How to Compute for Retention Rate

Retention rate is one of the most important metrics for understanding the health of any business, whether it's a subscription service, an app, or even an online learning platform. This figure gives you insights into how well you’re keeping your customers or users engaged over time. But, computing retention rate can sometimes feel like navigating a maze. Don’t worry. I’ll guide you through every twist and turn.

The Formula: Simplicity Wrapped in Complexity

At its core, calculating the retention rate is relatively simple:

$RetentionRate=\frac{CustomersatEndofPeriod-NewCustomersduringPeriod}{CustomersatStartofPeriod}\times 100$Retention Rate=Customers at Start of PeriodCustomers at End of Period−New Customers during Period​×100

However, while the formula looks easy, understanding what each element truly represents is where the real challenge lies.

Breaking it down:

• Customers at End of Period: This is the total number of users or customers you have at the end of the selected time frame.
• New Customers during Period: These are the users you acquired during the same period. Important – These should not be confused with users who returned after leaving.
• Customers at Start of Period: This refers to your total customer base at the start of the period you are analyzing.

Retention Rate in Real Life Scenarios

Let’s say you run a subscription-based service and are analyzing the month of June.

• Start of June: 1,000 subscribers
• End of June: 1,100 subscribers
• New Subscribers during June: 150

Now let’s apply the formula:

$RetentionRate=\frac{1100-150}{1000}\times 100=95\%$Retention Rate=10001100−150​×100=95%

This tells you that 95% of your subscribers in June were retained, which is a pretty healthy retention rate.

What Does a Good Retention Rate Look Like?

There isn’t a one-size-fits-all answer here. Different industries have different standards for what constitutes a good retention rate. Here's a table showing industry benchmarks:

Industry	Average Retention Rate
SaaS (Software as a Service)	35-40%
Mobile Apps (non-games)	20-25%
eCommerce	25-30%
Subscription Services	80-90%

For SaaS companies, anything above 40% is typically considered excellent, while for subscription-based services like Netflix or Spotify, you might aim for a retention rate above 85%.

The Impact of Retention on Revenue

The cost of acquiring new customers can be up to five times higher than retaining an existing customer. This is why businesses place so much emphasis on improving their retention rates. Every small percentage increase in retention can have a massive impact on your bottom line.

Consider this: if your retention rate jumps from 80% to 85%, and you have 10,000 customers, that’s 500 fewer customers you’ll lose each cycle, meaning you can focus less on customer acquisition and more on customer satisfaction.

Factors Affecting Retention Rate

There are multiple factors influencing retention rate:

• Customer Experience: The more delightful your service or product, the more likely customers will stick around.
• Product/Service Quality: Bugs, crashes, or inconsistencies? Say goodbye to retention.
• Onboarding Experience: How quickly and smoothly do new users learn to use your product?
• Price vs. Value Perception: If customers feel they aren’t getting their money’s worth, they won’t hesitate to leave.
• Competition: The options available in your market can lure customers away if they find a better or cheaper alternative.

Tactics to Improve Retention Rate

Personalized Engagement is key. In Tim Ferriss fashion, what if I told you that sending personalized emails to customers who are about to churn can increase retention by up to 50%? Studies show that engagement drops sharply right before a customer churns, so look out for the following signs:

• Declining usage or log-ins
• Less frequent purchasing or interaction
• Negative feedback or support tickets

Once you’ve identified these customers, deploy a personalized re-engagement strategy. Whether it’s a friendly check-in email or a discount offer, showing that you care about your customers can work wonders.

Understanding Churn to Improve Retention

Churn rate is the flip side of retention rate. It measures the number of customers who leave during a given period. A high churn rate means you’re losing customers faster than you can acquire them, which is bad news for long-term growth.

$ChurnRate=\frac{Customerslostduringperiod}{Customersatstartofperiod}\times 100$Churn Rate=Customers at start of periodCustomers lost during period​×100

If your retention rate is low, it’s likely that your churn rate is high, and vice versa.

Conclusion: Retention Is More Than Just a Number

Calculating your retention rate gives you a valuable insight into the health of your business, but more importantly, it points to the overall experience you’re providing. Keeping customers means creating something worth staying for.

Your retention rate is like the pulse of your business. Regularly check it, take action when it starts dropping, and remember that small changes—like improving customer service or making the product experience smoother—can have a significant impact on keeping your customers around for the long haul.

Retention isn’t just about numbers; it’s about relationships.