Have you ever heard a business owner say, "I'm totally fine with losing a bunch of our customers"?
No? I didn't think so.
No matter how you look at it, customer retention is critical -- particularly for B2B companies. But unfortunately, building a sound customer retention strategy isn't usually a high priority for Marketing, and customer success managers and teams are unlikely to be rewarded for successfully upselling in the same way that a salesperson would be compensated for closing new business. Customer retention simply doesn't have the same broadly appreciated appeal as a deal marked as "closed won."
It's funny because this doesn't make any sense. Even the best new business closers will go nowhere fast if their customer turnover is off the charts. In fact, it's so financially vital to the growth of your business that you aren't losing customers left and right, as the cost of acquiring a new customer is so much greater than that of maintaining and growing an existing account. In fact, research shows that increasing customer retention rates by merely 5% actually increases profits anywhere from 25% to 95% and that growing companies prioritize customer success more than stagnating ones.
So, why is it that the sales spotlight is so rarely shared with customer retention efforts?
It's possible that some business teams, in a way, are taking their customers for granted. They're assuming their product and price are enough to keep the customer happy, despite that studies show customer experience will surpass these attributes as a key differentiator by 2020. Perhaps they're also overlooking the chances to generate "easy money" with less effort and fewer resources. The irony is that those companies which haven't created a customer-specific marketing strategy or a customer success plan are inherently raising their opportunity costs -- and their risk of losing customers.
Yet another reason for these missteps could be that the data needed to assess customer retention, as well as identify areas of improvement, isn't easily accessible. This post is written to help with that. Read on for an explanation of the seven customer retention metrics your organization should be tracking, how to calculate them, and why they're important to your customer success strategy.
The 7 Customer Retention Metrics That Actually Matter
1. Customer Churn
Perhaps the most straightforward of customer retention metrics, your company's customer churn rate refers to the rate at which customers stop doing business with you. Whether the customer has ended or opted out of renewing a subscription, discontinued using your services or stopped purchasing your products, a churned customer is a customer that your business unsuccessfully retained.
With that said, attrition in your customer base is natural to a certain degree. Companies are acquired or go out of business, hire an internal resource, no longer need your product or service, etc. But if your annual churn rate is greater than 5-7%, it's time to evaluate the happiness of your customers -- and why there may be a problem. An unreasonably high churn rate is typically indicative of your product or service failing to meet your customers' expectations or help them achieve their business goals.
How to Calculate Customer Churn
How frequently you calculate and examine your company's churn rate will depend primarily on the volume of business your company conducts. For example, if you have hundreds or thousands of customers, it may be prudent for your marketing, sales or customer success team to track churn on a monthly basis. A relatively small customer list? Customers signed onto longer contracts? Semi-annual or annual tracking will suffice. Note that new customers you onboard in whatever time period you choose are not to be factored into the churn rate.
Annual Churn Rate = (Number of Customers at Start of Year - Number of Customers at End of Year) / Number of Customers at Start of Year
2. Revenue Churn Rate
Your revenue churn rate is the percentage of revenue you've lost from existing customers in a given period of time. For example, revenue churn can result from an order cancellation, a plan downgrade, or an end to a business relationship altogether. Particularly for SaaS (Software as a Service) companies or any other organization whose revenue growth and retention are supported by a subscription or retainer model, revenue churn rate is a critical indicator of customer health and satisfaction.
Along the same lines as your company's customer churn rate, some revenue churn is simply a part of doing business -- no matter how incredible your product or service is. A customer going bankrupt or an unexpected merger are each plausible reasons for turnover to occur, and most companies would take note of this in their CRM with a details code of sorts. However, it's still important that revenue churn isn't trending downward, particularly when increases in revenue from existing customers are incorporated into the rate, as well.
Moreover, overall revenue churn rates provide a bird's-eye view of customer health, but in terms of executing on a customer success strategy, revenue churn must also be tracked on an individual basis. One of your customer success team's primary objectives is to proactively ensure a customer isn't having problems effectively using your product or service, let alone approaching the point of unhappiness where they downgrade their subscription, decrease their retainer, or reduce their purchasing frequency. But if revenue churn in a customer account does occur, it's quite possible your customer may be on the brink of leaving -- and your operations or services team must quickly take action to prevent this from happening.
How to Calculate Revenue Churn Rate
It's recommended to calculate revenue churn rate in monthly intervals. To determine the percentage of your company's revenue that has churned, subtract the monthly recurring revenue (MRR) you have at the end of the month from the MRR you had at the beginning of the month. Then subtract any revenue you accrued from upselling or cross-selling to existing customers. Finally, divide this number by the MRR you had at the beginning of the month. You may, in fact, end up with a negative percentage, which would mean your company revenue gains from existing customers outweighed any losses. But remember, as with the customer churn rate, revenue from new customers is not to be included in this calculation.
Monthly Revenue Churn Rate = [(MRR at Start of Month - MRR at End of Month) - MRR in Upgrades during Month] / MRR at Start of Month
3. Existing Customer Revenue Growth Rate
The existing customer revenue growth rate is very important for your business to monitor. A steadily climbing rate would imply that 1) your marketing, sales and account teams are doing a great job at motivating customers to increase spending with you, and 2) your customers are quickly realizing the value from your engagement. Conversely, a floundering or falling growth rate should put your success team on alert.
A stagnant existing customer revenue growth rate could also be dangerous for your business. After all, acquiring a new customer is actually 4 times more expensive than upselling to a current customer, thereby hampering your organization's ability to scale. Additionally, the median SaaS startup spends 92% of first-year revenue on customer acquisition, taking about 11 months to pay back customer acquisition costs. If your existing customer accounts aren't growing, you're probably not spending enough time and budget on customer retention and failing to capitalize on easily tapped sources of revenue.
How to Calculate Existing Customer Revenue Growth Rate
Once again, the formula below should only take into consideration revenue generated from existing customers. No new sales are involved in this measurement. Existing customer revenue growth rate can be applied to a single account examined over a long period of time, or it can be measured to reflect 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. Repeat Purchase Rate
In simple terms, the repeat purchase rate (RPR) is the percentage of your current customers that have returned to buy from your company again. This metric is a pretty darn good indicator of loyalty -- often used by marketing and sales teams to assess performance and the impact of the overall customer retention strategy. Although this particular metric typically applies to products, you can also apply the same formula to repeat subscription or contract renewals.
What's especially useful about repeat purchase rates is their application to specific demographics. By taking a look at which types of consumers or companies are making the most repeat purchases, you can adjust your target buyer personas accordingly and inform marketing about where their efforts should be augmented or concentrated.
How to Calculate Repeat Purchase Rate
This is a measurement that can be calculated in any timeframe -- weekly, monthly, quarterly -- and your customer success team will still find the data valuable. However, although the calculation itself is rudimentary, it's important to consider the buying needs of your individual customers, as they may each have a different baseline purchasing frequency, depending on what they're using your product for.
In a B2B context, for example, you may sell a widget that is used in the manufacturing process of several different customers who sell several different products. Each customer's demand for your product may vary based on its own sales cycle, manufacturing procedures, etc. One new customer may make one large purchase order from you at the beginning of the year, while another may make purchases every month. In this sense, the RPR should be taken with a small grain of salt. If your customer success team is really on it's A-game, they will also benchmark purchasing frequency for each individual customer in addition to the overall repeat purchase rate.
Repeat Purchase Rate = Number of Returning Customers / Number of Total Customers
5. Product Return Rate
Another metric that applies specifically to companies that sell tangible products (as opposed to services or subscriptions), your company's product return rate -- or the proportion of your total units sold that have been sent back to you -- is worth keeping an eye on when it comes to upholding a customer retention strategy. Although products could be returned for myriad reasons, product returns are never good, and the ultimate goal is to keep this number as close to zero as possible.
While the B2C retailer average return rates for in-store and online purchases hover around 9% and 20% respectively and typically occur because a product was damaged, looked different from what was expected or was the wrong item entirely, product returns in a B2B setting can be a bit more lethal. Given both the larger sales volume and extended duration of the average B2B sales cycle, not to mention the greater number of players involved in it and the expenses associated with the typical contract, product returns can be extremely problematic for your customer retention strategy -- and customer service teams must quickly make amends before the sale (and/or customer) is lost entirely.
A high product return rate -- where "high" depends solely on your industry -- is most certainly a data point to which customer success teams must pay close attention. Not only can customer success managers use product return rates to justify reaching out to the appropriate internal parties and jumpstarting the damage control process, but they can also use the information to let the right people know where the product or its delivery need to be improved.
How to Calculate Product Return Rate
The timeframe in which you determine your product return rate will also depend on your sales volume. What's effective for another company may not work for yours. But here's the base formula -- it's just important that whatever time period you choose to contextualize the calculation, you consistently adhere to it.
Product Return Rate = Number of Units Sold That Were Later Returned / Total Number of Units Sold
6. Days Sales Outstanding
If your customer is consistently making late payments or there are a number of unsettled invoices associated with their account, this could be another bright red flag for your customer success team. In a nutshell, days sales outstanding (DSO) can be described as the average number of days that receivables remain outstanding before they're collected. DSO not only shows how well your company's accounts receivables are being managed but also how committed a customer is to maintaining a healthy working relationship with your business.
The longer the DSO, the longer it's taking customers to pay their bills -- which may be a bad omen for your customer retention strategy. Yes, it's important to look at DSO as a whole in order to identify trending behaviors and what you can do to combat DSO figures on the rise. But on an individual basis, a lengthy DSO could mean your customer is dissatisfied with your company's product or service OR that your marketing and sales teams are nurturing and closing customers with credit or cash flow problems. Remember, effective customer success strategies begin before the acquisition stage.
How to Calculate Days Sales Outstanding
DSO is usually applied to the entire set of invoices that a company has outstanding at any given time rather than to a single invoice. You can determine your DSO on a monthly, quarterly or annual basis by dividing the number of accounts receivable during the selected time period by the total value of credit sales during the same period -- and then multiplying the result by the number of days in that timeframe. The final figure is equated with the average number of days it takes your company to collect on an invoice. But for simplicity's sake, the annual DSO formula can be found below.
Annual Days Sales Outstanding = (Accounts Receivable / Annual Revenue) × 365 Days
7. Net Promoter Score® (NPS)
Last but far from least, the concept of the Net Promoter Score was developed by Fred Reichheld, Bain & Company, and Satmetrix to give businesses greater insight into their customer relations. As opposed to a rating provided by your customer regarding a specific purchase or interaction, each customer's score quantitatively measures their general satisfaction and loyalty to your brand. Once you've calculated the overall Net Promoter Score, the data will ultimately tell you if your customers are content and willing to refer your products or services to others.
What's more, if you compare your Net Promoter Score to your revenue growth rate and customer churn rate during an established timeframe, you may be able to form a correlation that can be used as benchmarking data to help predict potential growth through customer retention and referrals. While a high NPS does not guarantee growth and retention, of course, identifying and incentivizing brand evangelists can help drive referral business -- as well as content marketing initiatives such as the creation of case studies, website testimonials and other forms of social proof. Conversely, a poor or middling score provides the opportunity to address a satisfaction problem before it's too late.
How to Calculate Net Promoter Score
As simple as it may sound, this score is determined by asking your customer one question: "How likely are you to recommend our company to a friend or colleague?" That's it! The customer is then prompted to choose a score between 0 and 10. Note that only 9's and 10's are promoters, and any customer giving a rating of 6 or below is considered to be a detractor. If you feel it would be helpful, you can ask a follow-up question in your NPS survey (something along the lines of "Will you share why?") -- but keep in mind that response rates decrease as the number of questions asked increases.
Then, you can calculate Net Promoter Score by subtracting the percentage of detractor responses from the percentage of promoter responses.
Net Promoter Score = % of Promoters - % of Detractors
More Customer Retention Metrics to Consider
Depending on your specific business goals and the types of interactions you can expect from a typical customer, there may be a few other customer retention metrics that will serve your customer success team well.
For example, looking at the number of open tickets or the number of complaints a customer has filed could prompt your success team to work on a customer satisfaction solution. If regular communication and engagement with your customers is the norm for your business, particularly in the professional services industry, it would be wise to measure email open rates and email response rates. What's important is that you are able to quantify the values, record them using the right technology, and give each department involved with a customer account access to the real-time data should they need to address a problem with that customer.
In closing, if you can take away one thing from this article, know that it's imperative your company allocates time and resources to customer retention. If putting together a comprehensive customer retention or success plan currently feels out of reach, start small. If you begin tracking a few of the metrics mentioned here, and you'll be headed in the right direction.
Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
Originally published Jan 4, 2018 8:00:00 AM, updated July 12 2019