Customer retention rate

Sustained revenue depends on customers continuing to buy or renew. Retaining an existing relationship is generally less expensive than attracting and converting a new customer, and an established customer is usually easier to resell to, cross-sell to and up-sell. Customer retention rate shows how much of the acquired base actually stays.

When to use it

• Answer the key performance question: “To what extent are we keeping the customers we have acquired?”
• Assess this KPI within the Customer perspective.
• Plan data collection, formula use, reporting frequency, and data-source requirements for this KPI.
• Compare results against the targets, benchmarks, examples, or trend guidance available for this KPI.

Origins

Retention became a central management measure as relationship marketing and customer databases expanded in the 1980s. Leonard Berry’s nineteen eighty-three formulation of relationship marketing, followed by work on loyalty economics, shifted attention from completing individual transactions to sustaining profitable relationships. No single person invented the rate: cohort definition, period length, treatment of new customers and the meaning of “active” determine how it should be interpreted.

What it is

Perspective: Customer perspective.

Key performance question: To what extent are we keeping the customers we have acquired?

Most businesses therefore try to turn first-time buyers into durable, profitable customers. In The Loyalty Effect, Fred Reichfeld argued that “A 5% improvement in customer retention rates will yield between a 20 to 100% increase in profits across a wide range of industries.”

Retention is based on observed behaviour: customers actually renewed, stayed or purchased again. That makes it different from forward-looking indicators such as net promoter score or brand equity. Those measures may suggest repurchase intent, but neither intention nor past retention guarantees future behaviour.

The rate is the proportion of an existing customer cohort that remains active or repeats a purchase during a defined period. A high figure can indicate satisfaction, but it can also reflect switching barriers or incentives strong enough to outweigh poor service. A low figure should trigger investigation into why customers leave, especially relative to competing offers.

Not every acquired customer should be retained at any cost. Some relationships are structurally unprofitable or disproportionately expensive to serve, so retention must be interpreted with customer profitability and customer lifetime value.

Customer churn, also called attrition, is the complementary view: the percentage of customers lost over the same defined period.

How to use it

Measurement