How to calculate Customer Retention Rate?
While Customer Acquisition Cost, for a given set of customers, is calculated at a point in time, Customer Lifetime Value for that set of customers gets calculated over time.
The calculation depends on multiple factors, most important of which is the % among the set of customers that are retained over time. Also known as: retention rate. Let's start by understanding it.
Example:
An Indian online learning platform starts the year with 5,000 customers. During the year, it loses 500 customers but gains 1,000 new ones. The retention rate is calculated as:
Ending Customers = 5,000 - 500 + 1,000 = 5,500
Retention Rate = ((Ending Customers - New Customers) / Starting Customers) × 100%
= ((5,500 - 1,000) / 5,000) × 100% = 90%.
Significance of Retention Rate:
A high retention rate indicates that customers find significant value in the product or service, which is a positive sign for the business's long-term sustainability. On the other hand, a low retention rate may suggest customer dissatisfaction or strong competition.
The formula for Retention Rate is:
Retention Rate = ((Ending Customers - New Customers) / Starting Customers) × 100%.
The retention rate formula removes new customers acquired over time, and calculates retention of a particular set of customers who were acquired together in a specific timeframe. Also known as: cohort.
Lifetime value for that cohort can then be calculated using retention, engagement, and monetisation for that cohort.