For business to grow, focusing on how committed your customers are to your business is important. Keeping in mind where the lob holes are and how best to cover those lob holes is paramount to the growth of the business. For a business to grow, emphases should not just be put on customer acquisition but also on retaining the customer, to either up-sale or cross-sale and refer family and friends to your business without cost. In effect having a high retention strategy for your customer is paramount. But first what is customer retention metric?
Customer retention metrics are factors which are been used to measure the possibility of attracting and retaining customers to your business. There are various formula set in place to calculate the performance of business operation in a given period. Loyalty is important in business, it's even been referred as a currency of the business world. This is because it helps the revenue growth of your business, contributing to the lifetime value (CLV) of the business.
Asking yourself a few questions will help in knowing which customer metric to use. Questions like; Where is the revenue leakage happening? How fast is it happening? Why are loyal client turning away? Let’s go on a drive to know how to answer these questions as we make use of various customer retention metric formula
KEY CUSTOMER RETENTION METRICS
Customer retention rate (CRR)
Customer Churn Rate (CCR)
Customer Lifetime Value (CLV)
Customer Acquisition Cos (CAC)
Net promoter Score (NOS)
CUSTOMER RETENTION RATE (CRR)
Customer retention rate is the most straight forward formula to understanding how loyal are your customers to your business. The customer retention rate formula will help you understand if your current retention strategy is not just drawing customers but keeping them.
CALCULATING CRR
The retention rate is very critical in your business profitability. CRR is base on the percentage of customers your business has retain over a period of time which can be 3month, 6 month or one year depending on your business.
Customer retention formula
CRR = Customer Retention Rate
NCE =Number of new customers at the end of a period
NCA = Number of new customers acquired during this period
NCS = Number of customers at the start of time period
CRR = (NCE-NCA)/NCS X100
For example
You have 2000 customers as at 1st of March, but as at March 31st you gain 800 new customers to the business, but lost 300 customers. Now to be able to get your NCE you will have to add the customers as at March 1st with customers gained as at 31st March then subtract it with the lost customers to get the NCE.
NCE = (2000 + 800)-300
NCE = 2800 – 300 = 2500
NCE = 2500
NCA = 800
NCS = 2000
CRR = (2500-800)/2000 X100
CRR = 1700/2000 X100
CRR => 0.85 x 100 = 85%
CRR = 85%
Customer Churn Rate (CCR)
Churn rate is the opposite of retention rate. It is the rate at which a customer stop patronizing your business. A churn customer is a customer that your business did not retain, which could be either they just stop patronizing you or they move to your competitors, either way they discontinued doing business with you. A churn rate which is high is as a result of your product or service failing to meet customer goals or expectation. To have a better understanding about customer churn is to see it as the factor that brings about leakage to your consistent drop in revenue
Calculating CCR
Higher churn rate leads to slower business growth and revenue. That’s why it is your business best interest to implement strategies that will assist in retaining your existing customers before acquiring new customers. Calculating the churn rate varies depending on your business, and the number of customers. But most commonly use period is a year.
Churn Rate Formula
CCR = Customer Churn Rate
NCS = Number of customers at the start of the month
NCE = Number of customers at the End of the month
CCR = (NCS-NCE)/NCS X100
For example At the begging of the month, you had about 8,000 customers, during that same month you lost about 657 customers but you were able to gain 413 customers. What Is your customer churn rate?
Customer at the beginning of the month = 8,000
Customer the where lost = 657
Customers that were gained =413
For you to know how many customers were lost for the month of June, subtract what was lost with the number of customers that was gained
657 – 413 =244
So, for the month of June, we lost about 244 customers.
Now to gain the NCE we need to subtract the customers at the start of June with the number of customers lost, which will be
8000 - 244 = 7,756
Now that we have gotten our NCE lets dive straight to calculating our churn rate
CCR = (NCS-NCE)/NCS X100
CCR = (8000-7756)/8000 X100
CCR = 244/8000 X100
CCR = 0.0305 x 100
CCR = 3.05%
So, the customer churn rate for the month of June is 3.05%
When you understand the reason(s) why your customers leave, and how they leave, you will be able to optimize the customer experience so that the existing ones do not defect to your competitors or stop using your product or service.
CUSTOMER LIFETIME VALUE (CLV)
This is the profit value to the future relationship you will have with your customers. It is very important to the growth of any business because it helps you to evaluate and gives priority to customers that are worth retaining. CLV is quite valuable because it helps to determine the standard on what is to be spend on cost of acquisition (COA) and Cost of Retention (COR). With CLV you will know if your business is increasing or stagnant, but if your business is diminishing this means that your customers are low value or that you are losing customers at an increasing rate.
CLV Formular
CLV = (ARPA x ACL)/TNC
CLV = Customer Lifetime Value
ARPA = Average Revenue Per Account
ACL = Average Customer Lifetime
TNC = Total Number of Customer
In a business where you have various subscription plans
Individuals: $40 per month Team: $150 per month Enterprise: $600 per month
For example Your company has a total of 750 customers, 220 of your customers are on the individual subscription plan, 385 are on the team plan while 145 are on the enterprise subscription plan. The average customer lifetime varies per subscription plan
Average customer lifetime
Individuals: 6 months
Team: 12 months
Enterprise: 18 months
CLV = (40 x 220 x 6 + 150 x 385 x 12 + 600 x 145 x18)/750
CLV = (52800 + 693000 + 1566000)/750
CLV = ( 2311800)/750
CLV = $3082.4
If your cost of acquisition of a customer is 2-3 times less than $3082.4 the customer is profitable. In subscription base business or SaaS, where there are various prices for different customers and hey have different customer lifetime value. It is suggested that you calculate CLV base on there subscription price and their lifetime value. By putting an eye on your clv it will hep you know how healthy your business is. And know the various steps that should be taken to improve the profit margin of the business. Lifetime value is very good metric which can be used along with another metrics customer acquisition cost
CUSTOMER ACQUISITION COST (CAC)
This is how much you pay to get a new customer, this comprises of advertising, subscription for tools use by sale department, salaries and bonuses and other overhead expenses.
The CAC helps in understanding your market. When you analyze CAC with CLV, you come to understand how profitable and scalable your business can be. The CAC metrics assist the marketing team, sales team and even the customer success team to focus on maximizing profit in your business.
Calculating CAC
CAC = (Cost of Sales + Cost of Marketing )/(Number of Customer Acquired)
For example You have a subscription business and you want to calculate the marketing and sales expenses. The marketing expenses includes advert, content creating etc, amounted to $32,000. The salary and subscription for tools to help make the work of the sales and marketing personnel efficient amounted to $60,000. The total number of customers you got within the period the above amount was spent were 1000 customers.
CAC = (Cost of Sales + Cost of Marketing )/(Number of Customer Acquired)
CAC = (50000 + 32000 )/1000
CAC = (82,000 )/1000
CAC = $82
In effect you spent $82 to acquire one customer.
One thing is certain, if your CAC is greater than your CLV you are in big trouble and you need to stop and start fixing things. Because you are paying your customers to use your product and service.
NET PROMOTE SCORE It is a thing of joy when you hear your business is been referred by your customer. NPS measures customer satisfaction that they will be willing to refer your business to family members or colleges. It can be used to know customer loyalty by using micro survey to get feedback for business
CALCULATING NPS
NPS = Percentage of promoters – Percentage of detractors
To be able to calculate NPS, customers feedback is necessary. The customer will rate if the product or service is worth recommending to family and friends on scale of 0-10. Base on the rating that various customers provide, these rating is been classified into 3. Detractors (DT) This are customers who between the range of 0-6. This customer fails to find value in your product or service and might want to churn. Passive (PS) This are customers between the range of 7-8 Promoters (PT) This are customer who between the range of 9-10, who find value in your product and services.
NB. Passive customer are not put into consideration when calculating NPS.
For example Your business has 1,800 customers in which 650 are detractors, 400 are passive and 750 are passive.
NPS = PT – DCT x 100
NPS = ( 750)/1800- ( 650)/1800 x 100
NPS = (0.42 – 0.36) x 100
NPS = 0.06 x 100 = 6
NPS = 6%
It is essential for your business to create time and resources for customer retention. Sometimes it looks impossible to put together various customer metrics, why not start with one then progress as time goes and endeavor to block all the licks in your business. When you start with one you will slowly transit to other metrics. So, start from one.