What is customer retention?

Customer retention is the ability of a company or product to retain customers during a certain period of time.

Why is customer retention necessary?

Retaining existing customers is significantly less expensive than acquiring new ones. Marketing and onboarding costs are lower for customers who are already familiar with your brand.
Loyal customers often make repeat purchases, increasing their lifetime value to the company and driving consistent revenue.
Satisfied, long-term customers are more likely to recommend your business to others, providing valuable word-of-mouth promotion.
A strong base of returning customers leads to more predictable income, making forecasting and business planning more reliable.
Retained customers are more receptive to upsell and cross-sell opportunities, which has the potential to grow the average order value and increase sales.

How to calculate customer retention rate

Understanding the customer retention definition is just the first step. Knowing how to calculate the retention rate is key to tracking business performance and customer loyalty. To calculate customer retention rate, you have to subtract the number of new customers acquired during a period from the total number of customers at the end of that period. Then divide that result by the number of customers at the beginning of the period and multiply this value by 100 to express it as a percentage.

Here's the customer retention rate formula:

Customer retention rate = [ (Ending Customers - New Customers) / Starting Customers ] * 100

Where:

Starting customers = the number of customers at the beginning of the period.
New customers = the number of new customers acquired during the period.
Ending customers = the number of customers at the end of the period.

As an example, suppose that you begin a month with 200 customers, gain 50 new customers, and have 220 customers at the end of the month. Let’s apply the formula: ((220 − 50) / 200) * 100 = 85%. The customer retention rate for this example would be 85. This implies 85 percent of your current customers remained the same over that period.

The customer retention formula helps to understand how many customers have stayed with your business over a specific period. Tracking this number over time may indicate some problems within the customer experience and highlight areas that may need improvement.

7 most common techniques to improve customer retention

Customer service Excellent customer service means solving problems quickly, offering multi-channel support, and treating customers with genuine care.
Loyalty programs Loyalty programs drive repeat purchases by offering rewards, exclusive perks, and tiered benefits that recognize loyal customers.
Personalization Personalization tailors communication, product suggestions, and experiences based on individual customer data and behavioral insights.
Proactive communication Proactive communication engages customers by sharing helpful updates, anticipating their needs, and offering timely, relevant information.
Feedback Collecting and acting on feedback shows customers their opinions matter and helps improve products and experiences.
Social media engagement Engaging on social media means responding to comments, sharing value-driven content, and building authentic customer relationships.
Complaint resolution Resolving complaints professionally and promptly turns negative experiences into trust-building moments that boost customer retention.