Imagine that you are really great at attracting new customers. However, the vast majority of the folks that you convince to try your product use it only a small handful of times and drop off. You don’t want to be losing customers as soon as you get them since your acquisition efforts will be squandered. This means that you have to focus on improving how well your product and business retains customers. But how do you know what tactics improve retention? You will need some way of measuring customer retention, so you can discern what changes are helping your business to keep existing customers. Below are three common measures that are useful to track.
3.3.1 Customer Retention Rate
The most common retention metric that businesses track is the customer retention rate (CRR). The customer retention rate is the percentage of customers that you kept during a period of time as compared to all the ones that you had at the beginning of the same period, excluding new customers that you gained. Mathematically, this percentage can be represented as follows:
The closer the number is to 1, the better your product and business are at retaining customers.
3.3.2 Average Customer Lifetime
Directly related to customer retention rate is the average customer lifetime. This is a fairly simple measure that captures how long your customers stay active, on average. To calculate this figure, one would take all of the customers that became inactive and average the period between when they first became customers and when they ceased to be customers. A simple example is shown in the table below.
There are a couple of things to note from the above example. First, it’s clear that this is a contrived example because we’d probably have many more customers that joined and fell off in the implied time frame. In your analysis, you would want to include all those customers that you acquired up to the present date. Second, those customers that are presently active should not be included in the calculation since they might skew the average if your acquisition rate is accelerating. Third, it can be difficult to identify which customers are active and which are not. For example, if your product is a real estate app just because a user has not logged in for a while might not mean that they have abandoned it.On the other hand, if your product has a monthly subscription fee, your customers will cancel it when they no longer want to use your product.. It is important to carefully pick the criteria to use for designating a customer as inactive as well as to consistently use those criteria. The final point is that it’s possible to compare the average lifetimes of cohorts of customers. In fact, that is the main way that your team could determine if the changes that they make increase retention by a longer average lifetime.
3.3.3 Dollar Retention Rate
Another very useful measure of retention (and perhaps a more accurate one) is the dollar retention rate, or DRR for short. Here is why many consider it to be a more accurate measure of the health of your business: imagine that you have a hundred customers and each of them pay you a hundred dollars a month for your amazing project management software. Your revenue is $10,000 per month. Now let’s say that you raised your monthly price to two hundred dollars per month. However, many of your current customers got upset and quit using your product. Specifically, thirty customers stopped using your project management app. Also, during that same month you got ten new customers paying the higher fee. Was raising the monthly fee a sound business decision?
The customer retention rate would have clearly fallen, but perhaps your company is making more money. The dollar retention rate is precisely the measure that could help answer the above question. Mathematically, DRR can be represented as:
Your customer retention rate given that thirty customers left and ten were added comes out to 0.7.
At the beginning of the month you were making $10,000 and at the end of the month you are making $16,000 (70 X $200 + 10 X $200) with $2,000 in new revenue, which gives you a DRR of 1.4.
At the end of the day, your business is about revenue not about the total number of customers, so DRR might be the more authoritative gauge of retention. However, that does not mean that you should neglect your CRR. If you keep alienating customers by raising prices, you are probably not creating a viable long-term business model.
This post is part of the Growthzilla Book series, which is an online draft of the print edition that will be available in 2018. Be sure to check back next Thursday to learn how to measure performance of non-digitial marketing channels. New sections of Growthzilla are published every week.