Keep clients coming back · Every business
Customer Retention Rate: How to Calculate It and What Good Looks Like
Customer retention rate is the share of the customers you had at the start of a period who are still buying at the end of it, and a ten-point difference in that share compounds into tens of thousands of dollars within three years for an ordinary service business.
At a glance
- Customer retention rate = (customers at the end of the period − new customers gained during it) ÷ customers at the start of the period × 100.
- Research by Bain & Company, summarized in Harvard Business Review, found that raising retention by 5% raised profits by 25% to 95%, and that winning a new customer costs five to 25 times as much as keeping one.
- In an illustrative business with 400 customers spending $600 a year, keeping 80% a year instead of 70% leaves about 68 more of the original customers three years later, worth about $40,560 in that third year alone.
The number and where it comes from
The formula removes new customers on purpose, because a business that wins 100 new customers and loses 100 old ones looks stable on a headcount but is spending heavily to stand still. Count only customers who bought at least once in the period, define "the period" by your visit cycle (a year works for most service businesses, a quarter for those whose customers come monthly) and use the same definition every time.
The case for watching this number rests on two widely quoted findings from Bain & Company's retention research, summarized in a 2014 Harvard Business Review article: acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one, and increasing customer retention rates by 5% increases profits by 25% to 95%. Those ranges come from larger firms across many industries, so they are a direction rather than a promise for a salon or a plumbing company, but the direction is consistent with what owners see when a regular disappears.
A worked calculation
| Customers at start of year (S) (Assumption) | 400 |
|---|---|
| Customers at end of year (E) (Assumption) | 380 |
| New customers during year (N) (Assumption) | 60 |
| Retention rate (Calculated ((380 − 60) ÷ 400)) | 80% |
| Average yearly spend per customer (Assumption) | $600 |
| Original customers left after 3 years at 80% (Calculated (400 × 0.8³)) | 204.8 |
| Original customers left after 3 years at 70% (Calculated (400 × 0.7³)) | 137.2 |
| Year-three revenue gap from those customers (Calculated ((204.8 − 137.2) × $600)) | $40,560 |
Illustrative example; replace every assumption with your own numbers.
The business in this example looks healthy on a simple customer count, ending the year with 380 customers against 400, yet 80 of its original customers left and had to be replaced by 60 new ones. A drop from 80% to 70% retention would not appear on any statement as a line item, which is why it is worth computing directly.
What good looks like
There is no reliable public benchmark for retention in small service businesses; the published figures that circulate online usually come from software vendors that do not describe their methods, so we do not repeat them. Visit cycles also vary so widely, from a four-week haircut to an annual furnace tune-up, that a single "good" number would mislead. The useful comparisons are closer to home.
- Against your own last year: compute the rate for the last two years with the same definition; a drop of five points or more deserves a look at who left.
- Against your visit cycle: for businesses with short cycles, a customer who has missed two cycles in a row is a better early warning than an annual count.
- Against your best customers: compute the rate separately for customers who rebooked before leaving and those who did not; the gap usually shows where the system needs to change.
The first step is to export last year's customer list from the booking or invoicing system, mark who bought this year, remove anyone new, and divide.
Sources
- Gallo, A. The Value of Keeping the Right Customers. Harvard Business Review, October 2014. Summarizing Bain & Company retention research.
Related reading: Customer Lifetime Value for Service Businesses, Worked Out · How Often Customers Come Back, by Type of Business · Why Customers Don't Come Back (and How to Find Out Which Ones Left) · Measuring Customer Experience Without a Research Team
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