If you want to start a business or continue growing your current one, you'll need to be familiar with terms such as churn rate and retention rate. Both refer to the quality of your products or services, and the insight you gain from measuring these rates will also help you understand your customers better and can be used to improve customer satisfaction and increase repeat business.
In fact, Indeed reports that "maintaining a low churn rate can help a company grow and increase profits with fewer interruptions in its work processes [and] a higher retention rate means your company can use less time seeking new customers, which can improve its overall cost-effectiveness."
Here's everything you need to know about churn rate vs. retention rate, including the difference between the two, how to calculate them, and how they can make all the difference in the success of your organization.
What is Customer Churn Rate
Your customer churn rate measures the rate at which customers stop doing business with you. This rate can refer to everything from customers boycotting a brand and going to the competition to opting out of a subscription service by choosing not to renew their contract.
A high churn rate means more money spent on acquiring new customers, so the lower your churn rate is — the better. The average for the first year of your business is about 3-7%, but experts say your goal should be to aim for less than 3% in the following years.
You can calculate your customer churn rate with the following formula:
(Number of Customers at Start of Year – Number of Customers at End of Year) / Number of Customers at Start of Year = Annual Churn Rate
For instance, if you started the year off with 650 customers at the beginning of 2021 but ended the year with only 600 customers, then your annual churn rate is 8%:
(650 – 600) / 650 = 8%
Annual rates aren't the only way to measure churn rate, either. You can also calculate your rate:
What is Customer Retention Rate
Customer retention rate is the percentage of customers who sign up for your product or services and stay with you. The benefit of a high retention rate is that you can more accurately predict your future. In fact, this insight may allow you to invest more in your company if your retention is high because you know you’ll have money coming in.
It also suggests that your customer satisfaction is up. For instance, if your retention rates increase from 2021 to 2022, then you should consider the changes you've made over the year. Perhaps the special attention to customer service or product or service quality is the reason for the increase. However, a decline in retention may indicate that your customer service (or other areas) needs work.
To calculate your retention rate, you'll need the following formula:
[(Total Number of Customers at the End of a Given Period — Total Number of New Customers in That Period) / Total Number of Customers at the Beginning of That Period] X 100 = Customer Retention Rate (CRR)
An example would be if you:
- Started with 1,000 customers
- Ended the period with 1,100
- Gained 250
In this case, your retention rate would be 85%:
[(1,100 - 250) / 1,000] X 100 = CRR
[850 / 1,000] X 100
.85 X 100 = 85 CRR
Retention rates can also be done annually, weekly, monthly, and quarterly.
Churn Rate vs. Retention Rate
An excellent way to look at the difference between churn and retention is to note that:
- Churn rate is bad because it's the number of customers leaving
- Retention rate is good because it's the number of customers staying
If you have a high churn rate, you'll have low retention — and vice versa. Take, for instance, the example from the last section. Your retention rate was 85%. This means that you lost 15% of customers (i.e., churned) over that period of time.
This is a common percentage for many first-time and smaller businesses. At the same time, industry leaders often have an average customer retention rate of about 94% (which means they only lose 6% of their customers in that period). This number is preferred for larger companies who have had time to establish themselves in their market.
With that in mind, take note that this figure varies from industry to industry. For instance, insurance companies average around 84% for customer retention rates, retail around 63%, banking at 75%, Saas hitting 35%, hospitality at about 55%, media typically averaging 25%, Fintech at 37%, and Edtech at only 4%.
Tracking and monitoring are key to keeping your retention high and your churn rate low.
This is where KAM software, like Kapta's, can complement your key account management process and help you keep track of your churn and retention rates. This way, you can make insightful decisions based on the data provided to you.
Like Steve Jobs once said, "Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves." Consumer data will help you do that accurately and efficiently.
Kapta's KAM Software: Your Solution to Attracting and Retaining Customers
Our KAM process is your roadmap for building customer engagement. The more you know about your clients, the better prepared you will be to improve their experiences with your company, build engagement, and encourage repeat purchases. This will require understanding the dynamic by creating an org chart in our software, running a SWOT analysis for more insight into their objectives, and moving forward with Kapta's Voice of Customer tool, and that's just a small portion of what you can do.
Contact us for more information on how we can help you use your churn and retention rates to your advantage — whether that means implementing familiar strategies that got your retention rate so high today or making improvements to lower your churn rate.