How to Calculate (and Improve) Your Customer Retention Rate
According to 2021 research from McKinsey, top-performing, fast-growing SaaS companies earn median net retention rates of 120% or more—and they grow at a rate of 20% annually without adding a single new customer. Your customer retention rate (CRR) is a measure of how loyal your customers are. It’s hard data that reflects the quality and usefulness of your product. A high rate is a sign that your product offers value, and it could point to high growth potential for your company.
Your CRR is an indicator of your product’s success: Calculate it regularly, and you’ll be able to see changes before they become problematic trends. You’ll also get a clear picture of how your product updates influence customer retention.
Using the Customer Retention Rate Formula
To measure your CRR, you’ll need to know four key metrics:
- The time period you’re measuring
- Your total number of customers at the beginning of the period
- How many customers you have at the end of the period
- The number of new customers added during that time frame
Once you have that information, follow this formula to calculate your CRR:
((Total customers - New customers) / Previous total customers) x 100
Written another way, it’s ((E-N) / S) x 100 = CRR, where:
- E = end
- N = new
- S = start
As for the time frame you'd like to examine, the time frame you’d like to examine, you can calculate your CRR over the past month or quarter, or you can focus on a specific period of time that coincides with a significant product update or another major milestone.
For example, imagine you’d like to calculate your CRR over a one-month period. At the start of the month, you had 1,000 existing customers (S). At the end, that number dropped to 850 (E). During that one-month span, you gained 50 new customers (N). Following the formula, you would get a CRR of 80% for that given period:
((850 - 50) / 1000 x 100 = 80
Your customer churn rate is the inverse of your CRR. If your retention rate for a given period of time was 80%, your churn rate was 20%. As you track your retention rate, keep an eye on the customers who churn as well. Consider asking why they’ve churned—feedback from former customers can help you pinpoint the problems that are preventing you from retaining more of your current customers. As a SaaS company, it’s also important to be clear about precisely when churn has occurred. If a subscriber opts out of a renewal, they’re still a customer until their current subscription period expires.
What Is a Good Customer Retention Rate?
Your ideal CRR depends on your industry. However, as a general rule, 35% to 84% is considered a good retention rate. In SaaS specifically, 35% and higher over an eight-week time period is a great goal to aim for—even though that rate is lower than other industry benchmarks. According to a 2018 customer experience report that examined average annual retention:
- Media and professional services earn the highest average retention rate at 84%
- Healthcare companies earn a 77% retention rate
- IT and software retain 77% of their customers
- Retail businesses have an average CRR of 63%
- Hospitality, restaurants, and travel companies earned the lowest average rate at 55%
Aside from industry, many other factors influence external benchmarks. Companies with higher customer acquisition costs (CAC) typically need better retention rates. Your overall market size matters too. Businesses operating in smaller markets need to earn higher retention rates since there are fewer customers to replace those who have churned.
When figuring out your CRR benchmark, take your sales model, industry, CAC, and market size into account. If you have access to your competitors’ rates, that can help you set an accurate number.
You can also set internal benchmarks based on how your rates compare internally, month over month or quarter by quarter. Internal benchmarking can help you establish retention trends so you can examine how those coincide with product updates, a new marketing strategy, or other company initiatives.
Improving Your CRR
If your CRR is below your industry benchmark, you can take steps to improve it. As mentioned, your CRR is tied in with your churn rate, along with other important customer metrics, like customer lifetime value (CLV). Your CLV measures value over the entire customer relationship—so retained customers have higher CLVs than those who churn. Keeping your existing customer base and upselling where possible is a great path toward higher CLV.
High retention rates also mean customer loyalty. Loyal customers often make great sources for referrals through word-of-mouth buzz (which potentially leads to a higher net promoter score for your business). Word-of-mouth is a key driver of organic product growth and a potential indicator of product-market fit.
What Factors Influence Your CRR?
Before you can improve your CRR, you’ll need to examine how your overall customer experience is influencing retention. A consistently positive experience leads to consistently engaged and happy customers, but any hiccups can cause churn.
Key factors that will impact your customer experience (and CRR) are:
- Product price and pricing model: Companies using freemium models may struggle to turn free users into paying customers, and products that are priced incorrectly may see more churn.
- Customer journey: Any step between purchasing and using your product can retain or lose users. Even lengthy onboarding processes can impact your CRR.
- Competitors: A new direct competitor can shake up your retention rates as your customers seek out other product options.
- Product functionality and performance: Frequent crashes and bugs certainly get in the way of retaining users.
- Product usability: An intuitive user interface and easy-to-understand product will help you earn higher retention.
- Product features: Customers are looking for an innovative, delightful solution to their problem (and they’ll stick around once they find it).
Collect and Act On Your Customer Feedback
The best way to find out how you can improve your CRR is to ask your customers what they love about your product and what they don’t. Given the number of factors that can influence your retention, getting feedback directly from your customers is the fastest way to understand where the problem lies.
A customer feedback tool will make this process easier by giving you a central hub where you can collect and analyze feedback. Any member of your team, from customer success to sales to product, can collect customer feedback via emails, surveys, or one-on-one meetings. That feedback can be easily organized and distilled into actionable data you can use to improve customer satisfaction with your product and boost your retention rates.
Your customers are the experts on their needs. They know what their problems are and whether your product is successful at solving them.
Use their feedback to make thoughtful product updates that directly answer their needs and connect with your value proposition. Try to keep your roadmap and product strategy in mind—otherwise, you might veer off track from your goals.
Validate Your Product Choices
Before you make changes to your product, validate that your assumptions are correct. Product validation is the process of checking whether a proposed feature addresses your customers’ needs before you begin development on it. Validation can include an in-depth process where customer feedback is actively collected through surveys and other methods. It could also involve short, targeted tests to gauge user reactions to your product.
The overall goal of validation is to ask for opinions before you make changes to your product. This allows you to focus on the changes your customers would find most valuable—and offering that additional value will translate to a higher CRR.
If your team is planning a product update, you can validate with a small set of users before you begin development. Taking that extra step confirms that your customers need and want that new feature before you commit time and resources to build and launch it.
Keep an Open Line of Communication with Your Customers
Communicate regularly with your customers to stay ahead of problems that could affect your CRR down the line. Effective customer communication meets them wherever they are—on social media, using the chatbot on your website, or via email.
Collecting customer feedback is only the first step in creating a valuable product with a high CRR. Your team also needs a way to reference and act on that feedback. UserVoice Discovery captures and funnels feedback into a cohesive database your team can use to better understand your customers. You get at-a-glance data on common requests so you can make targeted product improvements that directly improve your customers’ experience. Ready to do more with customer feedback? Sign up for a free trial of UserVoice Discovery.