Recently a client asked me for a tool to help them calculate their customer retention rate. Along with the request came some questions about what they should include in their retention rate calculation:
- Do we only include monthly retainer clients and not one time clients?
- What about clients that sign on midyear?
- Do we just take the total clients at the beginning of the year and then at the end of the year and calculate it that way?
While we have an excellent customer lifetime value calculator, the issue is that there is no such thing as a standard “retention rate” calculator. What’s more the answer to each of these questions is not absolute and will depend on what your organisation is trying to achieve. Companies need to make decisions on what to include in the retention rate based on their own circumstances.
At a high level Retention Rate = (1 – Attrition rate).
Attrition rate is the percentage of customers that leave in any given time period. Normally retention rates are given in annual rates but some industries, e.g. telecommunication companies, often use monthly rates.
Do we only include monthly retainer clients and not one time clients?
This depends on whether your strategy is to grow retainer or project based business.
If you are strategically focused on retainer clients and see the project work as bluebirds (good to get but not something that you are chasing) then maybe you want to leave project work out.
On the other hand if you are focused on project business you will need to determine how to tell a retained customer from a lost customer. Maybe you can make an assumption that if you get one or more projects from a company in any 24 month period then they are a current customer. That way you can tell which customers have been retained and which have left.
Do we just take the total clients at the beginning of the year and then at the end of the year and calculate it that way?
This is certainly a good option but an improvement to the process would be to look at rolling 12 month periods; January-December, February-January, etc. That way you can generate an annual retention rate and report it each month. It also means that you can reduce any annual seasonality in your reporting.
This approach also answers the “What about clients that sign on midyear?” question.
As you can see there is no right way to calculate retention rate – only the right way in the context of your business.
Good post. Determining the lifetime value of a customer seem to be a goal for a variety of businesses. Thank you for sharing this information.