While marketers spend their days chasing after new customers, it’s easy for existing ones to slip away unnoticed. This approach is backwards—studies show it's much cheaper to retain existing customers than court new ones.
That part’s obvious. But how do you know if your customer retention efforts are working? Without a set of objective key performance indicators (KPIs), tracking customer retention for SaaS companies can feel like shooting in the dark.
In this guide, we’ll walk you through the basics of customer retention, then present 15 key customer retention metrics that will ensure your current customers keep coming back for more.
How to measure customer retention
There’s no single number that can tell you how strong your customer loyalty is. But, by tracking a range of metrics over a given period, you can gain a solid understanding of the health of your customer retention.
Here's a breakdown of the key steps involved:
Identify customer retention success metrics
The first step is to choose the most important customer retention metrics that align with your specific business goals. These might include customer churn rate, customer lifetime value (CLV), repeat purchase rate, and net promoter score (NPS). We'll explore these and more in detail later.
Gather the data you need to measure customer retention metrics
Once you've identified your key metrics, it's time to gather the data you need to measure them. Start by consulting your CRM, purchase history records, customer surveys, and website analytics. To avoid wasting time and resources, try to streamline your data collection process as much as possible through automation tools.
Determine your benchmark
Without a benchmark to measure them against, metrics are essentially useless. Gauge your performance by comparing it against industry averages or your own historical data. Doing so will help you understand how your retention efforts stack up against the competition and identify areas for improvement.
Monitor the data at a defined cadence
Keeping track of customer retention is an ongoing process. Monitor important metrics over a defined period of time (such as the beginning of the month and end of the month) to see how they’re trending.
Adjust when needed
Companies with high customer retention are continuously evolving their strategies. Be prepared to make adjustments, such as revamping your onboarding process or kicking off a loyalty program, based on performance.
What are customer retention metrics?
Customer retention metrics are KPIs that track how well your business keeps its customers over time. If the number of new customers doesn’t translate into many returning customers, it may be a sign that you need to focus your efforts around reducing churn.
Here are 15 of the most impactful metrics that can inform your customer retention strategy:
1. Customer Retention Rate
This one is simple—it measures the percentage of customers that continue using your product or service between the start of the period and end of the period.
Formula: (Ending customers / Starting customers) X 100
Example: If you started the month with 1,000 customers and ended with 900, your customer retention rate would be 90% ((900 customers / 1,000 customers) x 100).
2. Customer Churn
Customer churn is the opposite of customer retention. It calculates the percentage of customers who stop using your product or service within a given timeframe.
Formula: (Churned customers / Starting customers) X 100
Example: If you lost 100 customers from the 1,000 you started the month with, your churn rate would be 10% ((100 churned customers) / (1,000 starting customers) x 100).
3. MRR and Revenue Churn Rate
Monthly recurring revenue (MRR) is an especially important metric for subscription-based businesses. It shows how much revenue can be expected on a monthly basis going forward.
Revenue churn rate is similar, but considers total revenue rather than just recurring.
Formula (MRR churn): (Decreased MRR / Beginning MRR) x 100
Example: If your MRR decreased by $1,000 from a starting point of $10,000, your MRR churn would be 10% ((Decreased MRR of $1,000) / (Beginning MRR of $10,000) x 100).
4. Existing Customer Revenue Growth Rate
This is a great metric to gauge the success of your upsell and cross-sell efforts. It shows how much revenue existing customers are generating over time.
Formula: ((Current period revenue from existing customers - Previous period revenue from existing customers) / Previous period revenue from existing customers) x 100
Example: If your existing customers generated $5,000 in revenue last month and $6,000 this month, your existing customer revenue growth rate would be 20% ((increase of $1,000) / ($5,000 previous revenue) x 100).
5. Repeat Purchase Ratio
This metric measures whether customers keep buying after an initial purchase, which is especially important in industries like e-commerce.
Formula: (Number of repeat customers / Number of total customers)
Example: If you had 100 total customers last month and 20 of them were repeat customers, your repeat purchase ratio would be 20% (20 repeat customers / 100 total customers).
6. Product Return Rate
Frequent product returns can quickly eat into margins. This metric tracks the percentage of products returned during a particular timeframe.
Formula: (Number of products returned / Number of products sold) x 100
Example: If you sold 100 products last month and received 10 returns, your product return rate would be 10% (10 returned products / 100 products sold) x 100).
7. Days Sales Outstanding (DSO)
DSO measures the average time it takes customers to pay their invoices. Keeping this number as low as possible is imperative for maintaining strong cash flow.
Formula: (Average accounts receivable / Average daily sales) x Number of days in the period
Example: Imagine your average accounts receivable is $10,000, and your average daily sales are $2,000. Let's say you're looking at a 30-day period.
DSO = ($10,000 / $2,000) x 30 days = 150 days
8. Net Promoter Score (NPS)
NPS is one of the most popular ways to measure customer satisfaction. Customers are presented with a simple question, and asked to respond with a number between zero and ten: “How likely is it that you would recommend this company to a friend or colleague?”
Respondents are categorized as follows:
- Detractors: 0 to 6
- Passives: 7 to 8
- Promoters: 9 to 10
Formula: NPS = (% Promoters) - (% Detractors)
Example: If you survey 100 customers and receive 60 promoters, 30 passives, and 10 detractors, your NPS score would be 50 ((60 promoters - 10 detractors) / 100 total respondents).
9. Time Between Purchases (TBP)
Ideally, customers’ have a short time between purchases. Tracking how long it takes them to make a subsequent purchase can help inform marketing strategies.
Formula: 365 / (Number of orders in past 365 days / Number of unique customers in past 365 days).
Example: Imagine you have 10,000 orders from 2,000 unique customers in the past year.
TBP = 365 days / (10,000 orders / 2,000 customers) = 73 days
10. Loyal Customer Rate
Loyal customers are the bedrock of most businesses. This metric identifies the percentage of customers who consistently use your product or service in a given period.
Formula: (Number of customers with multiple purchases / Total number of customers) x 100
Example: Imagine you have 100 customers and 30 of them have made at least two purchases in the past month.
Loyal customer rate = (30 customers / 100 customers) x 100 = 30%
11. Customer Lifetime Value (CLV)
Some customers are more valuable than others. CLV predicts the total revenue a customer is expected to generate during their entire relationship with your business.
Formula: (Average purchase value x Purchase frequency) x Average customer lifespan
Example: If your average customer spends $100 per purchase, makes 2 purchases a year, and has an average lifespan of 5 years, your CLV would be $1,000.
((Average purchase value of $100) x (Purchase frequency of 2 per year) x (Average customer lifespan of 5 years)).
12. Reactivation Rate
Sometimes, customers come back to your product or service after a prolonged period away. This metric measures the percentage of churned customers you win back within a specified period.
Formula: (Number of reactivated customers / Number of churned customers) x 100
Example: If you reactivated 20 customers out of 100 that churned last month, your reactivation rate would be 20%
((20 reactivated customers) / (100 churned customers) x 100).
13. Cumulative Cohort Revenue (CCR)
Most businesses have certain customer segments that contribute more to the top line than others. CCR tracks the total revenue generated by a specific customer cohort over time, allowing you to target these high-value groups.
Formula: There’s no single formula for CCR. Generally, you’d calculate the total revenue generated by a cohort of customers acquired during a defined period.
Example: You might find that customers that sign up for your service in January are responsible for more revenue than those who sign up in June.
14. Daily/Weekly/Monthly Active Users (DAU/WAU/MAU)
Tracking active users is especially vital for social media apps and other online services, as it measures how often they’re using a particular platform. Users are only counted once, regardless of how many times they visit the site during the period.
Formula: What defines an “active user” can vary by industry.
Example: A social media platform may have 10 million existing accounts, but just 1 million monthly active users.
15. Average Engagement by Channel
For some businesses, email is the most effective way to engage customers. For others, it’s social media. Measuring average engagement by channel shows you which ones are most effective at reaching your customers.
Formula: Average engagement rate = Total engagement / Audience x 100
Example: A bakery may find that a recent social media post got 100 likes, while an email campaign got just 50 opens. Judging engagement levels depends on both a channel and company’s unique traits.
How to improve customer retention rates
All businesses need to add customers over time, but it’s even more important to keep the ones you have. Here are some proven tactics for boosting customer value by turning one-time buyers into loyal fans.
Focus on the customer experience (CX)
It’s business 101—customers that have a bad experience are unlikely to return. Stay laser focused on all aspects of the customer experience, from initial onboarding to post-purchase support. Moreover, go the extra mile to resolve any issues that come up to avoid bad publicity and word-of-mouth.
Implement a loyalty program
Loyalty programs are a fantastic way to incentivize repeat purchases and make existing customers feel valued. These programs typically consist of points that customers can redeem for awards, or basic referral programs.
Leverage strategic gifting
In a time when we’re all inundated with digital marketing messages, tangible gifts are a great way to cut through the noise. They also serve as an expression of appreciation for a customer’s business.
Customers that feel valued bring a world of benefits to a brand. They’re more likely to become repeat buyers and tell their friends about your company. Strategic gifts that celebrate customer milestones, thank them for their loyalty, or welcome new clients can go a long way.
While the benefits of strategic gifting are well-known, managing offline engagement can be tricky. You need a partner to help with the logistics—that’s where Postal comes in.
Postal’s comprehensive platform manages all aspects of offline engagement. From a gifting marketplace that allows you to send items from local businesses to a swag store with custom-branded merchandise, you’re sure to find something that your customers will love.
Remember, retaining existing customers is often more cost-effective and efficient than constantly acquiring new ones. By prioritizing customer retention and leveraging tools like Postal to enhance offline engagement, businesses can fight churn by building long-lasting relationships with their customers.
