sure you are investing in the right kinds of software. From customer relationship management software, to customer support software, to your MarTech stack, investing in the right kinds of tools for your business can help you create the best customer experiences. 

Offer the right incentives to customers who are churning

Most CRM platforms these days have mechanisms in place to alert you when a customer is likely to churn. How do they measure this? With product usage benchmarks that you can customize. To do that, you’ll need to think about what constitutes churn for your business and then monitor that in your CRM. So, for example, if your software is something that people typically use daily and a user has not signed in for a few days, you could define that as them being likely to churn. Once you identify which customers are about to churn, tempt them back with discount codes or other incentives to continue using your product. 

Measure your performance and improve it

Preventing customer churn is an ongoing process and it is something that you will have to perfect over time. Because this is something that you will be dealing with for the entire lifecycle of your product, the most important thing is to measure your performance and then constantly seek to improve it. We’ve already put together a list of the most important customer support metrics to track, which is a good place to start. But you will also need to track commercial metrics and marketing metrics to see how optimized your pipelines are and how sticky your product is. 

Wrapping things up

Customer retention rate (CRR) is an important metric for any business, especially in the SaaS industry where it can be more challenging to retain customers. By measuring CRR regularly, companies can identify any potential issues early on and take the necessary steps to improve customer retention. The benefits of a high CRR are numerous, including lower marketing costs, more profit, free word-of-mouth advertising, valuable feedback, and higher purchase values. To calculate CRR, companies can use a simple formula that takes into account the number of customers gained and lost over a specific period of time.