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Customer retention calculation metrics

How do you define the retention rate of customers? ROI guru Tom Pisello offers his suggestions in this tip.

Could you give some suggestions on how to define the retention rate of customers?

Retention rate is normally calculated as the number of customers who have been lost over a period of time, usually calculated over a quarterly or annual period. The key is to calculate the percentage versus existing customers, and not underestimate the loss rate by tallying new customer acquisitions into the mix.

In environments where users purchase a subscription, the calculation is easier, and can be represented as:

Number of subscribers who cancelled or did not renew during the period divided by the total number of subscribers for the period

The difficult part in this equation is determining the right total number of subscribers to use: the ones at beginning of period, the ones at the end, a peak, or an average over the period.

When customers are not subscribers, the calculation is harder to determine. In this case a customer is one who continues to make purchases, and a lost customer is one who has made purchases, but does not repeat these purchases for some time. The key is to analyze the repeats over a long enough horizon. Here the calculation is:

(Total number of customers - number of repeat customers) divided by total number of customers

This was last published in September 2006

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