How to calculate customer retention rate

The old saying, “You can’t please all of the people all of the time,” is definitely true in business. Sometimes, your product won’t meet the customer’s needs, and they’ll drop off.

But knowing that you’ll inevitably lose customers doesn’t mean that you should ignore your customer retention rate (CRR). After all, customer retention is key to your company’s growth.

But customer retention rate can be tricky to calculate and apply to your business.

B2B businesses need to pay special attention to their retention rate, since they have especially long relationships with customers. To get the most out of your customer retention rate, you’ll need to make sure you know:

• How to calculate customer retention rate correctly
• What customer retention rate your company should have
• How to make progress and implement strategies for improving CRR

If you nail these three factors, you’ll have a clear picture of the current state of your B2B company and be better equipped to set up your product for long-term success.

How to calculate customer retention rate

The formula to calculate customer retention rate is straightforward.

Customer retention is incredibly important and slightly different from user retention rate. For the purpose of this article, “customers” means subscribed users. To fall into this category, a user must be subscribed to your product, and have made at least one payment (if you're offering a paid service).

With this in mind, here are a few things to note:

• Subscribed customers are different from active users. Inactive users are still paying customers who can always be re-engaged, but churned customers are not.
• Subscribed customers also do not include people who are trialing your product. A free trial is a marketing strategy, so it cannot be used to measure the health and longevity of your product.

ProfitWell notes a few key considerations for B2B businesses managing retention rate. On one hand, B2B businesses have to appeal to entire teams to keep their retention rate high. If your tool doesn’t help people do their jobs better, you risk losing a whole company of users—not just a single customer.

You’re also often operating in a smaller, more niche market than most B2C companies. This factor makes losing teams of users all the scarier.

On the upside, B2B companies often have long, high-value contracts—especially in SaaS. So, while your churn hits harder, the payoff of the customers you retain tends to be higher than in B2C.

Three tips for calculating and assessing customer retention rate

What gets measured, gets managed. To improve your overall customer retention, you first have to measure it precisely, and in a way that makes sense for your business model. For example, looking at your customer retention rate quarter over quarter doesn’t make sense if your subscriptions or contracts are lengthy. Here are three tips for making sure your CRR is set up correctly.

1. know your target number

So, what is a good overall customer retention rate? What is the percentage of customers that you can expect to churn within a particular time frame? This depends on two factors:

• The age of your company. As you’re figuring things out, your churn rate is going to fluctuate. You don’t have a substantial enough user base to give you an accurate understanding of the traction of your product. Start by flattening your retention curve and getting a consistent churn number. Try to lift it every month.

If you don't have significant retention data yet, you can also compare to benchmarks. According to a Pacific Crest survey, 70% of B2B SaaS companies had an annual churn of less than 10%.

• The target market. The bigger the clients you are targeting, the better your churn rate should be. Bigger businesses do their research before signing on to new products and ideas.

There is some correlation between the age of the company and monthly recurring revenue with overall churn, according to a report by ProfitWell. Companies with a higher average revenue per user see much lower churn. Companies with contracts longer than a year experience lower churn rates than those who offer monthly contracts.

Hitting these numbers takes time. If you're still in year 1 or 2, don't fret if you're not hitting these metrics yet.

2. Compare time periods wisely

It’s all well and good to start comparing graphs from different time periods, but knowing the right comparisons to make will help you gain valuable insight and reach your goals faster. Here are the comparisons you should be making and why:

• This period vs. goal. Don't just keep that target churn amount in mind—also set incremental goals. It's too difficult to motivate a team of people to strive for a lofty goal, so aim to reduce churn and adjust based on your ability to hit that benchmark.
• This period vs. the previous period. Comparing periods can help you identify success when making changes within your product or  feature announcements. But it's not terribly useful to compare short periods back-to-back as indicators of overall progress, especially in B2B companies. You will need to monitor this on a regular and ongoing basis to truly measure success.
• This period vs. the same period last year. You can see whether your product has gotten stickier and observe if trends are aligned with your efforts to improve customer retention.

When it comes to deciding how long a period you should measure, take into account the age and stability of your company. If you've had a stable customer retention rate for a few years, you can compare year to year to see whether there are long-term improvements. But if your business is only two years old, it doesn't make sense to attribute notable changes to anything more than the natural maturation of your startup. In this case, shorter time periods will be your only option until you have more longevity.

3. Track your Customers

Whether you’re a B2B or a B2C company, you’ll need a way to track your customers in order to calculate CRR.

• Identifying your subscribed customers: Your product may inherently identify customers who are actively subscribed, but some B2B companies with more complex contracts and products may need to rely on internal tools for managing their active customers. Your customer database platform or other means of tracking should show your active customers, the date that they became active, and the date that they became inactive for accurately calculating your CRR.
• Churning customers: If your customers are required to provide you with notice of cancellation, use this information to estimate how many users will become inactive prior to the next time you calculate CRR.
• Projecting customer retention: If you track or score customer health, you may find indicators that other customers are likely to become inactive. This can help you prepare projections of your next period’s CRR, as well as proactively look for ways to retain the customer’s business.
• Consider contract length and contract value: Customers that can’t churn in a specific time period due to contractual obligations are not necessarily an indicator of “good customer retention.” If you are projecting customer retention, look at the overall health of the customer and when the contract is up for renewal when projecting future customer retention.

The right customer tracking will help you set accurate retention expectations and find ways to improve your retention efforts.

Strategies to improve customer retention

Whether B2B or B2C, your customer retention strategy requires departments to work cohesively to support the customer. Your marketing, customer service, and product development teams need to understand the reasons for churn in order to best focus your efforts on how to improve your overall customer retention.

Some strategies include:

• Successful onboarding, so that the customer understands the value of the product they’ve paid for
• Monitoring customer engagement and using product analytics to identify what might be slipping
• Providing responsive support and listen to customer complaints
• Personalizing the customer experience to show users that they’re important
• Providing continuing education with feature announcements, tutorials, live training sessions, and email campaigns

Keep in mind that you’re not going to see an immediate impact on customer retention. You may not be able to pull back customers who are already on the fence, but your efforts will be an investment in future customer retention.

Remember: Customer retention is a flag, not a lifeboat

Understanding how to calculate customer retention is step one in helping you determine the urgency of a churn problem. From there, the biggest factor in improving customer retention is understanding the reasons that you’re losing customers. Part of your ongoing tracking should include identifying why different customers have churned and looking for patterns. Knowing how to apply the right strategies will be the true measure of improving your customer retention.

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