10 Key Client Retention Metrics and Their Calculations
Client retention is crucial, especially for B2B businesses. However, developing a solid customer retention tactic is not a top priority for marketers; and consumer success groups are nearly impossible to be compensated for effectively upselling in the relatively similar way that a salesman is rewarded for closing a new business.
According to studies, growing businesses emphasize customer success more than stagnant ones, and raising retention by 5% boosts revenues by 25 to 95 percent. They believe that their product and cost are enough to satisfy customers, even though research shows that consumer experience will outperform these factors by 2020.
A further reason for these blunders could be a lack of easy access to this information necessary to analyze customer retention and identify areas for advancement. Companies measure success in this area to determine how well they are reaching the needs of their customers and whether they are progressing to earn their business.
Client retention data can help marketing, revenues, customer support, and even product management. However, measuring this data can take a while. It can also be frustrating to slice numbers only to discover that the outcomes do not add up.
1. Customer Churn
A churned customer is a client that the company was unable to retain. It is regardless of whether the customer had finished or decided to opt-out of renewing membership. Some level of customer attrition is typical.
However, if the annual churn rate is higher than 5-7 percent, it is essential to assess the customer satisfaction – and why there may be an issue. An insanely high churn rate usually signifies that the product or service is failing to fulfill the needs or goals of the customers.
How to Measure Customer Churn
The frequency with which users calculate and examine the company’s churn rate is determined by the volume of business conducted. For a business with hundreds or thousands of consumers, it may be sensible for the marketing, sales, or customer care team to track churn monthly.
It is worth noting that new clients added at any time must not be included in the churn rate.
Annual Churn Rate = (Number of Customers at Start of Year – Number of Customers at the End of Year) / Number of Customers at Start of the Year
2. Rate of Revenue Churn
The revenue churn rate is the percentage of revenue lost from current customers over a specific period. For instance, revenue churn can occur due to cancellations, a plan downgrade, or the termination of a business partnership. Revenue churn rate is an essential indicator of client health and satisfaction, especially for SaaS (Software as a Service) businesses.
How to Calculate Rate of Revenue Churn
Calculate the revenue churn rate monthly. Begin by deducting the monthly recurring revenue (MRR) at the end of each month from MRR at the start of the month. Then, deduct any income from upselling or cross-selling to current clients. Lastly, divide this figure by the MRR at the beginning of the month.
Monthly Revenue Churn Rate = [(MRR at the Start of Month – MRR at the End of Month) – MRR in Upgrades during Month] / MRR at Start of Month
3. Current Client Sales Growth Rate
The rate of current customer revenue growth is critical for the company. A rising rate would indicate that the marketing and sales account teams are doing an excellent job of persuading consumers to spend more.
It also implies that the customers are noticing the value of their involvement. A stagnated rate of current customer revenue growth could also be problematic to the company. After all, gaining new customers is four times more costly than upselling to an existing one, limiting the company’s ability to scale.
How to Measure the Rate of Current Client Revenue Growth
Again, the formula should only consider income generated by existing customers. This metric does not include any new sales. Existing client revenue growth rates can be based on a single account over time, or they can be quantified to represent the “big picture.”
Monthly Revenue Growth Rate = (MRR at the End of Month – MRR at the Start of Month) / MRR at the Start of Month
4. Purchase Recurrence Ratio
In layman’s terms, the repeat purchase ratio (RPR) is the portion of consumers who have purchased again. This metric is an excellent predictor of customer loyalty, and it is frequently used by sales and marketing teams to evaluate the efficiency and effect of the customer retention tactic.
Although this metric is typically applied to goods, a similar method is also implemented to repeat membership or contract renewals.
How to Measure the Repeat Purchase Ratio
It is a metric that can be measured in any period – weekly, monthly, or quarterly – and the data is still beneficial to the customer success team. In this regard, the RPR must be regarded with fair judgment. If the customer success team is truly on point, they will also track the buying frequency of each customer in regards to the total repurchase rate.
Repeat Purchase Ratio = Number of Returning Customers / Number of Total Customers
5. Rate of Returned Products
The product return rate is another metric that refers to businesses that sell tangible goods (rather than services or subscriptions). It is the percentage of the total items sold that were returned. Even though goods can be returned for various reasons, product returns are never good, and the utmost goal is to keep this number as low as possible.
How to Calculate the Returned Product Rate
The returned product rate can also be calculated by the sales volume. What works for one company may not work for the other. Below is the basic formula, and it is critical to stick to it no matter what time frame it is used to interpret the calculation.
Product Return Rate = Number of Units Sold That Were Later Returned / Total Number of Sold Units
6. Days Sales Outstanding
Days sales outstanding (DSO) is the average number of daily receivables that remain uncollected before being obtained. DSO demonstrates not only how well the company’s receivables are managed. Also, how dedicated a consumer is to preserving a positive relationship with the company.
How to Measure DSO
It is typically applied to a company’s whole set of outstanding invoices at any given period; rather than a single payment. The total result is calculated by multiplying the average number of days it takes the company to gather an invoice. However, for the sake of clarity, the annual DSO formula is provided below.
Annual Days Sales Outstanding = (Accounts Receivable / Annual Revenue) × 365 Days
7. Net Promoter Score (NPS)
The Net Promoter Score quantifies satisfaction levels and customer loyalty. Once overall NPS is calculated, it will reveal whether your customers are satisfied and willing to recommend the goods or services to others.
Furthermore, if the Net Promoter Score is compared to the revenue growth rate and customer churn rate, it is easy to predict growth potential via customer referrals and retention.
How to Determine Net Promoter Score
This score is calculated by asking the consumer one question: “How likely are you to recommend the company to a friend or colleague?” The Net Promoter Score can then be computed by deducting the percentage of dissenter reactions from the fraction of promoter responses.
Net Promoter Score = % of Promoters – % of Detractors
8. Time Between Purchases
The time between purchases is the time taken for a typical customer to buy again. When monitoring this metric, it is critical to correlate it to other metrics such as customer satisfaction and net promoter score (NPS). For instance, if you notice a long period between purchases, it could mean that the service or product is not distinguishing itself from others in its sector.
How to Measure the Time Between Purchases
Once a recording system is established, sum up each consumer’s average buying rate. If a customer purchases today and then purchases another product a week later, their purchase rate is seven days. Divide the total number of recurring customers by the sum of all customers’ buying rates.
Time Between Purchases = Sum of Individual Purchase Rates / Number of Repeat Customers
9. Customer Loyalty Rate
The customers with repeat purchases within a given period are referred to as loyal customer rates. Because the most loyal customers are frequent buyers, this metric represents the percentage of the customer base that has proved loyalty to the company.
How to Compute the Loyalty Rate
It is computed by first determining the total sum of customers served by the company during a given month, quarter, or year. It includes existing and new clientele. Then, identify the number of current customers with the additional purchase and the number of new customers with multiple purchases. Sum up the number of loyal customers by adding those values. Divide the total number of loyal customers by the total number of customers.
Loyal Customer Rate = Number of Repeat Customers / Total Customers
10. Customer Lifetime Value (CLV)
CLV quantifies the amount of revenue generated by an individual client. It is a metric that must be tracked regularly; whether selling individual products, services, or software — that are invoiced yearly. CLV should rise or remain stable, as shrinking CLV indicates getting low-value clients or rapidly losing customers.
How to Measure Lifetime Value
To begin, calculate the average expected revenue from a customer within a year. Divide the gross annual revenues by the total number of unique consumers in that year to arrive at this figure. Next, in terms of years, figure out how long a customer remains with the company. Then, multiply the average profit per consumer by the customer’s average lifespan to calculate the customer lifetime value.