Customer Retention Rate

Description:

All business/organisations require customers to purchase products/use services. The retention of existing customers is important to an organisations’ financing, as the cost of attracting new customers is generally higher than that required to maintain a relationship with an existing customer. Furthermore, an established (loyal) customer relationship is more likely to yield additional opportunities for the sale of additional or related products/services. A “healthy” percentage of customers returning for repeat business is a likely indicator of good customer satisfaction however it is necessary to evaluate the context of repeat business to ensure such customers contribute to desired profitability levels, purchasing cycles and customer lifetime value.

Calculation:

Usually calculated on a monthly basis (This should be adjusted as appropriate to fit with purchasing cycle suited to the business type). Customer Retention Rate = Number of customers at the beginning of a given period with the opportunity to be retained, divided by Number of those customers that remained customers at the end of a given period.

Example:

For car hire company: For a given month 500 hire agreements are arranged of which 200 have the potential to be repeat business. Of these 200 agreements, 50 are renewed at the end of the month. The customer retention ratio is (50 divided by 200 = 0.25) x 100 = 25%.