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Effectively attracting customers to your business is essential in driving sales, but customer retention is equally important. By providing your customers with an excellent experience and top-quality products and services, you can increase retention, meaning your business will receive greater value from those customers over time.
To drive profits and maximize your business’ success, it’s essential to understand customer retention, why it matters, and how to maximize it.
Understanding Customer Retention Rate
Your customer retention rate is the percentage of customers who continue paying for your business’ products or services over a specific period of time. For example, if you started the year with 1,000 subscribers and had 900 subscribers by the end of the year, your customer retention rate would be 90%.
Customer retention rate is a key metric for many businesses, often used by those with recurring customers, such as those that sell subscription products or services, or businesses that repeatedly sell products to the same customers. A cleaning business offering weekly commercial cleaning services would find value in understanding the customer retention rate, and the same is true of a business like a big box retailer, where customers might shop weekly or monthly.
Customer retention rates are particularly important to digital advertisers, since retaining existing customers is more cost-effective than continuously marketing to and attracting new customers. With high retention rates, digital marketers can use their advertising budgets wisely and get more value out of the customers they attract.
How Does Retention Rate Relate to Customer Loyalty and Lifetime Value?
Customer retention rate is closely linked to customer loyalty and lifetime value. A high customer retention rate suggests that your business also has a high customer loyalty rate, which refers to the number of customers who continue to support your business. It also indicates that many of the same customers are likely repeatedly buying from your business.
Your customer lifetime value refers to the total value a customer will bring to your business, based on the average purchase value, the number of purchases per year, and the average customer lifespan. If you have a high customer retention rate, then more of your customers are buying from your business for a longer period of time. That drives up your customer lifetime value, meaning you’re making more money off of each customer during their relationship with your business.
What Is the Formula for Calculating Customer Retention Rate?
You can calculate your customer retention rate using a simple formula:
((CE – CN) / CS) x 100
- To start, determine the time period that you’re measuring, such as a month or a year.
- Determine CE (Customers, Existing), which is the number of customers your business had at the end of that time period.
- Determine CN (Customers, New), which is the number of new customers you acquired during the period.
- Determine CS (Customers, Start), which is the number of customers your business had when the period began.
- Plug those numbers into the formula and you can easily calculate your customer retention rate.
Let’s say, for example, that you had 120 customers at the start of a six-month period, and 100 at the end, and that you acquired 25 new customers in the same period:
100 – 25 = 75
75 ÷ 120 = 0.625
0.625 x 100 = 62.5
So you have a customer retention rate of 62.5%.
What Is Generally Considered a Good Customer Retention Rate?
While there isn’t a single “good” retention rate across all industries, sources(1, 2) suggest that an average customer retention rate is around 75-75.5%. However, a good retention rate can typically range from 35% to 84%, with the ideal figure depending on the industry.
Good Retention Rates by Industry in 2025
- Automotive (Automotive & Transportation): A good retention rate for the automotive and transportation industry is around 76–83%. Factors like regular maintenance, service plans, and warranties contribute to higher retention.
- Finance (Financial Services & Banking):
- Health Services (Healthcare): A good retention rate in the healthcare industry is typically around 77%.
- Home Services: While specific “home services” retention rates are not as broadly categorized, related industries offer insights:
- Technology:
- IT Services: A strong retention rate in IT services is around 81–83%, often due to the continuous support needed.
- Software (including B2B SaaS): The average for software is around 77%. For SaaS specifically, an average is closer to 68-74%, but a “good” rate is generally 70% or higher, with top performers reaching above 85%.
- Travel (Hospitality, Travel, & Restaurants): This sector tends to have some of the lowest retention rates, around 55%. This is often attributed to price sensitivity and commoditized products.
- Retail / Shopping / E-commerce:
Factors Influencing Retention Rate
Many factors, from customer service to personalized engagement, influence your retention rate. Understanding and focusing on these factors can position your business for optimal customer retention.
What Role Does Customer Satisfaction Play in Retention?
Customer satisfaction is closely linked to retention. When your customers are satisfied, they’re more likely to make repeat purchases and remain loyal to your business, increasing retention. Satisfied customers may also refer their friends and family to your business, and word-of-mouth marketing can be valuable in attracting new customers who are well-aligned with your business.
Your customer service and support can closely impact customer satisfaction, meaning they also relate to customer retention. Providing top-quality, highly responsive customer service can build trust in your business and ensure that customers have positive experiences. Prioritizing customer service and support, such as ensuring prompt responses and giving customers a way to easily reach a human, can ultimately impact your retention rate.
How Does the Quality of Products or Services Impact Retention?
When your business offers quality products or services, customers are more likely to want to buy from you again, which can boost retention. You can also demonstrate your commitment to offering quality services and products by asking for customer feedback about what you can do better. When you gather and then implement feedback to make improvements, you’re showing your dedication to customer satisfaction while also offering even better products and services.
These strategies can also help build a strong brand and community. If your customers feel like valued members of your community, they may feel more loyal to your business, prompting them to make repeat purchases.
How Can Personalization and Engagement Strategies Influence Retention?
Personalization and engagement strategies can have a tremendous influence on customer retention rates. In today’s advertising world, where consumers are overwhelmed with messaging, personalized engagements stand out and are more likely to make a positive impression.
Personalization goes beyond just incorporating a customer’s first name into emails and messaging, though: Segmenting your messaging so your customers receive highly relevant content, offering personalized loyalty programs tailored to customers’ individual preferences, and responding to inquiries with an email or message crafted specifically for the customer all contribute to a customer’s connection with your brand, which can positively impact your retention rates.
Measuring and Analyzing Retention Rate
As noted above, the formula to calculate your customer retention rate is ((CE – CN) / CS) x 100, but the process of measuring and analyzing your retention rate is more involved. It’s worth developing a process to track, measure, and analyze your retention rate, though, since this can provide you with valuable information about your business’ performance and how well you’re connecting with customers.
How Do You Track and Measure Customer Retention Rate Effectively?
To effectively track and measure your customer retention rate, measure your rates across specific and comparable time periods. For example, you might want to measure your rate across each quarter or year. Keep these periods consistent to accurately compare your retention rates.
You also need detailed, accurate data to effectively measure customer retention. If you don’t have precise numbers, your calculations won’t be accurate. Tools and platforms that can accurately track your customers across time are essential in measuring your customer retention rate.
What Tools and Analytics Platforms Can Help Monitor Retention?
Customer analytics platforms can help you track essential data and monitor customer retention. These tools include customer success platforms, subscription and renewal management tools, product analytics tools, and customer communication platforms.
When choosing the right tools and analytics platforms for your business, look for tools that can capture the exact type of data you need. Make a list of your key requirements and consider whether the tool can grow with your business.
How Can You Segment Your Customer Base to Analyze Retention Patterns?
By segmenting your customer base, you can better understand their preferences and behaviors contributing to retention. You can also examine the factors contributing to customer churn, i.e., the rate at which customers stop using your products or services over a certain period of time. Common reasons for customer churn include poor customer service, competition, a lack of engagement with your current customers, and even pricing problems that prompt customers to look to your competitors. When you segment your base and are able to identify these issues, you can take steps to fix them.
To segment your base, you can sort customers based on factors like engagement levels, lifetime value, and behavioral patterns. Look for trends in your retention data among each segment, and determine which segments are more loyal to your business. You can also look for segments that are likely to churn so you can implement strategies to prevent it, like sending the segment special offers or targeted marketing campaigns.
Strategies to Improve Retention Rate
Once you know your retention rate, continuously work to improve it. Improving your customer retention can help boost sales and maximize the value you get from each customer.
What Are Some Effective Strategies for Onboarding New Customers and Improving Initial Retention?
To improve initial customer retention, personalize your onboarding experience. For example, if you’ve gathered data about new customers during your marketing and have segmented your leads, you can provide them with specific onboarding paths based on their background, product or service interests, and their previous interactions with your company.
Don’t overlook the importance of a truly personal touch, too: A call from your customer service team checking in on a customer’s experience with your product or service after their purchase demonstrates your dedication to their satisfaction, and will make your company stand out. You can also use that call to gather customer feedback. By acting on that feedback and ensuring a positive customer experience, you can improve retention.
How Can You Proactively Engage With Customers to Prevent Churn?
By segmenting your customers, you can identify those who are at risk of churn, such as those who haven’t made a second purchase within a certain period of time, or those who left negative reviews of your business. Consider having your customer service team reach out to these customers personally.
Loyalty programs and rewards can also proactively boost customer retention. For these programs to be effective, they need to offer real value to your customers, such as a steep discount or the option to apply rewards to the specific product or service each customer wants. Offering these programs early on in the customer’s journey can incentivize them to make future purchases and help prevent churn.
The Relationship Between Acquisition and Retention
While acquiring new customers is key to growing and expanding a business, customer retention is closely related and is also a top priority. Some customer churn is inevitable, so acquisition is necessary to maintain and grow your customer base. Maximizing your customer retention, meanwhile, can increase the lifetime value of your customers, so your customer acquisition efforts lead to greater profits.
Why Is It Often More Cost-Effective To Retain Existing Customers Than To Acquire New Ones?
Acquiring new customers takes time and can require significant financial investments, but retaining existing customers can be simpler and requires less resources. According to the Harvard Business Review, in fact, acquiring a new customer can cost 5-25x more than the cost of retaining an existing customer.
How Does a Focus on Retention Impact Your Overall Marketing ROI?
The same Harvard Business Review report points out that increasing your customer retention rates by just 5% can increase profits by 25% to 95%, highlighting the significant impact that retention can have on your overall marketing ROI. After investing in acquiring customers, working to prevent customer churn can increase the value your business receives from each customer, boosting your ROI and your profits.
How Can Acquisition and Retention Strategies Work Together Effectively?
A successful business needs to focus on building effective acquisition and retention strategies, since the strategies are closely paired. If you’re building a brand-new business, then you’ll need to initially focus more heavily on acquisition, but as you establish a customer base, you might shift more toward retention efforts. Think of your retention strategies as helping to preserve the value of the customers that your acquisition strategies have generated.
There’s no universal approach that works for every business, and you may find that the balance shifts depending on the phases your business goes through. With time, though, you’ll find the ideal balance between acquisition and retention strategies to help your business thrive.
Key Takeaways
Your customer retention rate provides you with valuable information about how your business is performing and the experience that customers are having. Working to improve your customer retention can pay off with higher profits and greater customer lifetime values, maximizing the value you see from your acquisition efforts. Strategies like personalizing the customer journey, providing quality customer service, and offering a great product or service can all boost retention and help build your profits.
Frequently Asked Questions (FAQs)
What is the difference between retention rate and churn rate?
Your customer retention rate refers to the percentage of customers who continue buying your products or services across a designated period of time. The churn rate refers to the percentage of customers your business loses over a period of time.
How often should you calculate your retention rate?
Ideally, you should calculate your retention rate monthly or quarterly. By frequently calculating your retention rate, you can promptly spot any fluctuations in the rate and can then identify potential causes.
Is a high retention rate always a sign of success?
A high retention rate suggests that customers are pleased with and loyal to your business, but that’s not the only indicator of success. If your business isn’t effectively attracting new customers, it will be difficult to grow it and increase profits, even if your customer retention rate is high.
How can you use retention rate to forecast future revenue?
If you know your customer lifetime value, multiply it by the number of retained customers to estimate the revenue you will receive from those customers.
