Organizations focus heavily on new sales and customer acquisition — and for good reason — but it should never be at the expense of retaining existing customers and growing their value.
Because over time, industry research has decidedly found that it costs more to acquire customers than to retain them, and that companies earn significantly higher revenue from loyal, returning customers than they do from new ones.
An active retention strategy, then, is essential to revenue and company growth, especially in the environment we operate in today — one in which customers are more able and willing to jump ship if they’re not happy with their current experience.
And at the core of a good retention strategy are the key retention metrics. That’s what we’ll cover in this guide. In the sections that follow, we’ll explore how to take a data-driven approach to retention with 6 retention metrics that help you:
- Know and monitor your current retention rate
- Identify opportunities and areas for improvement
- Build on your strengths
- Develop stronger relationships with your customers
- Provide exceptional customers experiences
Let’s dive in.
- Retention and churn measure the rate at which customers stay and leave (respectively) your company. Ideally, they’re measured overall and by individual customer segments.
- Customer lifetime value (CLV) helps companies invest in the most profitable customers.
- Monthly Recurring Revenue (MRR) measures predictable monthly revenue and is particularly important for SaaS and other subscription-based companies.
- Net Promoter Score (NPS) indicates retention by directly asking customers how likely they are to recommend your company to others.
- Time to value doesn’t directly measure retention, but improving it is a powerful way to improve the customer experience and boost retention rates over time.
6 Customer Retention Metrics You Should be Tracking
Retention Rate and Churn Rate
Retention rate and churn rate are two sides of the same coin, which is why we’ll cover them in the same section here. If you don’t track any other retention metrics, these are the two that you absolutely need to monitor.
Retention rate measures the rate at which companies are staying with your company over a given time period (typically monthly or annually). Conversely, churn rate measures the rate at which they’re leaving your company.
They’re calculated as follows:
Retention rate — Subtract the number of customers at the end of the period (CE) by the number of new customers acquired during that period (CN). Then, divide that number by the total number of customers you had at the start of the period (CS). Finally, multiply by 100.
[(CE-CN) / CS] x 100 = Retention Rate
Churn rate — Subtract the number of customers at the start of the period (CS) by the number of customers at the end of the period (CE). Divide by the CE, and multiply the quotient by 100.
[(CS-CE) / CS] x 100 = Churn rate
Your retention rate should always be significantly higher than your churn rate. Generally, a retention rate of 75% or higher is considered average, while churn rate should hover around 30% or lower.
Customer Lifetime Value
Customer lifetime value (CLV) is the measure of a customer’s total monetary value over the lifetime of their relationship with your company. As it relates to retention, CLV is helpful for determining a few important things.
First, it gives you a general idea of how long customers stay with your company based on the total amount of revenue they spend. Second, drilling down into CLV by customer segment can help you determine which segments are most profitable — and thus worth investing your marketing and sales resources in.
To calculate CLV — First, take the average purchase value and multiply it by the average number of purchases a customer makes to determine customer value. Then, multiply that number by the average customer lifetime.
Customer Value x Average Customer Lifetime = Customer Lifetime Value
Monthly Recurring Revenue
Monthly recurring revenue (MRR) is the total revenue you earn every month. When retention is strong, your MRR should be predictable — you should know what to expect based on recurring charges and fees from your current customer base.
MRR is a particularly valuable metric for SaaS companies and others who depend on recurring subscriptions for revenue and growth.
Tracking the movement of your MRR over time tells you how well you’re retaining customers and building reliable revenue streams for your business. To calculate MRR, multiply your number of total subscribers by the average monthly billing amount.
Total # of Subscribers x Average Monthly Billing Amount = MRR
Net Promoter Score
Net Promoter Score (NPS) goes directly to the source — your customers — to determine how likely they are to stay with your company over time.
It asks them a single question: How likely are you to recommend [X brand, product, service] to a friend or colleague? Their answer is collected using a 1-10 rating scale.
Anyone that answers 9-10 is considered a promoter (would recommend), 7-8 are passive (satisfied but unlikely to recommend), and 0-6 are dissatisfied and unlikely to purchase from your brand in the future.
NPS is one of the most valuable metrics to measure for both understanding current retention (i.e. Is customer satisfaction where it should be?) and predicting future retention (low customer satisfaction means you’re more likely to experience retention issues in the future). It’s also a generally good practice for keeping tabs on how your customers are feeling.
Today, NPS is easier than ever to collect via email or text message survey.
Retention and Churn Rate by Segment
Once you’ve nailed monitoring your overall retention and churn rate, it’s best practice to drill down by customer segment to glean further insight. Retention rates often vary by segment for a number of reasons, and you can take more targeted action when you understand what’s happening across different groups.
Refer to your buyer personas to determine how you’ll segment customers, then filter in your CRM system to measure retention for each group.
Time to Value
The business world moves fast today, and customers expect quick value from their investment in B2B products and services. You should know how long it’s taking your customers to see value from your offerings (in the form of revenue or another business metric) and aim to shorten it however possible.
Quick time to value (even if it’s not the complete value your customers will eventually see) jumpstarts customer satisfaction, creates a positive first impression, and makes your customers more likely to stay with your company in the future.
This metric may not actually measure retention, but it can absolutely help you improve it over time and optimize the customer experience you provide.
Over to You
Your ability to measure retention rate and leverage the insights you uncover from doing so are enhanced by the right intelligent revenue tools. Intelligent revenue platforms centralize important data and integrate sales insights with those from other revenue-impacting teams at your business (like marketing, customer support, and more).
Xactly’s solutions are designed specifically to enable intelligent revenue strategies and support your go-to-market teams with precise planning, better incentives, and data-driven insights.